Icici Bank launches ‘Merchant Stack


One of the achievements I’m most pleased with is how we have simplified the bank, consistently delivering lower absolute costs, focusing on our key customers and cementing our capital base.

We were ahead of our peers in much of this and it served us well during the pandemic. But our investors are rightly asking us about growth. Yes, we have built a robust foundation but how can we build on it?

“I’ve been talking increasingly about how we are accelerating our strategy and where the real opportunities are for us.”

Over the last few months, beginning at a meeting of our top leaders and for our half-year results, I’ve been talking increasingly about how we are accelerating our strategy and where the real opportunities are for us. How do our growth prospects differ from our peers?

I accept there’s a tendency to group the Big Four Australian banks together but a key difference with ANZ is our growth prospects are not focused on lowering costs but on developing a culture built around delivering better outcomes for our customers.

Our strategy is to improve the financial wellbeing of our customers – be they individuals, organisations large and small, governments and even other banks. We have a better customer experience strategy and that will result in faster, more responsive, self-directed services – and that will also be lower cost to run.

Consider our institutional platform: we have become the largest provider of bank infrastructure to other banks.

Our platform customers are foreign, regional and smaller financial institutions. We have a global network and our largest customer base, globally, is other financial institutions. We count the world’s largest and best banks amongst our customers.

We are also well advanced in building out ecosystems – and by that I mean partnerships with other organisations which amplify and deepen the products and services we can provide our customers, allowing us to meet more of their needs and grow the value of our relationship.

And I would also point to our digital banking which, while not so much a differentiator per se, is well advanced. This was critical during COVID-19 and our ANZ App, for example, has shown extraordinary growth and is ranked a leader in the market.

Between September 2019 and September 2020 we saw a 30 per cent increase in total transaction volumes. We added 442,000 new registrations over the 2020 financial year – a 15 per cent increase from 12 months earlier and averaging 37,000 a month. ANZ App logins exceeded one billion across the financial year, 87 million a month. For the whole of the previous financial year we had just over 881 million logins.

That growth continues and in December 2020 we recorded the highest number of logins in a single month at 100 million and we’ve just passed 3.5 million registered users.

Behind that extraordinary growth is a dramatic improvement in underlying technology and upgrades. We used to update the app every 1.8 days and the system had to go offline to do it. We now do it every day and it’s just built in.

Money flows

The platform business is fundamental to the operation of the financial system, it’s the plumbing. It’s payments, for example, and the New Payments Platform (NPP). It’s clearing – so if your aunt in Budapest sends you $100 dollars for your birthday or a payment comes through for trade, that has to come into the Australian banking system. ANZ, because of our global network, is the market leader in Australia, we have nearly 60 per cent market share.

And that’s a growth business and an increasingly important part of our strategy.

This is a very profitable, reasonably fast growing business. Despite the COVID-19 pandemic, money flow around the world is still increasing, money is being sent offshore or brought in for trade, ecommerce, international shopping. This business is profitable for a number of reasons.

Your counterpart, for ANZ, is not so much your aunt in Budapest but somebody like JP Morgan or HSBC or Wells Fargo or Bank of China. Those banks use our platforms to process the payment. For us there is no credit risk, these are all highly rated international banks. And this business is fee driven. We do earn a little on the float, a margin on the deposit while the money is sitting with us. But there is almost no capital associated with it. So it’s extremely high return on equity.

It is important to recognise while the credit risk is low the operational risk is high – as many banks have discovered. So it is absolutely essential we get our compliance, our anti-money laundering (AML) policies and the like right.

Indeed last year we saw one major player exit this business as a result of some AML issues which meant their customers had 60 days to find another provider. Of those, there were 17 major mandates and we won 16 of them. That took our market share from the low 40s to 58 per cent. We have the same share in New Zealand.

Because we have already built and invested in this platform, it’s operationally highly leveraged. That means the cost of ANZ doing extra payments or adding extra banks is very low.

Now that’s a business we’re building for growth and it’s a traditional business. There are also emerging opportunities, such as the previously mentioned NPP. The big banks built the NPP with the Reserve Bank of Australia (RBA). It enables anybody in Australia to make a real-time payment. The investment in the NPP was hundreds of millions of dollars each. The smaller banks, the foreign banks, the regional banks who want to offer the NPP to their customers just didn’t – and still don’t – have the capacity to build it.

So we rent our infrastructure to them. We sell the service and process the transactions for their customers. It is, if you like, what’s called Banking-as-a-Service (BaaS). There are 12 regional and foreign banks in the country that wanted to offer the NPP to their customers and 11 of them chose ANZ to do it for them.

Platform strategy

Again, this is a strength for ANZ. We are working very hard on this infrastructure as part of our platform strategy. At the moment the focus is institutional but as we build the bank that kind of service will be extended into the retail market.

So is there a threat of potential disruption by what’s going on in the whole payments system around the world? In fact, there are probably three key areas of disruption. One is more traditional – new entrants trying to find a better way to make payments internationally. But actually those people run on the same rails so they’re still using the same infrastructure as us, but they sit between us and customers. In that sense, they’re not so much taking away our business but they are taking away parts of the margin. They’re inserting themselves in but they still run on the same fundamental infrastructure we provide.

This strategy dovetails with the development of our banking ecosystem. An ecosystem, essentially, is where we partner with other organisations to offer services our customers want – remembering that our strategy is to help our customers grow wealth – but which don’t make sense for us to do ourselves.

For example, Airwallex is a fintech unicorn founded by an ex-ANZer in which we have a small stake but a very strong partnership. Or Revolut, which sits on top of bank infrastructure but provides better services to customers, augmenting our relationship. These are the sorts of relationships we see as important parts of our ecosystem or even investments.

The strategic question for us today is what do we need to do to keep infrastructure current and contemporary? And secondly, more importantly, what do we need to invest in for the next round of evolution so we can be a disruptor as much as just trying to protect our current business? Whether it’s blockchain or decentralised finance (DeFi) or other developments in finance, I’m optimistic we have the foundation, the customers, the expertise to participate. And we are doing lots of work at the moment on those opportunities.

Architecture build

A governing principle for us, as we invest and build out the architecture, is to do it in a way it can be used by others as a platform business and to give us the economies of scale. There is no doubt payments is on the frontline for disruption by new technology, new players – and we believe we are well placed. We won’t do all this ourselves – this is where our partnership with a global leader like Worldline comes in but also the development of those ecosystems with fintechs. Meanwhile, payments goes right from micro-transactions to multi-million dollar flows from customers like BHP.

The ecosystem side of our growth strategy is equally important. If we are to be true to our strategy, and our purpose, we see our future being beyond just the provider of home loans or just the provider of business loans or deposits. For the customer, there is more to it. Nobody wants a home loan. Nobody wakes up in the morning saying I’m really excited, I’m getting a loan today. People want a home. And there’s a lot that goes into that decision. Lots of complexity and difficulty – particularly for a first home buyer.

Our job is to help people save for, find, buy and own the home, not just fund it. It’s a question of how do we build out a portfolio of services that assist people on that journey? To that end we’ve been pulling together a portfolio of partners through joint ventures (JVs), equity investments and funding our own solutions – in our lab – by actually building new companies that solve some of those problems. That’s why we have a relationship with people like Lendi while at the same time we are building our own companies to solve part of those problems. The ecosystem includes elements like insurance, search and property management.

Of course discipline is important here. For what purpose are we owning 10, 20, 30 per cent of something? When we think of owning a share, we look at three outcomes and ideally we get all three:

Does it bring more customers to ANZ?
Does it deepen my relationship with my customers? Am I able to give them a service that they feel closer and more engaged with ANZ as a result of that service?
Am I able to co-create solutions with that partner that I would not be able to create on my own? So I’ve got something new and unique.

So that’s how we evaluate those partnerships. And when we’ve looked at buy now pay later (BNPL), for example, while it’s a product in and of its own right, we don’t see it solving those problems for us at the moment.

NPP is different. That’s a service we can offer but it’s also already a fundamental part of the Australian payments system. From a low base, it grew 75 per cent per annum last year and we’re confident that volume will continue to skyrocket, even though the NPP is sort of invisible, people don’t always realise they are using it..

NPP is essentially a consumer business and we can see that consumer. Retail business is obviously shifting to digital at an incredible rate and was really amplified last year because of the pandemic.

Digital-first, human-supported

Meanwhile, and we’ll talk about this more in the near future, you may have heard of our longer-term retail transformation called ANZx. We’ve been investing in that program for quite some time and sketching it out to investors. It’s early days still but it is about a whole new proposition around financial well-being. The first test products are saving and transaction accounts. Built-in, completely new technology. It’s digital-first, human-supported.

This is another growth opportunity for us. Of our 5.9 million customers today in Australia, about half of them only have a savings and transaction account with us. So we want to move them onto this new technology, which is the first step in enabling that ecosystem – that idea of being able to help people beyond just getting a home loan.

We’ll build that out over this year before launching a home loan version. That will be in a test phase either late this calendar year or early next year. These programs are completely new. This is not tweaking the current technology or rebuilding what we’ve got. It’s a complete new build and we’ve been able to do that without calling on our shareholders and raising capital for it. We haven’t used it as an excuse to increase expenses.

We’re still really focused on that. It’s really just about redirecting our attention and getting on with it.

So today, when people say to me the Big Four are all the same, these are the strategic initiatives I point out. These are competitive advantages. They make us – and will make us – different. And they are not about technology or products per se, they are about culture.The real competitive advantage is culture. Apps are great, platforms and ecosystems the new thinking, but it’s really about embracing customer needs and being able to drive change to best meet those needs – at pace, safely.

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