Key takeaways

  • After decades of growth, Australia’s banking sector has begun to homogenise, offering similar services to the same customers.
  • To escape commoditisation, banks must offer increasingly unique products and adopt a simpler, smaller, more customer-connected approach.
  • Digital technology can assist in this journey to differentiation, defining target customers, enabling stronger connections, and underpinning new services.

Australia’s banks have enjoyed decades of prosperity and success. However, the industry is rapidly approaching a crossroads, forcing the big players to consider switching tactics to ensure  the positive future of banking.

The traditional economic engine of Australia’s banking sector – asset growth (especially residential lending such as mortgages) and leverage (increasing assets using debt) – are not sustainable, even as margins and market share come under threat. This is due to a confluence of macro forces, including digital technology, changing consumer behaviours, natural limits to lending, the rise of Asia, and a subdued global economy.

What can banks do? Cost cutting alone, whilst important, isn’t the answer: history shows that for the past two decades, efficiency gains in Australian banking are quickly passed on to customers. In short, banks are getting caught in a ‘commodity trap’ – competing to provide the same services to the same people.

To ensure that the value of efficiency savings is shared with all stakeholders, including shareholders, banks need to get better at delivering differentiated offers to specifically targeted customers. Digital technology will be a critical part of this process.

Digital and the art
of thinking small

To avoid the oncoming commodity trap, and sure up the future of banking, Australia’s big banks should consider a new approach, one that combines simpler product offerings with a customer-centric focus and continued cost cutting efforts. They should start to think simpler and smaller, yet endeavour to become more connected to customers than ever before.

To escape commoditisation, banks must become simpler, smaller and more deeply connected to customers.

One of the ways to ‘think small’ is by driving fewer and more unique offers for a targeted group. US-based East West bank, for instance, has built a successful business by focusing on America’s Chinese community, offering products that facilitate sending money between the US and China.

Another American bank, USAA, has no business or private banking service lines. Instead, it focuses on providing members of the US military and their families with comprehensive personal banking services. This approach has paid off, with USAA cultivating a reputation for customer service and innovation.

Digital can also be a key part of this path to differentiation, from using data analytics to identify growth areas, to building better customer experiences through automation or personalisation. Banks can also leverage new digital technologies, especially cloud computing, to rationalise their back-end infrastructure. By choosing to specialise in a small number of services, a bank can decide which systems and software to retain and develop in-house. Other services, if required, can then be outsourced to third party providers, such as fintech startups. Using this strategy, banks could achieve significant efficiency gains, while keeping costs under control.

There are also opportunities for digital to power new, niche product offerings and solve problems banks haven’t solved in the past – problems found in areas such as tax, inventory, supply chain management and invoicing. Some banks are also designing digital services that assist customers with particular life decisions, such as helping families with school selection for their children or where to buy a home. These services can include savings advice for school fees, taking into account the family’s finances and the age of the children, or to help find homes in desirable school zones when seeking a mortgage.

Jack of few trades,
master of some

When it comes to innovation in the future of bamking, there are many areas of opportunity for banks to pursue, such as payments, cyber security and robotics. However, progress is more likely to be made by focusing on a handful of core competencies, such as the promising fields of data analytics or biometric authentication. Not every bank can become expert at everything.

By carefully choosing a few areas and concentrating resources accordingly, it is possible in such a new and fast-moving industry for any bank, anywhere in the world, to develop world-leading capability.

This is what makes digital technology so exciting for the banking sector, and why banks are so interested in it. It forges new connections with people and customers, potentially understanding them in fresh ways. So while digital doesn’t necessarily have to be the ideal solution, it’s highly likely that it will be.

For further reading on the Australian banking sector’s commodity trap, download the PwC Strategy& report Escaping the commodity trap: The future of banking in Australia.

Jim Christodouleas is a Director in the Melbourne office of PwC Strategy&.


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Jim Christodouleas