Are “Gypsy Banks” the future of Australian finance?
For 5 minutes, let’s forget about our banking oligopoly and look at another Australian industry which could also be considered oligopolistic.
The Beer Industry
With CUB and Lion Nathan dominating the beer industry, we can be certain that it isn’t as competitive as it should be. However, consumer trends have pushed back against the mainstream and enabled “micro–brewing” to blossom. A small part of this trend is called Gypsy Brewing.
What is “Gypsy Brewing”?
Gypsy Brewing is when a small group of people hire out the facilities of a larger brewer to make their own batch of beer, usually because the larger brewer is not running at capacity. This could be due to:
- Demand for the beer made by a specific piece of machinery is down.
- Maximum utilisation is impossible with seasonality, so pockets of downtime periodically emerge.
The Gypsy Brewers get access to infrastructure they could not afford at such an early stage, test their recipes, manufacturing skills and sales and distribution of the new brews. People drink their beer and the beer industry evolves, with happy taste buds in the consumer, major breweries with a new revenue stream, and smaller brewers getting access to equipment they can’t yet afford.
And this isn’t limited to beer. A friend of mine at Pacific Ice Creams was testing his IP protected process for making UHT Ice Cream, using a major ice cream manufacturer’s facilities. With this he also got access to their expertise for ensuring the food passes consumption laws and regulations.
Why can’t we create Gypsy Banks?
So why is this limited to beer and food when a financial services equivalent would provide a huge amount of value? If this approach works to improve customer choice and deliver to different niches in beer and food, the same can surely be done for banking.
Our current banks could then be described in another way: Infrastructure Banks. They have the licensing and most importantly deposit financing (the two biggest barriers to a new entrant), but they are not operating at capacity.
We know the banks are not good at manufacturing new financial products, and in recent years have been more focused on product rationalisation. Their Legal, Risk, Operations and Compliance teams have seasonality, so staff won’t always be at full capacity. Other staff in the bank, may not be completely engaged, but giving them new and varied work may help keep them satisfied. And finally, as market conditions change, the banks will be looking for new revenue streams outside the core business.
So what would a Gypsy Bank look like?
This needs to be about manufacturing new products and services, which is not where banks are going with their innovation teams (who are focused on improving digital infrastructure and the customer experience). That excess seasonality in product compliance needs to be linked up with Gypsy Banks (FinTech) who have a product vision and want to sell it themselves. The existing banks should focus on providing their infrastructure at a price, be it 10, 15, 20 or even 30% return on capital. This needs to be efficient and transparent.
So a FinTech needs to be in a position to say to a bank, “I have a product with a recipe (costs, risks, structure etc.)”. Then work with an Infrastructure Bank to agree a timeframe for product development, ideally around the downtime in Legal, Risk and Compliance (this shouldn’t be a marketing or business unit decision).
The Infrastructure Bank then needs to:
- Be able to agree to commercial terms for product development/prototype and medium-term manufacturing
- Look at contingency options if the Gypsy Bank proves a hit: is this an acquisition, is this a joint venture, are their extra services to offer (for example FX, hedging, complementary products).
Does this work overseas?
We are seeing this evolve in many forms. Tide is an example of a white-label small business bank run by Barclays. Other white-label products are further options but they are usually paid for upfront by the would-be Gypsy provider. Technically, they are not new businesses and in many cases are add-ons, such as mortgage broker group’s white-label home loans that have no distinguishing features to existing products.
The goal is to improve financial products and services so they provide the best possible outcome for consumers, including lower risk. People want or need different flavours.
Why banks should support this kind of structure and the competition it will bring?
This one is simple: local Australian FinTech are not a threat. FinTech globally are not a major threat. The major threat for our banks is coming from Google, Apple and Amazon from the US and the unknown quantity emerging from China by the likes of Tencent and Alibaba. After all, CUB and Lion Nathan aren’t worried about the threat of smaller craft brewers. They’re worried about other global giants or non-beer options coming to Australia to eat their lunch.
If we can then create a competitive market in Gypsy Banks and Infrastructure Banks, Australian consumers might be able to sample financial services that don’t leave a bitter taste in their mouth. And our banks will have access to a wider range of tools to compete with new entrants locally and offer to overseas markets.
I’ll drink to that.