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How much more profitable will new technology make the banking sector?

Move over low interest rates and low bad debts. Westpac Banking Corp (ASX: WBC) has revealed how cost savings, higher productivity and technological improvements can also boost the gains recognised by banks.

Each of the major banks, namely Westpac, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX ANZ), have benefited substantially from the low interest rate environment which has seen bad debts fall to a record low level. However, while it is inevitable that each of those rates will rise over time, investors and analysts have been wondering how their gains could continue to improve.

At an investor update on Friday, the bank’s Australian boss Brian Hartzer said that the industry would go through the most intensive changes seen since the 1980s. Technological improvements will continue to be made while service levels will also be increased to deliver customers a greater and more convenient experience.

For instance, the bank has redesigned 34 Westpac branches to make them more welcoming and accessible venues for selling products while a further 41 will be completed by the end of this year. Its Bank of Melbourne, St George and Bank SA branches are receiving the same sort of makeover. Indeed, performances from its branches have already improved dramatically with revenue (from the branches) growing 19% while sales per full time employee rose 40%.

Moreover, the bank expects that digital sales will soon outpace branch sales. Digital banking logins and mobile logins have been growing fast which, according to a report released by PwC, will help the banks to cut their cost base substantially. Since 2011, digital logins at Westpac have risen from 422 million to 607 million in 2013, while mobile logins are now accounting for 42% of those logins, compared to just 13% in 2011.

Foolish takeaway

According to Hartzer, the measures taken over the last 12 months to lift productivity and increase the cross sell of products added around $140 million in incremental earnings. It would add around 70 basis points to the division’s return on equity, while a new mobile app will also be rolled out this month which will help to significantly boost revenue per customer.

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

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