Finance Market Update - 24 September 21
The digital lending experience is almost the norm. In this fortnights update we talk about the reduction of friction with digital signing of documents, and how more money in peoples bank accounts might be a sign of more problems.
Gone is the need for paper and pen as the digital lending experience is becoming the norm.
This has been a long time coming, overdue in fact, and if it was not for the virus might still be a few years away. Now for the most part most banks and lenders will now be able to give a loan all from behind a screen, no pen required.
This is especially true for loan offered by online lenders (Fintechs) compared to banks. For some banks and types of loans, like mortgages for example, a physical pen signature can still be required, but even in these cases it is likely to change to digital being accepted eventually.
For example, CBA have recently announced they will have a direct to consumer fully digital home loan offering available around the end of this year, and often other banks follow suit after CBA, given they are the technology and market leaders in banking in Australia.
This is an important milestone and signals the transition to digital lending is well underway.
The transition to digital lending experiences is one of the few positive and enduring legacies of the virus crisis for the financial services industry.
It is in fact one of the main themes playing out across many industries - the acceleration of the adoption of technology.
You can see the new adoption of technology being adopted in all sorts of areas, from QR codes being used to check in everywhere (even though this technology is decades old), to virtual and video (zoom) meetings becoming standard and a much more widely accepted form of professional interaction, and one that will continue to be used.
It would have taken many more years to see the majority of banks, and even government departments, accept digital signatures for loan contracts if it was not for the virus crisis forcing people to be separated and keep distance.
This is also true for QR codes and zoom. The virus has made them the norm.
It might even help to accelerate the mass adoption of cryptocurrencies and the launch of a ‘central bank digital currency’ like we talked about in an update a few months ago, which I would view as a positive yet dramatic shift.
In the final update last year I made a number of predictions which are all proving correct. These were that we would see record high property prices, record low interest rates, change in commercial property, a booming economy, and the rise of the 100% digital lending experience.
The reason the digital experience was evident to me was that there was no way any serious business could be done using paper while covid measures were in place, the government new this and changes law very quickly, and that once these new digital measures were tried and tested, and found to be more efficient and better, they would become the norm.
There is an expression in Silicon Valley that all experiences will be reduced to the version with the least friction. In most cases friction means the number of steps needed, or the ease of which, for something can be done. This is true for the digital lending experience, as we have seen, and will be true for other things that involve money and technology as well, like paying for things with your phone.
The lenders that can reduce friction will likely win more business.
More money more problems
Cash balances are swelling as people are stuck at home and that could cause more problems than it solves.
The cash balance of people’s personal bank accounts, and that of many businesses, have swollen. According to a recent report released by the OECD, Australians are on track to have a giant extra $230 billion in savings by the end of this year.
There are consequences from this, not all of them positive.
For one, much of the new savings will be used for property purchases, which will continue to push prices upward. We know that when there is more buying and selling of property prices increase, and as people have more money to spend on property that will increase activity.
We also have talked about the high demand for property and why now might be a good time to buy property given the continued price increases are likely.
But it is not just property where prices have been and will continue to increase.
The cost of everyday items is on the way up.
This is driven by two important factors. First, there is more money in the world now than before the virus crisis because central banks ‘printed’ billions extra to combat the virus. Second, global shortages of goods and supply chain issues.
Both these factors will directly inflate the price of things like food and general groceries.
Then add in that fact that a lot of people have a lot more cash and savings who will spend it, also puts upward pressure on prices.
For the fortunate people who have been able to keep their white-collar jobs and incomes have almost record levels of savings as their everyday living expenses have plummeted while working from home.
Not having to commute each day, be able to travel, even go much further than their suburb, has meant people have just simply not had the chance to spend as much, and with mortgage interest rates at historical lows property owners have also had their mortgage costs reduced.
This has meant that for fortunate people in those circumstances their incomes have remained constant while their costs have lowered, creating perfect conditions for more money to accumulate in their bank accounts.
For those in much less fortunate circumstances, their incomes have been reduced to the minimum wage or JobKeeper levels, or worse.
It is these people, either that had paying jobs or were small business owners that have been disproportionately and negatively effected by the virus crisis, and even though we might not be in a ‘technical recession’ for many people it will sure as hell feel like one.
This is one of the core issues with all the money printing and extra savings, it will potentially lead to higher prices for just about everything.
Economists call this inflation.
The OECD are also forecasting inflation to hit 4.5% in the G20 countries largely driven by high shipping costs (and China?) and dropping commodity prices.
On the ground what really matters is how much you can buy with your money compared to before, and for now in Australia there is not much difference to a year ago, but in a year times that could be a very different story.
It might be that what you can buy today with $100 will only buy you $94 of stuff next year of in the not to distant future.
This process of money buying less is inflation and essentially makes people poorer. So, while they might have more dollars what those dollars can buy is less.