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Westpac behind on technology investments

Peter Brain, a respected macroeconomic forecaster for the National Institute of Economic and Industry Research, has suggested that Australia’s big four banks could ‘shrink to irrelevance’ by 2025 should they not adapt to new technologies or improve their core systems.

With technological behemoths such as Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) or eBay’s (NASDAQ: EBAY) PayPal business now being seen as enormous threats to the long-term existence of our banks, the big four are under pressure to invest in technology to ensure they remain competitive within the mobile payment space.

Commonwealth Bank (ASX: CBA) has taken the lead in this regard following a five-year investment in transforming its core system. According to The Australian Financial Review, this is the equivalence of paying for one million hours of technology investment.

Both ANZ (ASX: ANZ) and National Australia Bank (ASX: NAB) have also recognised the growing threat. Executives from ANZ travelled to the US earlier this year to gather more information regarding the technologies, whilst NAB has already begun transforming its systems (although, not to the same extent that Commonwealth Bank has). ANZ has reportedly prioritised its Asian growth strategy over investing in new technology as it is comfortable with its existing systems.

However, it is Westpac (ASX: WBC) that is lagging behind its competitors and is now playing catch-up – a fault which the bank has admitted to – despite having invested around $160 million for the six months ending March 31 on technology and information services. Whilst mobile and online banking is the fastest growing mode of transactions for Australia’s banks, Westpac’s customers recently endured a two-day outage of online banking, which posed as a reminder that its core banking system still requires much more attention.

According to Brain’s modeling, the pressure of the growing competition and new technology requirements will affect fees and interest margins greatly. Real fee income generated by banks will decline, on average, by 3.8% per annum from now until 2025, whilst net interest income will decline by 4.7% per year.

Foolish takeaway

Whilst the banks are currently very popular as investments – due to their defensive nature, record breaking profits and high dividend yields – Brain is reminding investors that ‘every segment of the economy needs a transformation agenda’. The banks will need to continue to invest in new technologies to stay ahead of the looming threats.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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