- April 17, 2020
- Author: Mani Parthasarathy
- Category: Banking and Finance, Fintech
Australia is in the middle of a revolution when it comes to financial services. The country has proven to be the beacon of the progress of technology coupled with strong financial support to those individuals who are willing to make changes to the changing times of the world. It is one of the strongest economies which have been competing with the world economy as a single entity. The accelerating pace of technological advancements has created unprecedented opportunities for customer service and interactions. And even though the incumbents observe the potential in applying innovative approaches to these situations, the rapidly changing market makes it extremely difficult to predict what strategies will be most efficient. The facilitation of advancing and supporting the changing times for growth has become one of the most crucial steps in ensuring that the pace is matched with the efforts of individuals in the society. Therefore, financial institutions are under pressure to continually innovate while technologies quickly change the shape of the industry.
As powerful forces like changing demographics and technological innovation continue to shape Australia’s banking industry, the financial services sector ought to face a few disruptions. Lending institutions are now put up against an increased competition against niche products that keep coming up in the market, and pressure to eradicate friction with the help of simplified customer interactions. The competition is vast in terms of world economies and the financial backing that is given to innovation in other countries. Australia has been quite agile in realising the need of the hour. Hence inevitably, Australian lending firms face an array of challenges:
The Unprecedented Crisis: Covid-19
Australian financial system is and will have to handle the consequences of the unforeseen global epidemic. As Australia experiences a rise in cases of Covid-19, the industry can expect a recession, loss in global share markets and a decelerated business activity. The economy inevitably suffers as prime economic activities such as tourism, travel and entertainment come to a standstill. The Reserve Bank of Australia has slashed its interest rates to a whopping low (0.5 %) in lieu of the evident effect of the Coronavirus outbreak on the economy. Thus, the lending institutions of Australia might face a setback and increased challenges.
The aforementioned interest rates are expected to stay low for a while now. Additionally, due to the expected recession, unemployment rates are expected to shoot to about 7.5%, which will have an adverse effect on the market, expectantly lowering the property rates. But the factor that will hit the Australian Financial Services the most will be the ‘shaken consumer confidence’. A suppressed economy will weaken the buyer’s confidence, forcing the transaction activity to suffer. Buyers and Sellers retreat to the sidelines till the time some sort of certainty supports their decision making- further challenging the functioning of loan management systems.
An Industry in Transition
The Australian Banking industry is in a state of transitional flux as the growth towards alternative credit models fuels an avid trend of Peer-to-peer lending. According to the analysts from Morgan Stanley, they are gravely concerned about the outlook for the next financial year. They recognize that one of the challenges, even for the top four banks in the market, is the ‘Industry in Transition’.
As a result, big banks can no longer rely on the market-power or the consistent growth of house prices to underpin returns. The situation, therefore, becomes even more sensitive with so many alternative institutions coming up as strong competitors. Thus, the Australian lending institutions are bound to continue focusing on the simplification of its customer-interactions. This way, they can counter the comparative advantage that the new entrants might be able to deliver. Morgan Stanley also suggests that recent regulations that ensure financial stability and address community concerns might also hinder future earnings.
Such evolving trends in the banking industry are and will be putting lending institutions under much pressure to gear up their presence and relevance. One key contributor to this is also the rise of the Application Programming Interface (API). As the developers continue generating platforms to build and integrate customer-facing enhancements, it creates a boost in the market and the competition. Also, the upsurge of alternative lenders is pressurizing the existing customer relationships held by the lending institutions, complemented by the disintegration of traditional banking products. Adjusting to this gust of transition can be easier if the incumbents can consider a few of the developing disruptions in the sector today.
As per Deloitte’s document “The future of financial services- Impact for Australia”, the following opportunities will surface for the Australian institutions in the field of Deposits and Lending:
– An entirely virtual banking experience that extends beyond underlying transactions
– Customer-centric programs
– Customization of the provided financial services
– Liberation from external providers to deliver online solutions promptly
A range of fluctuations surrounds the Financial Services sector, be it demographic, technological, or regulatory. However, the downside of a continually evolving industry is that organized loan organisations might not always be able to keep up with the stride of market trends. Organizational silos and non-scalable systems usually come in the way of adapting high technology and a multichannel range of services that the customers now expect from their services.
Lending institutions want to grow exponentially, and therefore wish to try a diverse range of loan products. However, the existing loan management systems are not able to modify as quickly. It leads to two types of scenarios- either the institutions have to invest too much, or if they invest at all, they do not achieve scalable returns. Thus, it is only with the help of agility that Lending Institution will be able to afford the pace of a constantly changing market.
Even though the industry might seem to be too dynamic to keep up with, there are a few things that can facilitate lending institutions to be more agile. The first step is to imbibe the customer experience in your working programs. Customers are easily frustrated if the entire onus of their work being done is on their shoulders. On the other hand, clients tend to look for a partnership experience when they approach a lending institution. Hence, to think from the mind of a customer and design your services in favour of his/her experience is what may set your services apart from your competitors. Other than that, institutions must also consciously work in rapid learning cycles. To be able to learn quickly will be a massive part of bringing your institution at par with the evolving trends, and will also facilitate you to adapt to dynamic internal and external forces.
Delivering value in business is a function of providing customer value- and financial services are no exception to this. A company’s capacity to be agile can flourish vastly through committed leadership and an empowering learning program.
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Complying with a range of regulations
Financial institutions must walk the rope carefully to balance the many obligations that are placed on their shoulders by the regulatory regimes. But it gets tougher when they are subject to opposing regulations between organizations. One such example would be the regulations of Responsible Lending Requirements (RLR) and the Australian Privacy Regime (APR). The former requires lenders to collect additional data from customers, while the latter intends to safeguard the customer by limiting the lender’s access to the customer’s information. As the lenders, and hence the lending institutions, are expected to comply with both these norms, compliance becomes a matter of grave concern.
Hence, the regulations pose a challenge to the lending institutions. The Australian Prudential Regulation Authority (APRA) has identified four crucial areas of strategic focus in its new Corporate Plan. These areas will work on strengthening outcomes for the Australian community, by a range of measures, like:
- by maintaining the resilience of the financial community, so that it can recover from setbacks better.
- to improve the outcomes for members who engage in superannuation ;
- to improve the cyber security across the financial system; and
- modify the governance, culture, wages and answerability across all formal financial institutions.
Consequently, the regulations and compliances are expected to become stricter, which the Lending Institutions will have to gear up for.
The Unbanked Population
Even during times as technologically advanced as today, a significant chunk of the population is still unbanked and uninsured. In order to have more reach, lending institutions need to bring their services closer to this section of the community which has been previously seen as “commercially unreachable”. This clarifies that there is a more significant revenue opportunity up for grabs for the financial services sector- if they are willing to act to it.
With the advent of technology, there are many mediums that have brought the formerly commercially-unreachable closer to the finance circle. The widespread proliferation of smartphones has opened up new distribution mediums to involve the unbanked population in the organized financial system. Fast internet access and its affordability have now lowered the cost to reach these customers, enabling lending institutions to launch digital-only products and services. This cuts down the number of costly branches and field agents by a right margin.
But only technological investment in the field of mobility solutions can help to reach the unbanked population (since most of them are using smartphones) and include them in the emerging markets. This still remains a unique challenge for the Australian lending institutions. The ability of banks to take advantage of technology in the field of finances will eventually affect the dynamics of their competitiveness in the industry.
The Millennial Population
With the banking industry currently facing a transitional phase, one age-group often finds itself in the middle of the debate- the millennials. A key player in identifying and anticipating these changes in the industry is “consumer behaviour”, especially millennial behaviour. Eighty-eight percent of the population today owns a smartphone, making Australia one of the biggest adopters of this technology. Majority of the smartphone users are millennials who are using their mobile phones to access an app that helps them manage their finances efficiently and effectively.
The definition of a millennial is pretty flexible, but most definitions abide by those who were born between 1981 to the 2000s. The group of people who are in their 20s and 30s at the time when you read this article. Since a person’s involvement in the financial sector is dependent on his/her awareness, consideration and decisions- the study of millennial priorities and preferences becomes significant for the Financial Services sector. For example, in the Awareness stage, the first challenge boils down to the difficulty of attracting the millennial population.
Bringing the financial industry closer and of more value to a millennial comes with additional challenges. Because of their inherent exposure to so much information, they have different needs from banks in general. In a lending institution, they tend to look for instant customer support that helps them judiciously use their time, and offers unique and sustainable solutions. More than 80 per cent of the millennial populace would instead switch banks if they were offered more and/or better rewards.
More so, a millennial interacts with financial institutions differently than other generations. Average millennial checks his/her phone 43 times per day, hence if your facilities do not extend to mobile services, there is hardly any chance that you will get their attention. They interact with companies over social media, so that further demands the online presence of the Australian lending institutions. This will help them interact, and ultimately be of value to their target audience.
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Australia being a transitional market for the financial sector, brings its own set of challenges for the stakeholders. Even though these challenges can be foreseen, the validity of the imagined solution cannot. Hence it becomes even more critical to stride quickly along with the fast-moving industry.
These insights hint towards a few disruptive trends that the lending institutions in Australia must consider. One of them would be Alternative Lending, wherein trends such as Peer-to-Peer lending and automated processes seem to be working positively for its customers. Other than that, one can notice a shift in customer preferences, where they get more and more habitual to technological advancements such as a virtual banking experience, mobile banking and banking as a platform (API).
As an indirect consequence of these factors, one can also spot an intensified competition for investments. Currently, there is hardly any overlap now between the traditional lenders and crowdfunding platforms. It can be foreseen that ultimately these institutions will have to compete against crowdfunding platforms for conventional lending.
Hence it is undoubtedly a difficult time for the Australian lending Institutions. However, change is the only constant, and there is no running away from it. Just like any other sector, the lending landscape has been changing and will continue to do so. One major factor that drives this change is the need for simplicity and improved customer experience. By shifting their perspective from the internal outcomes to uncompromised customer experience, the lending institutions in Australia will be able to come through these challenges victoriously. As far as the epidemic is concerned, it is extremely hard to predict where it goes with highly suppressed buyer-confidence and the amount of uncertainty in all arenas concerned. However, we hope for the efficient handling of the epidemic, and good health, care and safety to the world-community. Economies fall and rise back up, but a loss of health and precious lives is irreversible.