Aussie Banks: Double, Double Toil and Trouble


The CEO and founder of Twitter is in Melbourne. Now, Jack Dorsey is a man we should listen to.

He also runs a financial services company called Square. Let’s just say he’s seriously rich.

But it’s not his bank account we need to concern ourselves with.

It’s his view that the internet will have a native currency.

Dorsey is known to own a lot of bitcoin.

But even Dorsey says bitcoin is not yet a functional currency, and more like digital gold.

But the world is heading into a new phase where payments, deposits and all financial services look very different to years past…

As an Australian, this should be front of mind. For sure your superannuation fund is allocated heavily to the big Australian banks.

And they have multiple fights on more than one front. There is no ‘set and forget’ here.

Australia heading to zero rates is one of the struggles banks face. And tech disrupters like Dorsey are coming for them.

For example, his company Square has a lending division in America that makes loans to small businesses.

It gains excellent insight into their cashflow position because Square processes their payments.

That should allow Square to lower their credit risks…and cut out the banks before they even know the store wants a loan in the first place.

This problem is not unique to Australia, by the way. It’s global, and crosses into adjacent industries like insurance.

A potential masterstroke

Tesla supremo Elon Musk just introduced Tesla Insurance. This could be an inspired move. Tesla’s core advantage is that it has oceans of data on its drivers.

That means it should be able to plumb this for insights and lower premiums by potentially 20-30%.

Musk might have just created a massive new division in the blink of an eye.

Even better, he could use the premiums (potentially free money) the same way Warren Buffett does — to beef up his returns elsewhere.

Insurance, done right, can be extraordinarily lucrative.

I read recently that just 15 stocks turned Buffett from an average investor into one of the greatest of all time. His insurance firm GEICO was one of them.

Certainly, Tesla’s mix of data and analytics could make traditional insurers look as advanced as a man wearing a bear skin and using a bone knife to dig a hole.

But there’s a wildcard that could trump all these considerations when it comes to the Aussie banks.

That’s a power grab from the central bank to appropriate the entire financial system under its control.

How so? A digital Aussie dollar, of course!

Already there are inklings that China is very close to launching its own digital currency.

It can use the extraordinary reach of the Chinese tech giants Tencent and Alibaba to disseminate it across the entire country.

The difference with China’s cryptocurrency is that it won’t be decentralised like bitcoin. The People’s Bank of China will control it.

What comes after that? Physical cash will be abolished. This will enable the Chinese central bank to track, tax and regulate every transaction.

Power corrupts everywhere, and there’s no doubt in my mind that every central bank will follow China’s lead.

Banks: Unlikely to pay off big twice

Australia’s busybodies are already proposing a law that any cash payment over $10,000 could become a criminal act.

I doubt most of the public will even mind, numb as they are to the constant erosion of liberty and privacy. It’s almost inevitable that the use of cash continues to decline.

That’s as the Aussie banks rip out more branches and ATMs to cut their costs, with their earnings under so much pressure right now anyway.

The Aussie banks were a wonderful ride in the last big property cycle. If you learn one thing, it’s that Mr Market rarely lets us repeat the same act twice.

It just ain’t that easy because the world never sits still for any of us to get comfortable.

Ten years ago, no one would have ever imagined a world of negative interest rates, such as we have now.

A decade ago, it would have been a very reasonable bet for bank stocks to recover in the UK, America and Europe. Instead it has led nowhere for 10 years.

Perhaps the surprise is how long Australian banks have held out from this global pressure on their margins and their business models. But the clock is ticking.

Don’t get me wrong. You don’t have to bail today. But the long term bears considerable thought.

Already the Aussie banks are bailing on their non-core divisions like wealth management.

Now their very core operations, of lending and processing payments, are being disrupted too.

Jack Dorsey certainly won’t be the last billionaire to emerge from this upheaval.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch