Ix) Financial Planning

· Computer programmers will determine individual's risk appetite and automatically match investors with independent, low-cost products.

"...Technology is a powerful force to change the finance system, potentially improving efficiencies and competition, and benefiting consumers..."

Murray interim report into Australian Financial System as quoted by James Eyers, 2014a

The final Murray report on Australia's Financial System (2014) mentioned the impact of the digitalisation of society on the banking industry. Technology-driven innovation is transforming the finance system with the emergence of new business models like crowd financing, mobile banking, cloud computing, new payment services, etc. All these are subjecting the financial system to more market forces including competition which should enhance both productivity and outcomes for consumers. To handle the maze of financial service regulations, the Australian Securities and Investment Commission (2015) has established a special unit to focus on these novel developments. They need to harvest the opportunities that the digital age is creating while mitigating the risks, ie

"...actions which promote entrepreneurship, innovation, adaptation and skill building, that reward 'real' risk-taking, while providing a stable macro economic environment and a well functioning financial system..."

Glenn Stevens (Governor, Reserve Bank of Australia) as quoted by James Eyers, 2015a

Some impacts of online banking on Australian banking industry (2017) are

- approval time for loans from days to minutes, eg 22 days to 22 minutes

- doing deals with online search engines so that property buyers can search for properties and use the banks' calculators and mortgage services

- use of smart phones to set up mortgage negotiations on online booking platforms

- new arrangements between banks and mortgage brokers allowing faster and more efficient online processing, including instant contract of sale acceptance, instant delivery of valuations, new desktop evaluations and full valuations completed within a couple of days

- use of popular algorithms to help buyers access better information about the property market, ie property price predictions and streamlining property valuation system

- a national digital settlement

There is continuing automation of the banking processes

"... Around 90% of interactions with customers of major banks......are digital......mortgages are commodities, like car insurance, which can be settled by online calculations..." in real time

Duncan Hughes, 2017

Some of the ramifications of the looming technologically-induced threats from the digital world include banks looking at their business models. For example, in 2017 ANZ (Australia) was aiming to streamline its workforce (as most banks have a bloated cost structure), reduce the distribution dependency on mortgage brokers and branches, and rebuild the bank into highly productive data and technology-centric organisation that will use predictive modelling (including risk based pricing - in which everyone can capture a unique rate depending on their propensities. A more equitable rate of interest is calibrated based on their value proposition. This requires massive historical data, like proprietary historical default, retention and cross-sell data, etc, coupled with outstanding predictive modelling capabilities to handle competitors, especially larger banks. The larger banks have more chance of defending the old markets and handling "disintermediation" through maximising scale economies. ANZ is hoping to transform this competitive advantage of lack of size and market share by forming nimble, relatively autonomous small teams with a licence to ignore old methods in the search of superior solutions.

"...risk-based pricing is a vital precondition for ANZ's pivot from expensive mortgage brokers and branches towards end to end online origination in which customers can quickly buy deposits, loans, insurance, investments and super via a website in real time with no physical documents. The long overdue migration of intangible financial services which are purpose built for digital distribution, away from pen and paper will be facilitated by digital ID verification, the "new payment platform" and the electronic conveyancing of mortgages...... compelled to compete against banks and unregulated nonbanks on product functionality, customer utility and pricing position..."

Christopher Joye, 2017

Risk-based pricing allows companies to reward valuable clients who in the past cross-subsidised less lucrative users. They should be able to capture the best borrowers with the lowest risks and offer them a more competitive interest rate.

This is similar to the hedge funds world in which the most successful operators race to find and rapidly exploit asset pricing inefficiencies. 
For example, the $10 billion hedge fund firm Renaissance, with its dozens of PhDs, has produced a compound annual average return since 1988 that is 2.5 times better than Warren Buffett's track record.

The ANZ believes that customer loyalty is fickle as most clients are immobile, ie unable to change banks. This will all change once low-cost switching is enabled by online product processing, real-time payments between banks and government-mandated data sharing.

On important issues, the ANZ has taken a contrary approach to the 3 three large Australian banks, eg

- the other banks resisted customer data sharing, while the ANZ supported it

- other banks opposed the bank tax, while the ANZ wanted to debate the detail

- other banks claimed that the regulator would not impose higher capital requirements, but ANZ accepted the likelihood and accumulated the largest first-loss reserves

- the ANZ cooperated with disrupters like ApplePay while others opposed it legally

The ANZ is trying to innovate through technology that focuses on quality of data, people, analysis and speed of execution, rather than driving returns through scale, reach, offshore expansion and/or outright risk-taking

"...The conventional hierarchical chains that inevitably converge towards a lowest common denominator (and innovation killing) consensus are being replaced by nimble eight-person teams that can quickly conceive of, develop, decide and implement solutions in a fraction of the time of the existing architecture..."

Christopher Joye 2017

· In addition to competition resulting in reduced fees, another benefit for customers is reduced conflict of interests situations arising when financial planners, bankers, etc focus on products that return them highest commission rather than what is in the client's best interest

· In Australia it is estimated that $27b. of bank annual revenue is up for grabs by new technology, like personal loan books, eg

- SocietyOne (peer-to-peer lender that matches people needing a personal loan with investors through an Internet platform)

- CrowdfundUP (an alternative for businesses needing capital from brokers or investment bankers needing investors)

- Wealthfront (a US-based firm that uses algorithmic-based financial planning has built US$1b. in under two years)


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