New entrants to 'erode' bank distribution

Speaking to Mortgage Business, JP Morgan executive director Scott Manning said new entrants do not need to become a bank in order to compete with the banks.

“They will find a part of the market that has an attractive return and simply target that, and leave the bank to settle it all when all's said and done,” Mr Manning said.

Last week Mortgage Business reported that supermarket giant Coles had signalled a mortgage play by engaging a third-party distribution specialist.

“The more you align yourself to the look and feel of a bank, the more regulation will come, but if you stick close to the customer and focus on dis-intermediating the distribution, then I think you negate that argument,” Mr Manning said.

In its submission to the Financial System Inquiry, Coles slammed the complex banking regulations that fail to accommodate new entrants, pointing to regulatory regimes in other countries that have allowed for non-financial conglomerate groups to expand into the banking market by largely relying on their existing licensing regimes.

“Innovation can take hold relatively quickly,” JP Morgan’s Mr Manning said. “Wholesale lenders' share of mortgage approvals increased from virtually zero to 15 per cent share in just over 10 years.

“Contrasting to present-day dynamics, we believe technology is creating the environment to potentially bypass the perceived traditional barriers to entry such as vast branch distribution.”

Banks make much of their money through the distribution of their product, rather than the manufacturing of that product, Mr Manning said.

“Our argument is that on the technology side it allows other people to start to penetrate the profitability of particular segments and to effectively erode the distribution margin, just leaving banks with the actual manufacturing process,” he said.

“It’s part of a broader discussion to not necessarily say, ‘you will have a Google bank one day’ but that technology companies will basically insert themselves between the customer and the end product and grab some of that margin.”

In its latest Australian Mortgage Industry Report, JP Morgan found that brand value as a proportion of enterprise value is consistently low across all banks.

“The high level of brand value in technology companies is matched by high levels of willingness to engage these firms in banking activities,” the report stated.

“As such, technology companies may be able to use the power of their brand to potentially penetrate retail banking market share without needing to build a physical presence to engender trust.”

The report found Google and Microsoft score higher than ANZ, NAB and the Westpac group for digital migrants, while CBA is the highest rated major bank across each digital segment.