It's earnings week for the big banks in the US with the industry receiving its quarterly health check from Wall Street. Despite earnings beating analysts' expectations, the overall outlook is more pessimistic; investment banking is suffering on the back of an ongoing trade war with China and looming rate cuts are squeezing margins. Profits are instead being driven by tax cuts and consumer banking. US consumers are taking advantage of low interest rates to borrow more and delinquencies continue to fall. This perhaps explains why Goldman Sachs is so keen to enter the retail market. The firm has poured $1.3 billion into its consumer arm Marcus and is preparing for the launch of the Apple card. In its analyst call, Goldman confirmed that this investment will continue into next year and declined to give a timeframe for when it expects the unit to become profitable.
The encroachment of technology companies into the world of banking and finance is gathering pace but it is fair to say it is not being broadly welcomed everywhere.Facebook executive David Marcus faced a barrage of questions from US lawmakers, over the company's plans to create a new digital currency. House Democrats meanwhile circulated a draft bill entitled the "Keep Big Tech Out of Finance Act", which needs little further explanation. While the bill will probably face opposition from Republicans making it unlikely to pass, the reaction in the US goes some way to explaining Facebook's decision to base Libra in Switzerland.
One country in which big tech is already playing a significant role in payments is India. The latest to step into the ring is Facebooks' WhatsApp payments service. It has been present in the market since early 2018 in beta mode with approximately one million users, and reports suggest it is now ready to make its debut and merely awaits approval from the Reserve Bank of India. The domestic Paytm and international players such as Amazon, Google and Walmart are leaders in the mobile payments market. WhatsApp enters the payment arena with 300 million active users to leverage. "If Facebook gets this right, it has the potential to entirely alter the market share structure and dominate the mobile payments scene" commented Lorna Baek of Verisk Financial Research. "However, it still won't be an easy fight and competition is thick with excessive cash-back offers to entice users to join or stay with providers, affecting profitability." Recent reports also suggest Apple Pay is gearing up to enter the market, which will add to the pressure of competition. It remains to be seen who the last man standing will be, but there's one thing for sure - the fight will be of epic proportions with consumers winning out in the short-term.
A new wave of challenger banks are setting-up shop in Australia. The latest of these is '86 400' (named after the number of seconds in a day), which has just been awarded a full banking licence by the APRA. Like in the UK and other countries, neobanks would like to take advantage of the elevated smartphone penetration rate to offer specialised digital banking services. Chief executive Robert Bell was bullish as he outlined the bank's ambitions to the SMH: "None of us are interested in building a small niche bank. We want to build a serious alternative to the big four banks...". However, is this being realistic? One would have to think so, given the way that market share is so heavily concentrated among so few players in Australia. With complaints that the Reserve Bank of Australia's recent rate cut has not been fully passed on to customers, it is clear that consumers are open to alternatives. Either way, competition should be welcomed and at a minimum it should force the big four banks to up their standards.
To end, links to some other stories of interest this week...