Australian banks need to rethink business models: EY

The key themes outlined in EY's global banking report for 2014-15, released earlier this week, apply across all markets - and Australia is certainly no exception - according to Tim Dring, EY's Oceania Banking and Capital Markets leader.

"There is no doubt that all of the banks, from the majors and larger regionals, down to the mutuals, are looking at their markets to find ways of transforming their business," he said.

"Digitisation is also relevant as is the market segments that they operate in, and in particular how profitable some of those market segments are."

And while digitisation of the sector continues, along with streamlining processes, and taking costs out, the major Australian banks, "like all banks, globally and domestically, are looking for growth in a fairly subdued economic environment," he said.

That boils down to "looking strategically at what markets they play in." That is, while banks are strong in certain regions, market segments and product lines to increase revenue, they will need to start looking for opportunities in some of the segments where they are not as strong.

In his judgement, an important part of such a strategy will require an expanded branch network.

"It's been proved that branches are a good source of customer acquisition, particularly where there is high foot traffic. It's a costly model, though," he conceded.

"This means we will see approaches such as 'pop up branches', which might be in place for the period of three to five years,  or until customer acquisition numbers have tapered off. That may change the look and feel of that branch and where it's located in future."

Customers should also expect to see more concierge services, along with better use of technology - applied to customer identification, for instance.

"It's a convergence of the analogue and digital worlds. You do need an element of the analogue worlds. Face to face contact does create this element of trust before you transition the customer into the digital - and more efficient - process of banking."

However one area of revenue that most banks (and particularly the majors) are eyeing is the SME sector. And it is this sector, characterised as a cohort of small business operators who do their banking and other work at home, online, at night that has proved difficult to reach through the "analogue" world of face-to-face contact.

"That was one point that came out of the global report: aligning banking services to new workplace models and changing demands of customers, particularly in the SME market."

And in regard to the emerging P2P lenders, Dring believes there is plenty more work for them to do before they make any real impact on the bank's stranglehold in this sector.

"When there is an established model there is always a risk of a new competitor trying to undertake part of the value chain. We've seen the likes of PayPal and AliPay move into the Australian market and P2P is another element of that evolution. In fact some of these peer to peers are a still using bank services for their back-office arrangements."

"They offer a cheaper loan to an SME but at some point in time that business will need transactional services, card services and merchant services."

Dring also observed that most of the banks and some of the smaller regionals and mutuals were upgrading their banking platforms to be "leaner and better able to cope with changes in regulations", along with having greater ability to extract information and understand their customers.

This will open up another avenue of bank profitability, one that wasn't well highlighted in the EY global banking report: the cross-sell of wealth products and services.

"This is something that all banks large and small, have struggled with," said Dring.

"Getting that customer proposition right is going to be a new pathway to growth for Australia's banks."