As always in the financial services sector there are two streams. The big banks are looking to enhance their technology and data capabilities to provide increasingly personalised and seamless customer experiences. Smaller financial institutions and Mutual Banks, on the other hand, have a long history of excellent customer experience and benefits, and are looking at consolidation as a way of ensuring they can continue to work for the benefit of members within a more stringent regulatory environment post Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
It’s hard to believe that the final report from the Royal Commission was delivered over two years ago – on 1 February 2019. The ramifications, and new regulations, continue to be rolled out. Consumer Data Right – and Open Banking – is imminent. The onus is on the sector to adapt or be left behind.
M&A trends – tech savvy takeover targets
The fastest way to bring new skills and abilities into your organisation is to acquire it. This is particularly true for the big banks, which do in fact have whole teams dedicated to developing new products and R&D, but may run into roadblocks due to size and legacy constraints.
Neobanks and digital banks are currently attracting the most press around this. The National Australia Bank’s (NAB’s) deal to acquire 86 400, , earlier this year is a notable example. This is a particularly interesting case as 86 400 is set to merge with NAB’s existing digital-only proposition UBank.
The future is mobile. Roy Morgan research from March 2020 revealed that mobile banking is the service channel with the highest customer satisfaction. Forrester research from July 2020 said that more than half of Australians were using their mobile phone for banking. This sets the scene for genuine competition between digital and traditional banks.
Successful digital banks and neobanks have sought to compete with the more traditional banking institutions by offering their customers services such as very fast approval processes using bespoke technology, or AI engines for credit scoring.
Ultra-low interest rates are squeezing margins for the entire industry. Right now, the big banks do not want to lose young customers to nimble, tech-savvy challengers, so partnering with these smaller competitors is a low-risk, relatively low-cost way to head that threat off.
We expect to see more acquisition activity in this space, as incumbent banks seek to improve their own offerings to meet new customer demands.
Tax considerations in credit union consolidation
The banking regulator, APRA, has made no secret of its desire for smaller credit unions to merge with their larger counterparts. This has been underway for years, and well before the Banking Royal Commission.
The aim is to maintain the viability of the credit unions and Mutuals by creating scale within this part of the sector to meet new demands and regulatory requirements.
The Customer Owned Banking Association (COBA) and Grant Thornton have produced two reports on the impact regulation has on credit unions and Mutuals, arguing for proportionality in regulation to better reflect the smaller risk profile credit unions and Mutuals have compared to the big banks.
While proportionality, already enshrined in regulation in some overseas jurisdictions, is working its way through the system in Australia – to meet new obligations, some consolidation will be unavoidable. Work is underway between the Australian Taxation Office (ATO), APRA and COBA on legislation to ensure there are no adverse tax implications for credit unions which are seeking to merge.
Prior to COVID-19, APRA was actively engaging with smaller credit unions to assess their financial position and determine whether they might be better off partnering with a larger entity to ensure the business’s survival.
Culture is a huge consideration here.
Each with their own unique identity, many smaller credit unions are wary of the member benefits and services being lost or stripped away through the consolidation process. A delicate balance must be struck between serving members’ best interests and achieving a scale at which the business can successfully operate and compete.
With the taxation legislation around credit union mergers now on the table, and APRA’s increased activity around this, Grant Thornton expects to see more merger activity among credit unions and mutual banks towards the end of 2021.
Regulation, reforms, risk and the return to ‘normal’ from the post-COVID-19 pause
As we’ve mentioned, the final report from the Banking Royal Commission was delivered over two years ago now. The expected consolidation in the financial services sector as a result of tighter regulations and reforms is taking longer to play out, simply because a number of those reforms were delayed due to the impact of the COVID-19 pandemic.
However, this is merely a reprieve and change has recommenced. Many businesses and institutions, particularly in the financial advisory space, have not yet felt the increased cost burden of these regulations, but once that strain starts to really bite, consolidation is expected to pick up rapidly.
While this is typically an issue for small or mid-sized organisations, the idea of spreading the cost of increased regulation across a larger number of customers or accounts could also be an attractive prospect for big operators and could drive a desire for increased scale in the market.
By all accounts, the Australian economy is showcasing remarkable resilience, with falling unemployment, a robust capital city housing market and steady business sentiment emerging as features for 2021. It is highly likely there will be a return to a more ‘normal’ operating environment, with the regulatory and reform wheels starting to turn once more.
That is set to drive further merger and acquisition activity in financial services, particularly in the second half of the year.
A simplification of taxation rules is overdue and progress on the Corporate Collective Investment Vehicle Bill in particular with respect to foreign investment, is necessary to capitalise on Australia’s enviable handling of the pandemic.
This resilient economic environment provides scope for the Federal Government to review – eased from 1 January 2021 – that would make Australia a far more attractive destination to do business.