Bankground (to reiterate what you already know)
If you analyse hundreds of the banks income streams and if you spend time analysing the financial statements of the large institutional banks around 2/3rds of their income in general comes from a margin on interest of around 2%. Across the entire industry, the funding cost (including all costs) comes in at around 1.5% less than what they lend it out at (home, consumer and corporate). It is all basic stuff that we all know and lets ignore local deposit growth which has funded lending recently.
The banks then have side financial products (insurance, payments, etc). The market share on these products is getting eroded with so many new entrants into the marketplace.
They key to owning the banking industry however is home loans. That by far is the largest chunk of banking revenue, but it is much more valuable that that.
The humble home loan is the lead into creating a deep and personal relationship between the bank and that customer. I will say that again.... When a bank is chosen to be the provider of an individual's home loan, it is the largest and most relevant investment for a large proportion of the Australian population and gives the chosen bank an incredible opportunity to create a lasting relationship. It is the same as jewellery retailing, when a customer chooses an engagement ring from your organisation, it is deeply personal, emotional and the potential start of a lifelong relationship. The customer has their strongest bond with you in that field.
Some background figures for Australia
Average home loan size is around 300k (~9 million homes, 40% some form of residential loan)
around 15% of households have a vehicle loan debt
around 100,000 people are first home buyers per year
around 250,000 people refinancing on their existing property
around 450,000 new loan on a new property
Banks own 90% of the home loan market
In the whole, the market is reasonably stable. The 700k of people who are refinancing or getting a second or new loan generally go to their existing bank or shop around causing minor churn. The interesting component is the 100,000 first home buyers who represent ~$750 million annual ebit entering the market every year.
Over time, whoever can capture that market for life (with all the additional financial products) will grow to dominate the Australian banking market.
Currently all the traditional banks are doing very little. They blast advertising on television and use all the traditional marketing techniques, but have a think about who already has a relationship with these people.
First home owners have a bank account, they have a credit card, they have a mobile phone, around 70% of them shop at either Coles or Woolworths and they have a lot of friends. This market typically has a fairly thin credit file (the new positive credit reporting changes will be very helpful) and not a lot of information is known about them.
What methods are banks are using to acquire these customers:
1) The balance transfer - lets move your credit card debt over to us for a low temporary rate and we will start to get to know you. Nothing positive comes from managing a customers credit card facility. It has a huge interest rate, late fee penalties and points that are near worthless at 0.5 cents per dollar spent. That being said, banks do it to acquire a customer.
2) Brokers - It is far too late by this stage. It is a fight to the bottom of the margin barrel to acquire the customer.
3) Advertising - blast TV advertising. It does have subliminal affect, but I would question the return on marketing $ spent in this area with the recent fragmentation of media. The explosion of channels and Netflix etc and a large number have been using anonymous proxies for several years. These people are the younger generation and they will be the ones who will be first home owners.
4) Referral usually by friends and older family. Banking is not utilising this area enough. They expect it will naturally come their way with the first savings account and then naturally the first credit card.
5) Telco - Bendigo bank has diversified into becoming a telecommunications provider. They are trying to create a relationship with the younger customer. I think the franchise model of banking is an interesting one and worth a separate blog post at some point.
6) Technology - they are investing in technology to smooth out the customer experience and ease. They cannot acquire customers this way, but they may lower the churn.
It seems obvious that Woolworths and Coles are about to offer home loans. They already have a strong relationship with 70% of the population, including the first home owner market.
The merchants have been recruiting heavily in the banking technology space over the last 2 years as a preliminary move to prepare for their banking offerings, but they have also been very smart and investing in analytics engines such as Woolworths purchase of Quantium 2 years ago. If your credit card is already with Woolworths, they already know all your purchase history across all retailers / service providers and they will be able to provide an extremely well constructed targeted first home loan offer to a Woolworths loyalist.
The banks at their core must be retailers and adopt customer centric retail relationships. Operate how successful retailers do otherwise their customer base will decline.
The banks are already stagnating with their customer base. They have to attract new customers in the same way that successful retailers and merchants have always done. It is rare to see a bank with growing total customer numbers.
Bankers need to hire retailers and merchants.
Have a great week!
Ross.
