Category Archives: Banking

Same old economic crises?

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Amid the current turmoil surrounding tariffs and trade wars, I have been re-reading “Economics: The User’s Guide” by Ha-Joon Chang.

First published in 2014, this highly accessible introduction to economic theory and practice was written in the wake of the GFC, and the fallout that ensued from the US housing bubble and the consequential collapse (and public bailout) of major banks and financial institutions. The US bubble was largely caused by an imbalance in housing supply, poor lending standards, and over-engineering of mortgage-backed securities that quickly unraveled when banks lost confidence in each other, causing a major credit crunch and a lack of market liquidity.

Chang couldn’t have foreseen COVID and the knock-on effect on global supply chains and the impact of lock-down policies on overall productivity. He overlooks (ignores?) Bitcoin, a key ideological and technological response to the GFC, and he downplays the role of innovation in economic growth. However, his historical survey, his analysis of major economic theories (or “schools”) and his explanation of the roles that governments and the private sector play are all spot on and serve as a great resource for anyone wanting to try and make sense of the world.

Given the credit crunch at the heart of the GFC, the recent sell-off in the US bond markets reminds us that:

1. History repeats itself time and time again (albeit for different reasons)

2. Global markets are deeply interconnected, despite various attempts at de-coupling and policies designed to challenge globalisation and bring about increased protectionism

3. The US housing market is heavily reliant upon foreign investors since US treasuries both create market liquidity for new mortgage lending, and set key interest rates for borrowers – and major holders of US treasuries are foreign governments and institutional investors

The US mortgage market is underpinned by a near-socialist funding model (in the form of Fannie Mae and Freddie Mac), a propensity for long-term fixed rate loans, and a significant volume of non-recourse mortgages.

If a global trade war results in higher cost of goods for US consumers, and a bond sell-off results in higher interest rates, could we see a repeat of the GFC but driven by different causes?

Banking Blues (pt. 481)

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Last week, I attended a networking evening for Intersekt, Australia’s largest annual fintech conference. Billed as the “flagship event of the Digital Innovation Futures Victoria Festival”, the 2-day event is supposed to take the pulse of Australian fintech – by highlighting current industry trends, showcasing local success stories and identifying areas for future growth and collaboration. I wasn’t able to attend the 2-day conference itself, but based on the networking audience, and the program agenda, it feels like there is very little “innovation” these days, and certainly not among the major banks.

The fintech product focus is still very much on payment solutions and open data – even though we’ve had the NPP and Open Banking for several years – plus SME lending (since the major banks have largely abandoned cashflow lending, just as they have exited wealth management and financial planning). There was barely an hour of the conference given over to crypto currencies and digital assets, and from what I could see, no sessions dedicated to Blockchain technology.

Challenger or neo-banks have not managed to gain traction in Australia, mainly due to the dominance of the incumbent banks, especially the so-called Big 4, which continue to enjoy an entrenched oligopoly protected by regulation. Despite Financial Services (banks, diversified financials and insurance) forming the largest sector (27%) of the ASX 200, it is highly concentrated and appears structurally designed to keep out competition (and hence, stifle innovation).

Indeed, I cannot think of a single new product that my bank has introduced in the 20 years I have been a customer. Over that time, I have held both personal and business accounts with this bank – mortgages, investment loans, credit cards, transaction accounts and savings products. They no longer offer wealth management services under their own name, and the share trading account I hold with them is actually operated by a foreign financial institution. At the same time, the bank has been shuttering branches, and disbanding services, often without any notice or customer communication.

My frustration with this bank goes unheeded – if anything, the customer service has worsened, often under the guise of “the Royal Commission”. The latter has no doubt given rise to staff cuts to pay for greater compliance costs, and is used to justify over-bureaucratic customer processes. Meanwhile, every time I raise a complaint, I’m told it’s the bank’s “systems” that are to blame, or their third-party service providers – it’s never the bank’s own fault, and they never take responsibility or demonstrate accountability.

These are just the latest incidents in a litany of poor customer experience:

1. A simple title transfer involved me visiting three different branches (thanks to branch closures and rotating staff), plus e-mailing and phoning an interstate office (at least the settlement was probably executed on Pexa’s blockchain-enabled platform…)

2. A glitch in setting up a replacement bank-issued credit card in my digital wallet was blamed on the card provider’s technology (even though I had just successfully linked this same card to my smart watch). I hope the bank has robust SLAs with this third party…

3. Some unsolicited (and highly misleading) e-mail marketing sent out under the bank’s name was blamed on another third-party provider (surely the bank must authorise what communications are issued in its name?)

4. I spent over 2 hours in a branch to open some basic term deposits in the name of existing businesses that already have client profiles and accounts with this same bank – a combination of bureaucracy, slow technology and cumbersome processes which still involve wet signatures on hard copy documents.

5. In the process of setting up one of these business accounts, it turns out the bank had the wrong company details on their core records, even though the statements are sent to the correct address. I advised the bank of the change of address several years ago, but despite the findings of the Royal Commission, the bank has not bothered to run a check on the ABN register, which is free to use, to check the company details.

The really depressing thought is that even if I switch banks, I will probably run into similar problems elsewhere!

Next week: Non-binary Politics?

Digital Identity – Wallets are the key?

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A few months ago, I wrote about trust and digital identity – the issue of who “owns” our identity, and why the concept of “self-sovereign digital identity” can help resolve problems of data security and data privacy.

The topic was aired at a recent presentation made by FinTech advisor, David Birch (hosted at Novatti) to an audience of Australian FinTech, Blockchain and identity experts.

David’s main thesis is that digital wallets will sit at the centre of the metaverse – linking web3 with digital assets and their owners. Wallets will not only be the “key” to transacting with digital assets (tokens), but proving “identity” will confirm “ownership” (or “control”) of wallets and their holdings.

The audience felt that in Australia, we face several challenges to the adoption of digital identity (and by extension, digital wallets):

1. Lack of common technical standards and lack of interoperability

2. Poor experience of government services (the nightmare that is myGov…)

3. Private sector complacency and the protected incumbency of oligopolies

4. Absence of incentives and overwhelming inertia (i.e., why move ahead of any government mandate?)

The example was given of a local company that has built digital identity solutions for consumer applications – but apparently, can’t attract any interest from local banks.

A logical conclusion from the discussion is that we will maintain multiple digital identities (profiles) and numerous digital wallets (applications), for different purposes. I don’t see a problem with this as long as individuals get to decide who, where, when and for how long third parties get to access our personal data, and for what specific purposes.

Next week: Defunct apps and tech projects

 

 

The Social License to Operate

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The “social license to operate” is best described as follows: companies only get to do business so long as they retain the trust of their customers, employees and other community stakeholders.

The current debate about de-banking reminds us that financial institutions are among the largest beneficiaries of that social license, especially in Australia where the so-called 4 Pillar banks operate under a protected oligopoly. If you want to be cushioned against external and internal competition, then you need to demonstrate why you deserve to retain that privilege.

Apart from arbitrarily shutting customer accounts, banks are also closing local branches and/or reducing their opening hours. They are scaling back on the services available at some branches, even though their archaic processes still require existing customers to attend in person for things like ID verification and to apply wet signatures on hard copy documents. Seriously, you can’t have it both ways – reducing customer access while at the same time forcing customers to get to a branch to sign papers. (In a recent case, I ended up dealing with three separate branches, as well as an inter-state department, just to process some standard forms.)

The Banking Royal Commission dealt our major financial institutions several reputational blows – but rather than forcing them to improve their ways, foster innovation, increase efficiency, embrace technology and lift the overall customer experience, it seems that the banks have hunkered down in defence. They use the findings of that very same Royal Commission to justify why they now need to employ more and more layers of bureaucracy, form-filling and pen-pushing, in an attempt to cover their backsides and to mitigate against the public backlash.

And it’s not just the banks that are under increased community scrutiny – supermarkets, utilities, professional service firms, property developers, telcos, builders, insurers, landlords and tech companies are all facing various criticisms, for things like price gouging, squeezing suppliers, corruption, monopolistic and anti-competitive behaviours, poor quality products and service, financial irregularities, atrocious consumer data protection, environmental damage, unconscionable contractual terms and unreasonable policies. Unfortunately, our regulators don’t seem capable of holding these parties to account, so it will largely depend on consumers and the community to stand up for their own interests.

Next week: More on Music Streaming