As the big banks face the Royal Commission, analyst Ian Munro from CCZ Statton Equities explains what to look for in the new generation of digital banking stocks.

Many big banks have announced “digital transformations”. Are they going far enough?

Compared to the US, Australia is way ahead in terms of digital banks. Our fee structures are way more favoured to customers and the banks are more concerned about user experience.

If you look at the United States there is arguably more room for disruption. Their fee structures begin at $6.95 a month for the most basic and can be as much as $19.95.

Monthly fees like these are largely what we take for granted in Australia.

Unlike Australia, a lot of the banks in the US are very regionally based and you get a lot of banks that are specific to one city or one town. What that does is stifle their investment in technology and fail to provide scale.

While Australia’s banking system is by no means perfect, the nature of our sector is that there is a broader sharing of technology investment that provides an economy of scale.

How has the emergence of specialist digital banks like Change Financial (ASX:CCA) changed the landscape?

The prevalence of fees, both at home and abroad, have fed into negative sentiment around banks and has been key for those smaller disruptor banks to target.

Those that have come out on top are the banks that have adopted a consumer-centric approach and been willing to take on technology to increase mobility and ease of payment.

While we have seen major banks in Australia develop apps and digital features, the US largely hasn’t gone through the same phenomenon.

The landscape has been a breeding ground for the likes of ASX-listed Change Financial (ASX:CCA) as well as Chime, Varo, Zero and Jiko.

We have seen a proliferation of digital banks — and when you consider the size of the under-banked market there is a lot of space for new players.

What should investors look for when considering digital bank stocks?

The competitive edge for digital banks is largely the lack of overheads. That allows them to offer no monthly fees and value-add through budgeting tools or round-up saving tools.

They are focused more on customer alignment than the major banks. But there is a trade-off as the path to monetisation will take longer.

As more come to market, the difference between a good and bad digital bank will be those that can acquire customers organically and build an active customer book without spending through the nose on marketing.

Where are the best opportunities for digital banks?

Particularly overseas, as more consumers take on digital banks, we will start to see a roll-out of new products such as lending and student loan payments.

In Australia, while we are served better relative to the US, there are still significant pockets in small to medium enterprises (SMEs) that are underserviced.

Major banks are often focused on mid-to-large clients because they are the most profitable and that has led to the emergence of peer-to-peer (P2P) lending groups and payment processors.

One of the early movers in P2P lending was MoneyPlace, a marketplace bought by private company Liberty from ASX-listed Auswide Bank (ASX:ABA) earlier this year.

But that won’t be the last of M&A (merger and acquisition) activity. I envisage that further deals like this will come down to a disruptor’s ability to solve a problem and be cost effective and have a market share that can grow.

What will ultimately see is more M&A in time, dependent on the industry.


Ian Munro is a senior analyst and co-founder of the Melbourne desk for brokerage house CCZ Statton Equities. CCZ specialises in emerging company research, targeted at investors looking to achieve superior risk adjusted returns.

Ian adopts a fundamentals-based, yet innovative approach to valuing businesses, drawing upon investment experience locally and abroad, including a wide network of private and listed company contacts. A product of the Melbourne Business School, prior roles include UBS Global Asset Management (London) and National Australia Bank.