Banking in Australia and New Zealand: at a Digital Crossroads

Banking in Australia and New Zealand: At a Digital Crossroads

A GlobalData report for NCR

Published: July 2018

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial Executive Summary

A market in transition to a new banking model

The emergence of a raft of neobanks and fintech start-ups has highlighted the shift towards a fully digital experience in the banking market. The shift to digital channels has been a long time coming, but Australia and New Zealand are now seeing an entire generation – millennials – who are not just digital-first but digital-only. This is reflected in all aspects of their lives, with the drive towards better digital banking closely linked to their heavy use of online shopping as well. As banking has shifted channels, new products and services are emerging that leverage the vast volumes of data generated as well as the potential of new technology and standards such as the New Payments Platform (NPP) and the move to open APIs.

Key findings

• Consumer behavior has shifted towards viewing digital channels as the main means of engaging with their bank, across all age cohorts. • Millennials, though only moderately more digitally inclined than other age cohorts are much more comfortable banking or even paying via their mobile handset. • Millennials are both more open to purely digital banks such as neobanks as well as more likely to switch provider. • Security while shopping online is even more important with having card details stolen over the internet the top type of fraud committed against Australian and New Zealanders.

Critical success factors

Target millennials for innovations – Whether you are an established bank or a digital start-up, millennials are the most open to trying new services and switching to new channels.

Consider how you help clients with ecommerce – Ecommerce is already big business, with the market only forecast to grow. Consumers need banking partners that put their security online at the heart of their value proposition and can better protect them while they go about their lives online.

Use the Big Data to offer new services – With more and more banking conducted digitally, banks have a new resource with which to add value to their customers, providing them with more customized advice on finances, budgeting, their spending and so much more.

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial The Crossroads of Digital Banking

Use of digital channels has soared, with a rapid shift to mobile

Financial services in Australia and New Zealand are at an inflection point in the transition from a mixed branch and digital proposition to one that is primarily or solely digital. The number of branches in Australia has declined by almost 12% since its peak in 2011 to just 5,814 in 2017 according to APRA stats, all while personal lending to households has risen about 42%, mainly driven by mortgages. Clearly, there has been a fundamental shift in what it means to be a bank. The business of taking in short-term money and lending long with appropriate risk management will always be there, but increasingly the value that a bank can provide in facilitating their clients’ online lives is becoming critical. Whether this is in giving them anytime/anywhere access to their money, helping them shop online, guard against digital theft, or advising them on their finances, digital banking is now so much more.

We can see this transition in the shifts in strategy from the big banks, with both NAB and Westpac setting up dedicated funds to investing in fintech – all while new players come onto the scene. Australia has already seen its first neobank licensed this year, with Volt Bank the first to get the new restricted license in May and Xinja likely to take the plunge soon too. More will soon be on the way as well, from 86 400 backed by Cuscal and up, formerly Alt, with many other more specialist fintechs already in the market and keen to take on some aspect of banking.

While it may seem like the perfect time to disrupt the Australian market, with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry causing all sorts of negative headlines for the incumbents, the Australian banking market is a tough one. Switching rates are notoriously low by international standards, beaten only by the Kiwis across the Tasman. Not an easy market to crack, even without considering regulatory hurdles.

In Australia and New Zealand, millennial consumers are uniquely open to a digital-only bank. But for them, digital increasingly means mobile- first, not as a useful add-on to online banking but as the primary means for banking, and they will demand this from their financial services partners. Millenials need a bank that is less about managing their cash and more about helping them monitor their spending online and offline. Personal financial management tools that help control spending and saving are important to these consumers like no others. Above all they need a banking partner that can protect them from the wilds of the digital jungle, shielding them from fraud as they go about their lives online and offline.

Consumers rarely engage with a bank in-person, but will continually be using its apps and website, sometimes daily

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Everyday banking has become primarily a digital service for most and the dominant way customers self-service, whether this is transferring money, checking their balance, or notifying the bank of overseas travel. While online banking penetration has been fairly stable, with near universal usage among the working age population, mobile has been the channel on the move. In just 2013, only 28.6% of Australians logged into their banking app at least once a week; fast forward to 2018 and that figure is 51%.

While all banks have been digitizing their front ends, consumers are increasingly expecting a completely digital experience. This of course means faster services like real-time opening of basic products such as savings accounts but also entirely new services that bring value to the customer beyond simply a competitive APR. For example, real-time mobile payments, personal financial management tools, and tailored advice based on in-depth analysis of the customer’s own transactions; not something banks have really been in the business of doing before but a natural extension of a digital service.

Figure 1: Banking is primarily a digital affair; banks are no longer places but apps and websites

Note: Not shown: consumers using channels less than monthly Source: GlobalData’s 2018 Retail Banking Insight Survey © GlobalData

Millennials in Australia and New Zealand are at the forefront of the mobile shift

While there is a broad turn to mobile banking in Australia and New Zealand, the shift towards mobile has been a stampede among millennials. ‘Nomophobia,’ the anxiety that comes from not having access to a mobile phone,

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial may sound strange to most but to its mobile phone-tethered millennials it is entirely understandable. This shows up in the banking stats of both countries, with mobile app penetration near saturation point for millennials, head and shoulders above the rest of the market. All financial services providers have had to cope with the shift, with app development coming a long way from the early days of limited functionality and clunky design.

Mobile apps, besides having been wrung through rigorous design and UI testing, are now starting to integrate AI- enabled chatbots as a means for conducting everyday banking as well, keeping the mobile channel at the center of technological innovation. CBA, an early leader in the mobile app space, launched its Ceba chatbot onto its app in January 2018. With over 200 banking tasks that it can help with, the chatbot should see mobile begin to make inroads into the amount of troubleshooting and problem solving that is still handled by the branch and call center, at least among millennials that is.

Figure 2: Everyone banks online, but the first fully digital generation are doing this on their mobiles

Note: Not shown: consumers using mobile banking less than monthly Source: GlobalData’s 2018 Retail Banking Insight Survey © GlobalData

Millennials are searching for a new banking proposition

The millennial population is fast rising in importance within the banking market, but they are also one of the demographics that banks have really failed to connect with so far, making them a concern for any big player. As

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial baby boomers have retired and more young immigrants have arrived, the clout of the millennial cohort has grown, accounting for some 4.8 million in Australia and 875,000 in New Zealand. Most have now completed their schooling and entered the workforce as full-time workers, making them the core banking client base and one that should be earning banks lots of money. But the lower penetration of many traditional banking products among millenials, particularly mortgages, means this promise has not been borne out by experience. One can see this in the greater willingness to switch among millennials compared to others in the market: the connection between bank and client is weak. Any bank that can establish this connection will, in theory, be able to not only tap into a client base that can be a prime revenue driver for the next 20 years but one that could be relatively easy to peel off others. And that is just what the neobanks and a few of the established players are counting on.

However, for new purely digital banks such as neobanks, the millennial cohort is the critical demographic, combining both a willingness to try a digital-only bank with a stronger-than-average inclination to switch. With the Banking Commission throwing up all sorts of negative publicity, these are the customers most at risk.

Figure 3: Millennials consistently make up much of the opportunity for pure-play digital banks in Australia and New Zealand

Source: GlobalData 2018 Retail Banking Insight Survey and ABS population statistics © GlobalData

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Banks have gone from providing the payment tools to being the payment tools

As with most markets around the world, consumers in Australia and New Zealand are very accustomed to using payment cards when making transactions at the POS. Millennials have among the lowest inclination to use cash as a payment tool compared to older demographics in both markets. However, when it comes to payment card use, in both Australia and New Zealand most consumers across all generational segments are content to use plastic.

With cash and payment cards being the standard forms of payment in both markets, and with mobile technology and the internet being an integral part of consumers’ day-to-day lives, Australia and New Zealand are ready for the next big thing in payments. Banks that can leverage their investments into faster payments such as the New Payments Platform (NPP) in Australia will be able to leverage this shift away from cash.

Figure 4: Millennials have turned away from paying with cash in their daily lives

Note: Not shown: mixed cash and card users. Source: GlobalData’s 2018 Retail Banking Insight Survey © GlobalData

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial As consumers become increasingly comfortable on mobile they look for more than just the usual bank account

With the shift to digital has come a shift in expectations of what a bank is supposed to do for you. The most mobile- and digital-savvy consumer groups, particularly the millennials, are increasingly looking to their bank for more than just digitized traditional products. There is a growing enthusiasm in both Australia and New Zealand for banks that can actively help their clients save, manage their money, and benchmark themselves against peers.

With all their bills, payments, and spending done digitally, millennials and other tech-savvy consumers are keen for their banking partners to help them budget. There is a strong correlation between being a mobile-first consumer and the desire for these personal financial management services that add value, particularly when it comes to saving. These customers want active engagement with their bank, or at least its algorithm, to make helpful suggestions on their finances and spending. As open banking is rolled out, the advice will spread from simple cost-saving and budgeting analysis to recommendations regarding the right utility and mobile package. All banks need to embrace this shift towards becoming active financial advisors rather than passive custodians.

Figure 5: Banking is evolving as the technology allows digital players to offer more services to customers

Source: GlobalData’s 2018 Retail Banking Insight Survey © GlobalData

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Unconventional payments is just one more way that millennials are leading the shift in the market

One of the most hyped banking innovations in recent years has been the launch of mobile payments, with many banking apps and digital wallets allowing consumers to pay using just their phone, Fitbit, or smartwatch. Once again millenials lead the way in mobile payments. Almost 40% of millennials in Australia, where Apple Pay has been in the market since 2015, know that they have a mobile wallet, with slightly more than half of this figure actually still using it. In New Zealand where Apple Pay is a more recent addition to the market, the percentages are lower but the trend is the same.

In both markets, millennials are the key demographic for mobile payment apps, with other consumers more likely to be still using their contactless cards. These mobile-centric consumers increasingly expect to pay at any POS with their phone, a trend that will only grow. Banks need to enable this both via their own apps but also as merchant acquirers that provide the tap-and-pay functionality on the nations’ extensive POS networks.

Figure 6: Paying with your phone is still not common, but among the young it is becoming standard

Source: GlobalData’s 2018 Retail Banking Insight Survey © GlobalData

E-commerce is not a niche concern for banks catering to digital natives

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

The e-commerce market in Australia and New Zealand has continually expanded

Despite pressure on household budgets, or even because of it, more and more Australians and Kiwis are shopping online. Roughly 75% of millennials have shopped online in the last month, compared to just half among older consumers. E-commerce is the new normal, and supporting consumers in their online purchases has become an important part of modern banking. Banks that can add value to the process, whether by offering rewards for online shopping purchases or even just securing the transaction from fraud, will have a strong USP for these digital natives.

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Figure 7: E-commerce has been growing by more than 10% a year, with the trend set to continue over the next five years

LCU: Local currency Source: GlobalData E-commerce Analytics © GlobalData

Millennials need bank partners that help them buy online as easily as they can in the shops

Millennials in both Australia and New Zealand choose to use their debit cards for online transactions more often than their credit cards, and even when compared to the market in general, which is likely due to the range of payment options available. To millennials credit cards don’t have the same kind of prestige compared to how they are perhaps viewed by baby boomers and the older generations. For the deferred payment functionality of the credit card, Millennials are therefore more likely than average to opt for new payment tools such as Afterpay. Additionally, reward schemes are not as enticing compared to how they once were, reducing the appeal of credit cards that in many cases may still be charging an annual fee.

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Figure 8: Not only are millennials more likely to shop online, their choice in payment tool is more varied as well

Source: GlobalData’s 2018 Retail Banking Insight Survey © GlobalData

Comfort, security, and convenience determine the choice of payment tool online

Cards are still the preferred tool for online transactions in Australia and New Zealand. However, almost half of Australian millennials use PayPal for online transactions, primarily due to its ease of use as they don’t need to enter their payment card details each time. It may not seem like a big deal, but for more frequent online shoppers such as the millennials, it is a benefit. Established brands such as PayPal, Mastercard, and Visa, with their perceived security and wide acceptance, give online shoppers the confidence to pay online.

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Figure 9: Familiarity and knowledge of payment tools drive payment tool choice among millennials

Banks need to be more effective at securing the e-commerce world

Extensive online shopping has resulted in more fraud for Australian millennials to contend with

In Australia, about a fifth of consumers generally and a slightly higher share of the millennial generation have experienced payment-related fraud in the past four years. Incidents of payment fraud range from classics like having the purse or wallet it was in stolen, to more contemporary issues like having the card details skimmed while using it to pay for something or take out cash. These are then used by fraudsters to pay for large orders of gift cards, high end fashion items or premium consumer electronics defrauding small businesses that may lack the controls that a larger chain such as Coles or Woolworths will have. In New Zealand, such incidents are slightly less common for the overall market and are just half the rate when comparing the millennial segment, but reports suggest that this is higher than it has been historically. For example, ANZ (NZ) reports that it replaces roughly 2% of its credit cards each year because of fraud, and credit cards are considerably less popular in New Zealand compared to the ubiquitous debit card.

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Figure 10: Australian millennials are at high risk of having their payment card details stolen while shopping online

Not all payment card fraud happens due to online shopping; sometimes its bill payments to fake sites Many of the stolen bank details come from scammers impersonating trusted brands and institutions in what is called ‘brandjacking.’ Tax time for example, means there is likely to be a renewed round of phishing emails impersonating the Australian Taxation Office. Imagine getting a notice of assessment, going to pay your tax bill, and finding you’ve used an expertly cloned website. The scam emails and sites are often so good that a consumer doesn’t realize their details have been compromised until after the first frauds have been committed.

Figure 11: Fraudsters try to steal details by impersonating trusted sites like my.gov or even banks themselves

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Securing the online payment experience alleviates a lot of millennial angst

As can be expected, the fraudulent incidents that consumers in Australia and New Zealand experience the most are also the ones that consumers are mostly concerned with. Online fraud is the leading fraud concern across Australia and New Zealand and the top concern for those avid online shoppers, millennials.

While concern for payment details stolen over the internet or skimmed at merchant locations is high among millennials, there is a more relaxed attitude among these consumers compared to the rest of the market. This is reflected in that almost 60% of millennials in both Australia and New Zealand feel that their banking providers are doing enough to protect them against fraud.

With Australia and New Zealand both being developed markets, while consumers are still concerned about fraud they also have greater confidence in how such incidents will be handled. They are reassured that providers have appropriate solutions and measures in place to minimize any fraudulent mishaps. Additionally consumers in these markets have faith that should they experience any financial loss due to fraud, their banks will compensate them.

Figure 12: Online fraud online is the top concern for most consumers across Australia and New Zealand

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial Appendix

Methodology of 2018 GlobalData Retail Banking Insight Survey

The findings of this research are based on data from our 2018 Retail Banking Insight Survey, which was conducted online in Q1 2018 across 20 markets globally. The survey explores global consumer behavior, purchasing preferences, general payments behavior, channel interactions, and attitudes across the most important banking products. The number of respondents to any particular question will depend on an individual’s characteristics, their financial product holding, and their interest in that area. In all our research we specify a demographically representative sample for all the countries surveyed, ensuring an accurate sample of a country’s total adult population. We consistently conduct online surveys with consumers across a range of countries as part of our syndicated research. Sample in Australia was balanced in accordance with the latest ABS statistics on age, gender and income. Sample in New Zealand reflects similar statistics of Statistics New Zealand.

The survey fieldwork is conducted online using the latest techniques to maximize data robustness. There is also a higher reliance on closed-ended questions. Total sample in Australia for the questions used in the research was 5,000 respondents with 2,000 in New Zealand. Sample was split between payments and everyday banking categories to ensure full product coverage and reduce survey length.

Definitions

APRA- Australian Prudential Regulation Authority

LCU- Local Currency Units

Neobank- A completely digital bank, typically with no legacy systems and a heavy focus on mobile delivery of banking services.

Table 1: Guide to age cohorts, 2018 Age cohort Age range in 2018 Birth dates Generation Z Under 22 (born post-1996) Millennials/Generation Y 22–36 (born 1982–96) Generation X 37–57 (born 1961–81) Baby Boomer 58–72 (1946–60) Older 73+ 73+ (born pre-1946) Source: GlobalData © GlobalData

Banking in Australia and New Zealand: At a Digital Crossroads

Published: July 2018 Financial

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