Like me, I suspect you've been noticing the newspaper stories detailing Macquarie Group Ltd (ASX: MQG) 's increasing success in the retail banking market – particularly mortgages.
The most recent article was in the Financial Review, titled "Macquarie hoovers up deposits to back its rapid mortgage growth".
And that growth has indeed been rapid; impressive in general, but even more impressive given the traditional reluctance of Australians to change banks.
Here are a couple of grabs from that article:
"Macquarie grew its mortgage book and deposits at three times the pace of Commonwealth Bank in September […] grabbing more market share from the four major lenders."
And:
"Macquarie […] grew home loans at 2.13 per cent over September, or 3.7 times the rate of the market, expanding its mortgage book to $153.7 billion. That's 22.4 per cent higher compared to a year ago."
The 'Silver Doughnut's mortgage book is now around one-quarter of Commonwealth of Australia (ASX: CBA) – and CommBank is the biggest mortgage lender in the country!
Yes, it's easier to grow quickly when you're small; CBA (and the other Big 4 banks) aren't growing at 22% any time soon!
But trying to grow at 22% when your competitors are the deeply entrenched Big 4 – and when Australians are notoriously (and, in my opinion wrongly) loyal to their banks – is no mean feat.
Turns out, though, that smart people, a well-known brand, huge asset backing and a very carefully chosen business model and product suite, can take you a long way.
Incumbency – being the big dogs when the little guys try to steal your lunch – is a powerful asset… until it's not.
Let's start with the 'asset' bit, first. The Big 4 have incredible brand awareness, huge balance sheets, reputations for safety, enormous (if slowly contracting) branch networks, incredibl(y misplaced) customer loyalty and are considered 'too big to fail'. They also have scale to burn; across marketing, administration, technology and more.
If you asked me to start a business, those are some of the very things I'd be aiming to achieve, to maximise my long term success.
And yet…
And yet, for all of the size, scale and success of the Big 4, there are some serious liabilities, most of which stem from those very assets.
Consider the branch networks. They were (and largely still are, at least in urban, suburban and major regional areas) ubiquitous. In my youth, there was a Commonwealth Bank, ANZ Group Holdings Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), State Bank of NSW (originally United Permanent, from memory, for those who remember that one!) and an IMB branch in our local suburban shopping strip.
As a typical example, the Westpac branch was long and had room for maybe 8 or 10 tellers with the usual security features. If you wanted to withdraw money, you took in your passbook and signed a withdrawal slip. If you wanted to withdraw money on holidays, you had to ask the branch to send your authorised signature sample to another branch so they could verify your identity!
No, this isn't just a boring ramble through history (though it may very well be that, too!). It's an illustration of why a large branch network was so powerful.
These days? The banks would close at least 50% of the branches, tomorrow, if it wasn't politically impossible. Maybe up to 90%, frankly. Why? Because they've gone from the heartbeat of any bank to costly 'service centres' where the staff do their best to direct you to an ATM or on-site computer.
Don't blame the banks, by the way – these days, $6 in every $7 we spend is done electronically. Only $1 in $7 is a cash transaction. And that number is falling precipitously.
To wit: Macquarie is branch-less. You can contact them online or via phone, but that's it. If they thought a branch network was necessary and profitable… they'd have one.
(I know some of you want to use branches, and want to keep cash alive. Those are valid views – they're just very, very uncommon, and becoming even less common, for better or worse.)
The other liabilities of the Big 4? They include, but aren't limited to large numbers of staff, legacy IT systems often held together with virtual string, bloated product offerings, organisational calcification, incentives and more.
Essentially, Macquarie has 'done an Aldi' – taking on retail banking the way Aldi chose to fight Woolies and Coles.
It has carefully chosen the field on which it wants to fight – a branchless offering, a narrow product range, a specific funding model, and only accepts good credit risks. It has designed its systems either from scratch or from a relatively newer 'tech stack' than the incumbents who have decades of 'spaghetti' to unravel. And, from all reports, that means a slick user experience for customers who are prepared to work with a branchless-bank.
Essentially, the power of incumbency, for so long the defensive battlements that allowed the Big 4 to thrive while fighting off would-be challengers, has very potentially become a millstone around those banks' necks, instead.
They are, to use the (somewhat challenged) common analogy, like the guns defending Singapore in World War II, cemented in place to face the sea: effective until the enemy attacked from a different direction.
Maybe Macquarie comes a cropper, for one reason or another. Maybe the bigger banks face down this threat just as they have faced down threats from regional banks and overseas players.
Time will tell.
But The Millionaires Factory has laid down a very credible challenge. To use a martial arts metaphor, it is using its larger opponents' size and momentum against them – aided by a community that hamstrings those competitors by adding layers of cost and expectation (staffing sizes and branch networks) that Macquarie doesn't have to bear.
Our politicians might consider that an unfair fight, if they genuinely wanted to promote competition. But if they wanted to buy some votes and keep talkback quiet, they might just demand banks keep unprofitable branches open, thereby giving Macquarie a rails run.
No, no-one will feel sorry for the Big Banks. And that's fair enough. But it might be our demands that, in part, are their downfall. And we'll likely end up with fewer branches either way.
(For the record, I think banking services should be considered an obligation, but not bank branches. If it was up to me, I'd make the banks, including Macquarie, commit to making their core products fully available (some already are) via Australia Post branches – that's much more efficient than branch duplication, likely extends the reach of those banks, and underpins letter- and parcel-delivery services at a time when we're sending many fewer of the former.)
Whichever way this goes, there's a lesson for investors: incumbency can be a huge advantage. But if a company stops innovating, that incumbency might be the very thing that brings them down.
Fool on!
