Are Australian banks in the middle of a price war?
There is strong evidence that the correlation between the Official Cash Rates of Australia and New Zealand and average deposit rates is weakening. In Australia, while the Official Cash Rate has fallen to historic low of 1.5 percent in 2016, deposit interest rates are rising, and are expected to increase to 2.9 percent in 2016 compared to 2.3 percent in 2015. Similarly in New Zealand, average deposits rates are expected to be broadly similar to 2015, despite a sharp fall in New Zealand’s Official Cash Rate.
The phenomenon of banks maintaining artificially high levels of deposit rates is nothing new. After the global financial crisis European banks were locked in a heated battle for retail deposits, the lifeline of banking and the funding base to back loans. Some Spanish and Italian banks waged an aggressive “deposit war”, enticing customers with high savings rate offers as much as 5.5 percent interest rate for 12 months. It was a self-destructive strategy that eroded margins, destroyed profits and drove up bank costs.
Is this same scenario likely to happen in Australia and New Zealand?
Basel III has had a significant impact on the strategies for funding in both regions. Under Basel III, the deposits business ceases to be solely a volume and margin game. The fight for deposits is the fight for sticky retail deposits that will improve stability, reduce outflow factors, and provide the capacity for banks to service the growing demand for credit. A growing home lending market with increasing property values and loan demand, also means that Australian and New Zealand banks need to proportionally grow their funding base to support current and future demand.
However, Australia and New Zealand banks have a high proportion of institutional and wholesale funds on their balance sheets. In order to improve stability, increase liquidity coverage, and reduce reliance on wholesale funding, the banks in both countries are now seeking to improve their base of retail deposits. These deposits provide better stability and liquidity coverage and hence a “war for deposits” has started in both markets.
As the trend continues, the outlook for 2017 is likely to see reductions in Official Cash Rates in both regions, but flat or even higher deposit rates. The differential between liquid cash deposits and fixed term deposits is likely to widen, encouraging customers to lock in deposits and support banks’ demand for stickier funds.
Without a scientific approach to this conundrum, there is a danger that the market will “overprice” deposits, solely reacting to market factors. This will potentially cause the same issues of margin erosion and escalating costs that we have seen in Europe and North America.
Banks in both regions want to improve their capability to use consumer behavioural data, transactional data, market data, and competitor data to design a strategy for deposits and determine the optimum approach to both deposits retention and acquisition.
Banks in both regions are now looking at ways to optimise deposit portfolios to balance the competing demands of margin, customer expectations, volume, and stability. This is not an easy conundrum to solve, but the use of new technologies including data analytics is a necessity for solving it.
Damian Young is the managing director of Nomis Solutions, Australia
Timeline: India takes unicorn leap with six in five days
We chart an historic week in India’s tech industry, where in just five days, between 5-9 April 2021, the country achieved six new unicorns, bringing India’s total to 10 in 2021 to date, an immense unicorn leap from just seven in 2020 and six in 2019.
April 5: Meesho
India’s first social commerce unicorn, Meesho raised US$300m from SoftBank, Facebook and Shunwei Capital, giving the Bangalore-based startup a US$2.1bn valuation, a threefold jump from its previous funding round in 2019. Founded in 2015 by two IIT-Delhi graduates, Meesho connects producers and resellers, helping small businesses sell through social media. It has 45m customers and has enabled 13m entrepreneurs to start their online businesses with no investment.
April 6: CRED
Founded just over two years ago, Bangalore-based credit card repayment app CRED raised US$215m from Falcon Edge Capital and Coatue, nearly trebling its valuation to US$2.2bn from its January US$80m round. Allowing customers to pay off their credit card debt while earning CRED coins which they cash in for rewards, CRED has grown rapidly during COVID-19, doubling its customer base to nearly 6 million in a year.
April 7: API Holdings / Groww
The first epharmacy startup to gain unicorn status, PharmEasy (API Holdings), which has digitised 60,000 brick and mortar pharmacies and 400 doctors across India, raised US$350m in a round led by Prosus Ventures. Founded by four former Flipkart employees as a way of making investing simple, investment platform Groww became India’s second-youngest fintech unicorn, raising US$83m in Series D funding led by Tiger Global, quadrupling its previous round in September.
April 8: ShareChat
New Delhi-grown social media startup ShareChat, founded in 2016 by Mohalla Tech raised US$502m from Lightspeed Ventures, Tiger Global, Twitter and Snap taking its raised total over six rounds to US$766m and pushing its valuation to US$2.1bn. The funding will be used to grow its user base and short video platform Moj, which launched in 2020 following TikTok’s ban in India. The regional language startup claims 280m users.
April 9: Gupshup
AI-led conversational message startup joined the unicorn club after raising US$100m from Tiger Global giving it a ten-fold valuation of US$1.4bn. The smart messaging platform, which has seen accelerated growth during the pandemic, was founded in Bangalore in 2005 by serial entrepreneur Beerud Sheth, whose online freelancing platform Elance is now listed. Gupshup’s API enables 100,000+ businesses to build messaging and conversation experiences across 30+ communication channels.