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After going against the international grain in their retreat from financial advice, local banks would do well to rethink their wealth strategies.
In brief
- In recent years, facing regulatory scrutiny, dwindling profit margins and an increasing compliance burden, Australian banks withdrew from wealth.
- In contrast, international peers built up their wealth management capabilities and began playing a larger role across the retirement lifecycle.
- Given the ‘advice gap’ in Australia, there is a genuine need to assist customers in navigating the retirement phase of their lives.
After the 2008 Global Financial Crisis and the related Basel reforms, banks around the world moved to re-focus on core products and geographic markets. Simplified products, market segments and geographies became the core tenets of banking strategy. Australian banks were no different than their international peers and have been keenly focused on shedding non-core businesses and returning focus to the domestic market.
However, Australia has been an outlier in one key aspect of this global trend. While many international peers put wealth management close to, or at the core of, their strategy, Australian banks almost uniformly exited the wealth market.
In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and the Future of Financial Advice laws, the major Australian banks made a mass exodus from wealth and financial advice. With regulatory scrutiny on financial advice intensifying, profit margins dwindling and compliance requirements increasing, wealth and financial advice were placed in the ‘too hard’ basket.
The widening ‘advice gap’ (i.e., the unmet need for financial advice) in Australia demands a different approach to retirement planning and retirement itself. The current path of fragmenting financial services required during income-generating years, retirement planning, and the decumulation phase seems at odds with consumer demands and international practices.
In international markets, Banks have been building wealth management capabilities and are successfully playing a larger role across the retirement lifecycle, suggesting there is a bigger part for Australian banks in the domestic market.
The search for growth
Despite the bank’s reporting positive half-year results, several warning signals suggest the gains from the higher interest rate environment are being eroded. Intense competition and slower loan momentum are impacting growth opportunities in traditional retail banking products – a primary source of revenue in the Australian banking sector. Banks are now looking for growth in other segments.
The market opportunity for wealth services in Australia is considerable. Australia is home to the world's fifth-largest pension pool. Our pension structure is such that this will only continue to grow above global system rates, substantially outweighing the nation’s relative population size.
Overseas examples have shown that wealth can be part of a bank’s portfolio and that this diversification can help to smooth out revenue and earnings volatility. With substantial competition in core markets, particularly retail credit and deposits, wealth management offers local banks a new stream of funding and revenue while staying true to the domestic market mandate.
A chasm in the financial journey
The banks’ customer base is aging. According to Treasury estimates1, the number of people aged 65 and older is expected to grow from 0.4 million people today to 1.8 million in 2050. This is the vanguard of Australians who have accumulated retirement savings over their full working life since the Superannuation Guarantee was introduced in 1992.
It is a customer base that will need increasing access to wealth management services as they move from income generation to retirement spending. This includes assistance with budgeting and day-to-day management of retirement incomes, medical expenses and related aged care expenses.
In retirement, people need security and confidence; Is their money safe? Can they control it? Is there enough to last? With their established customer bases, suite of products to serve the end-to-end financial journey and existing infrastructure, banks are well-positioned to offer a range of wealth management and decumulation products. If done carefully, supporting customers towards and into retirement could improve customer experiences and outcomes, provide new sources of growth for the industry and increase loyalty.
Who is better placed to estimate retirement needs?
The banks’ access to vast amounts of customer data, including on saving and spending habits, offers an ideal data set to build profiles on risk appetite, consumption habits and retirement timelines. Who else in the economy can see income, expenses and consumption habits for most Australians better than the banking sector?
Banks have transactional-level data for their customers. They know how much is spent on utilities, housing, groceries, vacations, and other living expenses. The industry has made substantive investment in building budgeting and spending tools into their consumer apps. This can assist to determine income and expenses and estimate potential retirement needs forming the basis for retirement saving programs. This information (along with the information generated by the superannuation industry through the retirement income covenant) can also provide banks with a sound data set to develop decumulation products.
A well-worn path
Overseas, a pivot to wealth has helped banks to re-baseline strategic purpose and reposition the institution in their home market. Perhaps more importantly, such a move would be a logical extension of a holistic approach to support financial wellbeing throughout a customer’s life. Planning for retirement requires people to make complex decisions around sequencing risk and longevity risk, as well as inflation and interest rate risks.
Banks are already proactively supporting people to save for a holiday or a house with budgeting and spending tools. Wouldn’t it also make sense for them to help Australians plan, save and invest for retirement?
It may well be time to reconsider the role of Australian banks in retirement.
Summary
The Australian banking industry’s absence from wealth is an outlier in the global financial system, where wealth has been a key pillar of banking strategy. Commercially, wealth is a natural extension of a bank’s traditional products and services, providing a pathway for new revenue streams and sources of funding. Given Australia’s advice gap, and their rich data on spending and saving patterns, banks would be well advised to look to wealth as they seek new sources of growth.