Profit reporting season starts this week and investors will be keen to see if there is any sign of a turnaround in the banks’ earnings. It doesn’t look likely, as revenue pressure emerges from several new directions.
Banks are facing another hit to their earnings over the next couple of years, as fee revenue declines, according to a Macquarie Securities report.
Increased competition, changing customer behaviour and post-Hayne changes in bank policies will drive down fee revenue in areas such as foreign exchange, deposits and payments.
Macquarie estimates that Commonwealth Bank will suffer fee reductions worth about $650 million over the next couple of years, ANZ $410 million, Westpac $400 million and NAB $335 million.
The banks have already reduced or removed a number of fees. These include ongoing service fees for financial planning customers, grandfathered commission on investment products, lower wealth management fees, changes to the way interest charges on credit card accounts are calculated, overdrawn account fees and ATM fees
The practice of offering consumer credit insurance with credit cards has largely stopped.
Macquarie says other fees are exposed to competitive pressure and are likely to come down. These include foreign exchange fees, payment fees and deposit fees.
Macquarie estimates big banks earn around $1 billion in foreign exchange fees. Their charges are considerably higher than fintech rivals and are unsustainable, Macquarie says.
It says competitors provide superior service, product innovation and lower fees. “The majors will need to significantly lower their FX fees to stay relevant,” the report says.
The big banks earn around $1.7 billion from payments and credit cards. Payments and cards provide multiple sources of revenue. Banks charge annual fees on cards and they charge shopkeepers and other merchants fees for terminals. Interchange fees are also a significant contributor to fee income.
One of the big changes in consumer behaviour over the past few years is a move away from the use of credit cards. Card issuers face pressure from the increasing use of alternative payment technology, such as Apple Pay.
Under the new Open Banking regime these business segments will be more easily targeted by competitors and new entrants.
“We see the greatest risk to the majors from specialised providers and global technology firms targeting their most profitable business verticals, including foreign exchange, mortgages, payments and deposits.
“Large global technology platforms are potential entrants, given the ease of integration of data and customer relationships with the advent of the consumer data right (Open Banking).