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. © GlobalData 2018. This product is licensed and is not to be photocopied. 1 Banking in Australia and New Zealand: At a Digital Crossroads Published: July 2018 Financial © GlobalData 2018. This product is licensed and is not to be photocopied. 2 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 © GlobalData 2018. This product is licensed and is not to be photocopied. 3 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, © GlobalData 2018. This product is licensed and is not to be photocopied. 4 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 © GlobalData 2018. This product is licensed and is not to be photocopied. 5 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.