Much has been written on the prospects of Australia's 'big four' banks, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB), and Australia and New Zealand Banking Group (ASX: ANZ) in recent times.
The share price of all four companies has taken a hit in the past 12 months as it increasingly looks like profits have peaked, while competition is squeezing profit margins.
On other fronts, some believe that a slowing economy will lead to higher levels of unemployment and consequently more bad debts, which are currently at decade-low levels. Weak house prices and higher interest rates for investors are also likely to hurt demand for loans, potentially reducing profits.
These are all real threats, but they are well covered in the media and it is possible to become well-researched enough to be comfortable with the risks. However, investors are also overlooking the propensity of financial technology, or 'fintech' businesses to disrupt the banks' cosy oligopoly.
Here are three of the biggest threats:
- Peer-to-peer (P2P) lending
Companies like Directmoney Ltd (ASX: DM1) accept deposits from investors, repackage them, and then loan them to consumers at lower rates. Theoretically, this can lead to receiving a substantially higher interest rate on your deposit, and paying a lower interest rate on your loan as a result of removing the middleman (the banks).
It has mixed effects in practice, although Directmoney is growing and a number of private peer lenders like ThinCats and SocietyOne are also entering the market. Some of these are part-owned by major banks.
- Automated financial advice
The banks (and others) have hurt consumer trust in recent years thanks to a number of financial advice scandals involving conflicts of interest. There is substantial opportunity for companies to reduce costs and personalise advice through the use of automation and customer data.
The big banks are likely to dominate this business too, but change brings opportunity for companies like AMP Limited (ASX: AMP) and IOOF Holdings Limited (ASX: IFL) to grow at their expense.
- Plain old product innovation
Simply put, you can no longer get the best deal on loans, deposits, wealth management services and superannuation from your local bank. Often investors pay too much to receive too little, and an enormous number of companies are nibbling away at the edges.
Yellow Brick Road Holdings Ltd (ASX: YBR) is one company that outperforms the banks in many categories (even though they fund most of its loans) and has had several of its products declared best-in-class by Morningstar.
There are many more threats to bank supremacy out there, including Apple Pay and a squazillion new payment and international currency transfer solutions, as well as new products from Mastercard and Visa. Even Carsales.Com Ltd (ASX: CAR) is getting in on the action – sort of – with its financing services on automotive vehicle sales.
With technology and the internet vastly expanding the reach of businesses, the opportunity for companies to encroach on competitors' territory is growing rapidly. One Macquarie analyst even estimated up to $27 billion of bank revenue was under threat from fintech start-ups.
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