Australian banks enter tech arms race as rising rates squeeze profits

SYDNEY, May 18 (Reuters) – The 10-minute home loan – at the touch of a smartphone screen – is becoming the next frontier for Australia’s banking sector as rising interest rates quash a property boom fueled by the pandemic, eats into mortgage income and renews focus on cost-cutting technology.

The Big Four lenders have posted windfall profits during the COVID-19 pandemic due to a nearly one-third jump in house prices since 2020, but runaway inflation has driven shock rates higher this month and the expectations of many others. Read more

This has left banks, which derive the bulk of their profits from mortgages, looking to automate every step of the lending process and cut overhead costs such as staff and real estate to continue increasing profits from what analysts say to be a dwindling supply of money.

So far, only the Commonwealth Bank of Australia (CBA) (CBA.AX), the largest lender, has put a speed target on its automation. He said a fully digitized loan service that went live on Tuesday could process an application in as little as 10 minutes.

But in this month’s earnings updates, National Australia Bank Ltd (NAB) (NAB.AX), Westpac Banking Corp (WBC.AX) and Australia and New Zealand Banking Group Ltd (ANZ) (ANZ.AX ) all pointed to automation to offset the impact of a cooling real estate market.

“They have an incentive to invest in technology and get to where CBA is because it’s pushing people online,” said Hugh Dive, chief investment officer at Atlas Funds Management, which owns shares of major banks.

“They can improve their profits without increasing their turnover.”

Citi banking analyst Brendan Sproules in a client note said CEOs face an “unending battle to transform their 1970s/80s processes and systems into the modern digital age.”

“A rising cash rate may well provide the opportunity to accelerate this transformation faster than we initially thought.”

Instead of filling out paper forms and providing documents, to be checked and analyzed by back-office staff, a client would enter the address of a property they were considering buying along with their bank account ID. Their computer or smartphone camera would confirm their identity.

Algorithms determine the rest, such as employment history and likely purchase price.

A bank employee only intervenes if the software detects discrepancies in the data, people working on loan automation software have said.

Some smaller, online-only lenders are already automating mortgage applications, but – so far – not the Big Four, which dominate Australia’s AUD10 trillion ($7 trillion) property market with the three-quarters of loans by value.

“What we’re seeing right now is a lot of optimization using existing processes, using existing lending systems,” said Hessel Verbeek, head of banking strategy at KPMG Australia.

“The room for improvement will include when people actually start replacing some of the key systems.”

The banks did not say how much money they plan to spend on automating mortgage approvals, or how much they would save.

Of the A$3.6 billion invested by the Big Four in the first half of financial year 2022, 35% went to “productivity and growth”, up from 32% a year earlier, according to KPMG data.

NAB, the second-largest lender, said last week that its “investment in customer experience, efficiency and sustainable revenue” increased 46% in October-March compared to the same period a year earlier. , to reach 228 million Australian dollars. He said he wants every home loan to be automated by 2024.

ANZ, which has been losing mortgages for two years as staff shortages led to increased approval times, said it had only just begun to digitize processes.

“There is no doubt that we have some catching up to do,” CEO Shayne Elliott told The Australian.

SLOW START

Banks have been slow to begin automating retail products, in part because major compliance and risk management overhauls have undermined both capital budgets and management attention since then. that regulatory scrutiny increased significantly in 2018, analysts and industry participants said.

Rebecca Engel, head of Microsoft Corp’s Australian financial services unit (MSFT.O), said there was a “massive increase in technology investment, deployment, acceptance and trust” by banks, alongside increased regulatory attention and higher transaction volume during the pandemic. .

“The goal should be higher levels of assurance, higher levels of quality, at lower cost,” Engel told Reuters.

“It depends on the technology. »

($1 = 1.4282 Australian dollars)

Reporting by Byron Kaye; Editing by Christopher Cushing

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