Morgan Stanley
  • Research
  • Jun 26, 2020

The Evolution of Banks

Australia’s banking industry is experiencing a rapid change of digitisation, especially with the rise of neobanks.

Banks in Australia, which play a central role in our financial system, have been experiencing rapid change over the years. Technological advances and changing consumer behaviour continue to contribute to the powerful forces shaping the industry today. 

A change in the way we bank

Like many other parts of our lives, banking is becoming increasingly digital, enabled by new and emerging technologies. 

More and more banking customers are seeking financial institutions that can offer them a personalised service and better integration across physical and digital channels, to meet their evolving needs. 

Customers are becoming less loyal to their main bank, and spreading their money across numerous providers. Research suggests this is because people are better informed of the different rates and products out in the market, and the significant reduction of time taken to open a new account. This could be a concern for banks, but it also presents an opportunity to create deeper relationships with customers. 

A growing trend in banking technology is ‘open banking’, which uses Application Programming Interfaces (APIs) to make proprietary data available to accredited third parties who have the consumer's permission to access it. Open banking gives the consumers greater access and control over their banking data, and is designed to improve the customer experience by making it easier to switch products such as savings accounts and home loans to different banks. 

The rise of neobanks

Neobanks, also known as digital banks, operate digitally without the need for physical infrastructure like branches. Australia has seen a wave of neobanks emerge since late 2019, after a change in legislation in 2018 opened the floodgates. Neobanks still need banking licences and approvals, but the application process to enter the deposit market has been simplified, lowering the barriers to entry.

Neobanks are challenging the established banks by focusing heavily on technology-led banking and world-class digital services, and removing pain points in traditional banking, for example approval times and fee levels. 

For neobanks, the mobile phone app is the gateway to providing financial services to customers. By using big data and artificial intelligence, some offer features to help customers manage their money better, such as recognising higher than usual bills, reminding them to deposit money to earn maximum interest, predicting upcoming payments and highlighting subscriptions a customer may not need. 

The idea behind neobanks is that they’re more cost-efficient and nimble than the large, traditional banks. Expenses can be saved as they do not need to maintain large offices, hundreds of physical branches and thousands of employees. With these cost savings, neobanks assure more competitive rates and lower fees for customers. Neobanks can also build their systems from scratch, whereas some of the larger banks have been around for generations and may be using outdated legacy systems, which lack the agility to continuously integrate the latest technologies. This advantage means they can use more advanced technologies to accelerate and enhance their service, for example, faster home loan applications by automating certain processes.

However, building a digital bank from scratch is not easy and it has its challenges. While new features can be impressive and sophisticated, the level of personalisation still differs greatly from person to person. The licensing process, as well as building awareness of a ‘new way of banking’ takes a lot of time. And although neobanks are set to revolutionise the banking industry, the more established banks have been responding by supplementing their full-service models with enhanced digital banking offerings of their own.

The evolution of banks

Disruption has already arrived for the banking sector. The increasingly competitive digital banking landscape is pushing banks to cater to the needs of the digital era. Customers’ channel preferences are becoming increasingly complex, therefore banks need to give customers a choice in how they interact and offer a variety of accessibility options. 

The banks that can successfully anticipate their customers’ needs and stay ahead of technology trends, are likely to be the long term winners with strong customer relationships and sustainable profits.


For more on the evolution of banks, speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.