Royal commission a tailwind for new digital bank

UK entrepreneur Anthony Thomson - who launched Metro Bank and Atom Bank - says the time is ripe for a new digital challenger in the Australian banking sector which has been plagued by bad publicity and scandals.

For, Thomson - who is setting up new digital bank called 86 400 - the royal commission is a good tailwind and comes just as the big four banks' oligopoly pricing power has peaked.

While the local banks are resolved to change their ways, he remains unconvinced. “You would have to believe there was going to be a massive cultural change and everything I’ve seen in terms of the way the banks have been dragged kicking and screaming to the commission suggests that there is no major cultural shift taking place in these banks," he said.

“And even if they were genuinely committed to it would take them years.”

Interestingly, the boost that new entrants like 86 400 will get from the royal commission is much more significant to Thompson than an open banking environment.

According to Thomson, there’s a timing question with open banking in terms of its impact on the banking market. He thinks the UK experience is a useful precedent in the sense that open banking is way behind schedule and there are whole lot of technical and legal issues that are yet to be resolved.

Open banking

Thomson, who will be chair of the new digital bank, thinks it will take some time for the open data regime to play out.

“There are a couple of neo-banks in Britain who have in effect bet the farm on open banking and who are struggling because there is absolutely no consumer recognition of open banking there,” he said

“It’s a volume play if you are taking a small clip of the ticket you need an awful lot of tickets," he added.

“So yes, over time, open banking will make a difference but in the short term say, over the next 12-24 months I think it will make very little difference.”

86 400, which will initially be funded by Cuscal, plans to launch current and savings accounts in the first quarter of 2019 after being issued with a licence but will fairly quickly follow that up with home loans.

“It is very important that we start with transactional accounts because people touch them every day which gives us an opportunity to demonstrate how we can offer consumers a better experience,” he added.

Thomson has often claimed that one of the great malaises in UK and Australia is that the banking majors have lost sight of the customer.

“The banks have forgotten that they’re here to serve the customer; they just think they’re here to make money,” he said.

As he sees it, this provides a real opportunity for a full-service digital bank to turn up the heat on the big four lenders.

True alternative

Everything Thomson saw in the UK underlines his belief that people will try out a real alternative to the high street banks.

He should know having launched two highly successful digital banks in Britain.

After co-founding Metro Bank in 2010, he set up Atom Bank four years later - the first mobile-only banking services to launch in the UK. Atom Bank currently has £1.6 billion of consumer deposits and a loan book of more than £1.2 billion.

“I believe passionately if you give the customer a better product, a better service or experience and manage your business efficiently you will have a successful business,” he says.

Thomson doesn’t buy the argument that people are too lazy to switch banks if they’re dissatisfied with the service.

He cited UK monthly figures that claim 2 or 3 per cent customers changed but argued these are consumers who switch entirely from one bank to another.

Consumers will switch

According to Thomson, there are 64 million primary checking accounts held in the UK and under 40 million adults.

“So, there are 1.5 accounts per adult which is far greater than the absolute switching numbers suggest.

“All my experience at Metro and Atom supports this.  So, I think the raw switching numbers underestimate the number of people who will open a new bank account.”

The banking veteran is not saying he knows things others don’t – even though he has a track record of taking on incumbents and winning.

Rather, he says, it’s his team’s ability to apply what they know. “We all know that cost efficiency is the key driver in banking and 86 400 will be world-leading in terms of its cost-income ratio.

“That enables you to offer better value products to customers and better returns to shareholders so it makes you attractive to the providers of capital.”

Analysts sceptical

86 400 is one of several digital bank start-up in Australia.  Xinja and volt, which were granted restricted banking licences earlier this year.

However, the country’s analysts remain sceptical that these new entrants will have a major impact.

Says Morningstar’s David Ellis: “You’d have to say if Thomson has done this before twice he would have the know-how and entrepreneurial skills to set up a successful digital bank in Australia," he said.

“But I can’t see a new online bank getting a massive number of new customers from the incumbent banks.”

Also, he added, the bad publicity and distrust of the banks has not moved the dial.  For example, Ellis cited the Commonwealth Bank presentations which claims to CBA has attracted net 1 million new transactional accounts in the last year with 200,000 of those in the last six months.

CLSA’s Brian Johnson said the major banks benefit from consumer apathy.

To him,  a new competitor needs to offer low home rates. “No-one has offered a product that dramatically cut housing rates since Aussie Home loans in 1999.”

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