Banking Review

A banker’s view of innovation

NAB head of consumer and commercial cards Sam Nickless yesterday acknowledged what many bankers know but few are willing to admit.

Speaking at Cards & Payments 08 in Sydney, Nickless outlined why banks are usually late to the party on innovation – the need to grapple with complex systems, the weight of back book profitability, and the threat to the existing brand of responding to disruptive start-ups.

It’s a sad indictment on our industry that our major banks have for a long time sailed along on the profitability delivered by complacent or misinformed consumers.

“A lot of profitability now comes to banks from sub-optimal decisions that customers make” says Nickless.

“Unnecessarily high balances sitting lazy in a transaction account, accidental revolve on a credit card, exception fees and the like.”

“All of that income comes from decisions customers wouldn’t make if they: 1 -had the perfect information about what was going on; 2 – if they had costless access to the transaction system; and 3 – if they had the time to really care about it.”

Nickless formerly held a strategy role with the bank and his views are clearly shaded by his time before that with McKinsey and Co, but it’s a view many banks are starting to come to grips with.

Nickless says “Wherever we’re making dumb profits, that’s where the innovations will hit us first and it will take a smart response to that to replace lost income with new income from services that customers really value. That’s going to be the real challenge.”

Proving he still thinks like a banker, Nickless gave one example of the types of decisions being made on innovation within the bank. “It’s not easy to tell someone like me as head of cards to invest in an SMS alerts service, for example, that’s going to have ongoing telecommunications costs and will potentially slice into late payment fee revenue.”

“Those are difficult decisions to make but they’re the ones that will happen over time because they’re customer focused.”

The next area banks are likely to feel pressure is ATMs, thanks to the Reserve Bank spotlight now on direct charging. It’s an issue likely to gain more traction with consumers once the direct charging regime planned for 2009 gets closer.

The Commonwealth Bank and ANZ recently raised foreign ATM fees to bring themselves in line with the average $2 fee charged by competitors. This is despite the Reserve Bank’s cost of payments study revealing the actual cost to the banks is closer to 50 cents.

Yesterday Reserve Bank head of payments policy Michele Bullock gave the strongest indication yet that the Bank will be expecting these fees to come down once interchange fees on ATM transactions are removed.

“The relationship between fee and cost doesn’t appear to be a particularly good one” says Bullock. “I would challenge the banks to rethink how they will set foreign fees.”

And on the topic of innovation Bullock told Online Banking Review the bank is still of the view that innovation in payments has lagged behind in Australia in recent times, particularly with regards to the lack of alternatives to credit card payments online and business to business payments.

Beyond this, Bullock says there is also room for more network innovation. “We think that’s a very important part of innovation and where perhaps we haven’t been as successful in Australia getting otherwise competitors together to think about ways they might work together, what is the competitive space and what is the co-operative space.”