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Ignoring market forces is a new peak in bank bashing

Friday, 03 November 2017

We have reached peak bank bashing.

Businesses ultimately prosper if they deliver products and services consumers want – and to do this they need the freedom to respond to market forces.

With the expansion of technology in our economy and around the world, consumer demands in terms of service have increased significantly, and the competition to service consumers has also intensified.

We see this in areas such as banking. Digital disruption is clearly playing a role with Goggle’s Android pay and near field communications technology transforming how we pay for goods and services in Australia.

This is only the tip of the iceberg, with many now understanding that platform businesses (such as Google and Facebook), have large networks of potential customers that can be tap on the shoulder and offered a range of services above and beyond what they already offer, including banking services.

In such an environment, it comes as little surprise to hear that those in Australia’s traditional banking sector are seeking to enhance their technology spend, change the way they do business, and in the process cut costs out of their business which are hopefully passed onto the consumer via better services and lower prices.

That’s why NAB this week announced a plan to reduce their headcount by 6,000 general staff and but hire 2,000 new technology staff over the next 3 years – a plan seeking to deliver annual cost savings of $1.0 billion to fund additional investments they need to make in technology to make their services better and cheaper, and position themselves to compete in this highly evolving marketplace.

This of course has been received with much consternation in the media, reflecting new peak in the era of bank bashing.

But it shouldn’t be the case.

There are three questions we should answer before partaking in the next round of bank bashing: (1) do we understand the pressures in the market?; (2) does the economics of the decision stack up?;  and (3) if we were in a different context would we have a different answer?

First, on top of increased competitive pressures driven by technology, those who have advocated for increased regulation of the financial services sector have failed to acknowledge that it does come at a cost, namely jobs.

A lot of what could be spent on technology, underpinning investment new products and better services, is instead being redirected to increased spending on complying regulatory requirements – something new entrants can seemingly avoid and adopt more cost effective approached to implementing when starting for scratch.

This is especially the case in financial services now.

Second, are we really saying that businesses shouldn’t make decisions to improve their products and service offerings by changing their capital-labour mix.

Do we not want productivity growth in Australia which is driven by allowing markets to change their capital-labour mix, adopt new business process and methods, and in the process, reallocate capital and labour throughout the economy towards their highest productive use?

Now of course, it goes without saying that we need to be sure that in this process there are adequate provisions to ensure people don’t become structurally unemployed, but equally we can’t live in a fantasy world of a frictionless labour market.

Third, if we took this decision to a different context, would we have the same consternation?

Government services are a great example to consider.

If the public sector had matched the speed of shift to digital provision of services achieved by the private sector, we would have higher satisfaction levels with government services, lower taxes and better services.

Over 75 per cent of Australian bank transactions are done online or through mobiles – how much can we say of that of interaction with government services?

It’s clear we shouldn’t fall into the trap of bank bashing against the public interest.

The public demands better services and lower prices from banking, just like they demand better government services and lower taxes. - Spiro Premetis

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