Bitcoin and lessons from the Australian mortgage market

The enigmatic Satoshi Nakamoto, who may or may not be a person or a collective or a “creative cloud”, carries a profound warning for traditional financial services companies which goes deeper than cyber currencies and security.

Click image to zoom Tap image to zoom

Nakamoto, according to an investigation by Newsweek magazine, is a Japanese-American technology genius with an interest in model trains. Significantly though – and it doesn’t matter whether this history is accurate or not – he was driven to create Bitcoin not by his genius but by his frustration as a simple consumer.

When buying sophisticated model train components from England, he was aggravated by the fees  charged for cross-border payments. Anyone who has bought items oversees, and this was far worse last century before ecommerce took off, will be familiar with transfer fees, foreign exchange fees, interbank charges, and so on.

Whether these are justified by risk or process or not, to Nakamoto, they appeared too large, inflating the cost of goods. So he set about creating a secure payment system that avoided these charges.

This is not a unique scenario. In Australia one only needs to look back to the 90s for a case study in market disruption driven by the confluence of profit pools, consumer unrest and new technology. In the early to mid-90s, a group of non-bank mortgage originators entered the market, companies like Aussie Home Loans, RAMS, Wizard.

These specialist companies did nothing but originate mortgages. They had no or limited bricks and mortar premises because they didn’t sell loans from such premises nor, critically, raise deposits in them to fund the loans. Funding was done directly via capital markets. This new business took off in particular when Aussie teamed up with Macquarie Bank – a brilliant consumer marketing front end was welded to a highly sophisticated investment bank backend.

In the process, between 200 and 250 basis points were sliced off traditional bank mortgages, an extraordinary piece of market disruption with massive revenue implications.

Of course, these mortgage companies no longer exist or at least not in their original form. RAMS failed during the financial crisis as funding dried up, Aussie and Wizard were bought by traditional financial giants. Other mortgage originators changed shape.

But the impact they had on the profit pools in the mortgage market has endured. Those margins have never returned.

Bitcoin, brilliant as it is, may not last. It is already plagued with governance and legal issues. Confidence in its security has been damaged. But that doesn’t matter. It has potentially opened up a new vista on a lucrative segment of the financial services market.

As UBS says in a recent note out of America: “Setting aside its political agenda, we see Bitcoin as having some potential as a new transaction technology, where a bitcoin-like technology could provide a basis for a new shared payments and transfer system using existing currencies and securities”.

“Such a system could reduce systemic costs, and provide faster, secure, transfers – particularly in the international arena,” UBS mused.” However, given the status quo and the lack of any clear incentive for developing such a network, we do not see banks developing this any time soon.”

Just like with the Australian mortgage market, there is little incentive for the established players to pursue such a disruptive technology. This is an issue the Reserve Bank and its Payments System Board have identified as stifling innovation in the Australian payments system.

But that doesn’t mean there is not consumer demand for such a service or that someone else, a non-traditional player, may not attack this space.

Following a recent forum on innovation by Celent, senior analyst Eiichiro Yanagawa noted “the technologies driving disruptive innovation were categorised into three trend areas, analytic, digital and collaboration”.

“Noted as common to these categories were that efforts to ‘respond to changing customer expectations’ would drive innovation, which would be ‘led by firms willing to take risk’.”

Critically, the environment surrounding innovation mapped in these discussions pertains not only to a radical new project like Bitcoin but matches that which existed in the Australian mortgage market in the 90s.

Yanagawa outlined factors which  inhibit innovation and they included a focus on short term return on equity (which obviously is also a focus of investors); corporate cultures that are averse to change and the enormous legacy assets many traditional players have.

“We learned two important things from some success stories introduced there: the effectiveness of initiatives by subsidiary firms which have a clear purpose and an unrelenting approach; and the importance of management that has taken innovation to heart and ‘made it part of the corporate DNA’ to enable these initiatives to take root.”

It’s of course particularly appropriate to address these themes in this publication, BlueNotes, a brand new venture in quality journalism produced by a non-traditional player, responding to the fragmentation of audiences,  new reader demands and the opportunities created by new technologies.

The Australian market is rapidly adopting mobile devices and new services – when, like contactless payment, they cross a threshold of trust.

According to JP Morgan, Australian retail banking customers are one of the highest users of online, smartphone and tablet appliances as a percentage of total interactions.

And not just the young and sophisticated:  “Additionally, self-funded retirees are coming to an inflexion point, with branch preference falling from 50 per cent to 33 per cent since 2007,” JP Morgan says in a mortgage industry report Harnessing The Digital Revolution: Can Technology By-Pass Traditional Barriers To Entry?

“As such, branch preference is on the decline for the most profitable customer segments, with digital banking not only proving to be more efficient, but also exhibiting higher retention rates.”

Bitcoin itself may not survive but the combination of alternative technologies, changing customer preferences, attractive profit pools and publicity makes for a market ripe for innovation and disruption.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks