Would you like a mortgage with your groceries?

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By Chris Becker

The crowded financial sector looks set to get two new entrants – in the form of the supermarket duopoly behemoths of Coles and Woolworths. From Fairfax:

On Monday the supermarket group claimed the alliance with Visa and Macquarie Bank would ”set a new benchmark” for retailer credit cards, as it transfers its Woolworths Money systems from HSBC and MasterCard later this year.

Woolworths has jumped on the supermarket bandwagon of showering its shoppers with a suite of financial services revolving around credit cards, announcing Visa as a new partner for its Woolworths Money business that recently signed up Macquarie Bank.

Woolworths will work with Visa and Macquarie Bank to deliver consumer credit products across its retail banner group, which includes Woolworths, BIG W, BWS, Dan Murphy’s, Thomas Dux, Woolworths Petrol and Masters stores.

This follows recent speculation that Coles will apply to APRA for a banking license to take deposits as it rolls out more financial services, including life insurance, as it seems to follow its duopoly brother:

Coles is exploring a deeper penetration into the market by possibly also securing a banking licence from the Australian Prudential Regulation Authority to allow it to take deposits.

The extent to which Coles takes a step towards becoming a fuller-scale provider of banking products, including deposits, loans and transaction accounts, will be decided next year.

The trigger will be the expiry of its partnership deal with GE on the Coles MasterCard. The contract could be rolled over or a new partnership could emerge, potentially with a bank.

Risks to their underlying and successful business models include further concentration of exposure to the consumer cycle and  tying up a lot of capital at low internal rates of return, news shareholders may not want to swallow.

Both may take a “lite” approach by slowly broadening the basic retail finance offerings and/or offering services at the counter for a banking partner, without going the full deposit route.

This is a model that Australia Post could adopt given its foray into the sector  following the “crisis” within its traditional mail delivery business (projected to lose about $1 billion a year in the next 5-7 years) with recent partnerships signed with Westpac and Virgin Money a sign of more financial services to come.

The upside risk is that the three have much higher customer satisfaction levels than the big four banks, which should translate into some market share on sentiment alone, if only at the periphery.

Coles might be relying on overseas experience in this new business model, as it attested to the potential at the recent Murray inquiry:

”While the provision of financial services by retailers in Australia has grown over recent years, it remains less well developed than in other markets. Experience from these markets suggests that there are opportunities for Australian retailers to pursue further growth in their financial service offerings.”

Regulation is always the problem:

”While we believe that regulation is critical in protecting consumers from market failure, it is important that regulations appropriately balance the benefits that new entrants bring against the potential costs and risks.”

Translated: we want to be a bank without the capital costs of being a bank and we don’t want to pay for the systemic risk that rises when there are multiple players (all performing the same job). I’m sure further lobbying will make sure that smaller players – even established players in the retail finance field – will not be able to have the same access due to market capitalization or other “size” based requirements.

The real question is: do we need these “extra” services? Perhaps on a per capita basis, as Australia’s population burgeons, particularly as banks continue to close traditional branches, there is a niche for supermarkets.

Will consumers get lower prices – perhaps during startup (witness the battle royale over new entrant Masters into the DIY sector) – and perhaps across “lite” financial services. Mortgage origination maybe another matter as the scope for lower mortgages would require a new front in the deposit war, a battle Wesfarmers and Woolworths shareholders probably want to avoid.

The final macro and systemic risk question is are the new players “too big to fail” as well? It’s difficult to imagine the services being of sufficient magnitude to fatally compromise the underlying businesses. But then, the US conglomerate General Electric was slowly eaten by eats consumer finance division, until the GFC of course.

 

 

Comments

  1. Slightly off topic, but couldn’t resist…

    How about a $3500 per week interest only mortgage, when you could have rented it for $1500 /wk?

    http://theage.domain.com.au/real-estate-news/renovation-sells-865000-above-reserve-20140616-3a6yr.html

    “The $4.65 million result for 21 Mowbray Street was Melbourne’s highest priced sale and left agents stunned.”

    “James Tostevin, of Marshall White said there were five bidders competing for 21 Mowbray Street.”

    “The three highest bidders were Asian families, all owner occupiers.”

    Almost 900k over reserve – **Falls off chair**
    Were passports checked?

    “Selling your houses to foreign nationals when your kids can’t afford them is generational theft. It’s inequitable, immoral and unAustralian.”

    • KO’D’s FIRB inquiry must start with an independent audit for purchaser’s compliant residency status/FIRB approval on all Syd/Mel existing dwelling sales in the last 12 months.

      Then publish the audit results.

      KO’D’s inquiry in Melbourne this Friday 20 June for public hearings.

    • “Selling your houses to foreign nationals when your kids can’t afford them is generational theft. It’s inequitable, immoral and unAustralian.”

      If I was selling a house, it would be to the highest bidder. They could come from Mars for all I would care.

    • Hah! I almost spat coffee all over my keyboard at the thought of getting financial advice butcher with a CFP.

  2. How hard is it to flog Mortgages if that’s the direction they eventually take?

    Discussion overheard at kid’s party on the weekend;

    Mum1: Steve’s away for work this weekend.
    Mum2: Off driving?
    Mum1: No he’s not working as a courier anymore, he’s got a new job as a Mortgage Broker. He’s training in Sydney.
    Mum2: That’s a fantastic career……

    At least used car salesmen need a working knowledge of the motor vehicle.

    • The Patrician

      Maybe all those unoccupied 15year olds could flog us mortgages as we pack our own groceries.

  3. Can you confirm: Aus Post is losing 1 BILLION a year? My understanding was letters was losing 250M a year, parcels was making money?

    • Its a projected loss, my mistake forgot to add that word – thats in mail delivery, not other sections which are very profitable as you state. Last year Austpost lost nearly $150million on letters are projecting major losses going forward, hence the job cuts and move into other areas – and perhaps even cuts in services (regular mail only 4 or 3 days a week, which makes sense)

      • Chris,
        What about regional areas. Post is very important. And what if they do a premium service, so the posties will be doing say 10% recipients on premium and passing doors anyway …. = silly.

      • I dont have an opinion on regional mail – although my postman (lady) is a contractor and I live in a semi-rural area. She seems to be doing a roaring trade up here on the Sunshine Coast as Auspost moves more to private contractors. Nice business that.

        User pays should be the go, all else being equal.

        I’m happy to pay more for mail if it means I dont have to live in the city/suburbs.

        Just like I pay more for petrol and a few other things…price you pay for this lifestyle.

        Oh and I used to be an Auspost employee back in the day when I was getting my degree. Fun times (its hard to wheelie a postie bike….not impossible…hard!)

  4. Coles and Woolworths will use their brand names as a front for financial products originated by actual bankers and insurers. Nothing wrong with that.

    Maybe they’ll also get into the business of taking deposits and making basic loans but APRA would surely insist on a stand alone, separately capitalised entity.

    • Think I’d prefer their banks to be tightly bound to Wesfarmers and Woolworths…our loans ( deposits) to them would actually have some collateral.

      This doesn’t happen with the existing banks.

      • I think I would prefer the soundness of their banks not to be tied to how many groceries they sell.

        And, needless to say, no loans from Woolworths Bank to Woolworths.