Finance Market Update - 13 August 21
Businesses might not need banks in the future. In this fortnights update we talk about tech companies acting like banks, and how the reverse brain drain of rich and smart people who want to own property will help to continue the property boom when borders open.
Tech > Banks
If you were to start a business what would you need a bank for?
The obvious answer to that question is a bank account, maybe a loan if they would give you one, and maybe merchant payment facilities.
But for most new businesses their banking requirements, at least in the early stages, are quite simple. Give them a bank account to pay and receive money and that’s basically it.
This is particularly true for independent retailers and sellers who have basic but also specific requirements for accepting payments. Traditionally banks have not helped them very much and getting a merchant facility has been cumbersome and often overly complicated.
Enter tap and pay technology.
The emergence of tap and pay facilities changed the game for many retailers and they were very underserved by the banks.
This is an exercise in removing friction and something technology is exceedingly good at solving.
Humans are lazy by nature so when there is an easier version of something with the same outcome we tend to go for that easier option.
Writing a cheque is slow. So we got credit and debit cards to swipe and sign. Keeping cards in a wallet to pay for things then becomes normal. Phones then get the capability to tap and pay, so we stop carrying wallets.
This is the process of reduction in friction, this is what technology does.
Technology makes something that seems like the norm seem like it takes to long. That apparent time taking to long or having an extra step that can (and will) be removed is friction.
We tap our cards and our phones and pay for things. But why should we have to pay for the whole amount now, why not over four even instalments? Better yet is not even having to pay interest on the delayed payment.
This reduces the friction we might have to pay for something, lowering our aversion to the easy tap and pay and semi frictionless paying experience.
This compounds the lowered friction of taping and paying while psychologically reducing friction in paying for something.
Square is a technology company that provides financial services.
Their most popular and recognised products are the small white plastic squares that you can connect to a mobile phone or computer and might be sitting on the counter of a café which they use to accept payments.
This small piece of technology dramatically lowered the friction small retailers had with traditional banks and as a result Square has been one of the fastest growing payment companies in the world.
They have also been innovative in focusing on helping the ‘unbanked’ of America and other parts of the world who never even had a bank account.
That might seem strange to an Australian who are indoctrinated to banking through Dollarmites and such, but in many parts of the world people do not have bank accounts. Even Aboriginal communities and other regional areas here would be considered under or un-banked.
This is where simple mobile payments and banking apps can help give people previously out of reach financial services, even to start a business.
In a surprise announcement Square is buying Afterpay for $39 billion.
For small businesses and consumers, this is excellent news.
The combining of these firms will impact the future of banking and probably see easier access to cash flow loans and offering on ‘BNPL’ services to their business customers.
Combined they will likely further reduce friction in payments and banking.
It is also excellent news for Square, who basically bought Afterpay for free. Even with the AUD $39 billion purchase price, Square’s stock price went up 25% after the announcement, eclipsing the purchase price and making it a no brainer of a move, and a leading indication of acquisitions ahead. Good old value creation.
For banks, this is not such excellent news.
We have talked before about the same difference between new banks and old banks, and how banks are becoming more like utility providers and how they are constantly shape shifting, all of which is relevant to this wider discussion about how tech is going to change the banking game.
For small businesses, it is most relevant for them as they might not even need a bank in the future, all of their “banking” requirements can (and will) be done by a technology company.
This is what banks have been extremely worried about – relevance.
It is hard to say that when forty or so percent of the Australian Stock Exchange (ASX) is made up of banks and other financial services organisations, but it is true.
It is true because when you look at trends you see tech companies coming to eat the banks lunch.
Good examples of this trend are Apple partnering with Goldman Sachs for lending, Banking-as-a-Service (RIP Westpac x Afterpay collaboration), and the aforementioned Square acquisition of Afterpay, and even CBA taking a stake in Klarna and spending over a billion dollars in the past year to fight off disruption. One has to wonder whether a big bank might try and buy Square.
But it is not just tech companies coming for the banks, central banks are also coming.
Avid readers might recall my attempt to link the Wu Tang Clan to the Reserve Bank of Australia in their views about how cash rules everything around us, and the continuing decline of hard cash payments, and how the centrals banks will soon launch their own digital currencies, which will further disintermediate banks by offering people a bank account directly, instead of people having to even have a bank account with a commercial bank.
In the end it will be organisations that offer the most frictionless experience that will get customers.
Reverse brain drain
When our borders open up we will see a huge influx of skilled, rich, and intelligent immigrants wanting to live in Australia, and who will want to buy property.
This is one of the less talked about up coming positive influences for property prices. Likely because we are so focused on controlling and managing the virus crisis before we can even contemplate opening borders, but when borders are opened it will be like opening the flood gates.
Unfortunately there are thousands of Australian citizens still overseas and unable to get a ticket or approval to return to our shores, and thousands more of international students, and people who want to live and work here, and who want to come for a holiday here.
It looks like one way in-bound plane tickets are going to get expensive from strong demand.
But plane tickets are not the only thing where prices will rise because of this, property prices are still going to continue to increase.
Those same rich and smart immigrants are going to want to buy property, probably houses, and probably in already affluent and desirable areas where prices have been steadily rising.
The imported demand from these rich and smart immigrants will continue to support property prices in the mid to upper tier in the residential housing market.
That will see house prices in particular see an increase in already strong demand, and higher demand will see prices stay elevated.
It is not just demand that will continue to keep prices buoyant, in fact I think we will still see prices hit new records in 2022 as well, but that is because of the underlying five forces we have talked about before.
This leads to a question about if the government is going to get concerned about prices getting to hot.
Similar to 2017 when APRA intervened in the hot property market by limiting loans to investors on interest only we could see them enter the market with intervention again.
We talked in March about how a logical intervention would be to limit the ‘Debt to Income’ ratio for borrowers. This might not be exactly what they do but with the consistent underlying growth in asset prices some sort of restrictions are definitely on the cards.
Whether of not the government or regulators decide to step in the property market is likely to continue a strong upward trend even after this most recent round of lockdowns.