The Australian mortgage industry has seen very few product innovations over the past few years. This is largely due to the big four’s market dominance and their ability to generate ever-increasing profit without the need to offer more to the customer.
But all that may be set to change in the near future.
The introduction of digital currencies, particularly BitCoin, presents the largest threat to banks’ profitability in generations.
Originally, our currency was a form of a government-issued IOU backed by gold. But the precious metal-backed form of currency has been extinct for over 40 years, with Australian coins and notes no longer being backed by an asset of any intrinsic value.
BitCoin does in fact meet most of the classical stipulations of gold as an original currency: it is durable, portable, scarce, fungible (ie it can be substituted with other separate units) and is divisible.
What is of critical importance to its long-term success is that users believe it to be a legitimate form of currency. BitCoins are valuable because they exist, and because people believe that they have value. Additionally, there must be trust in the system for a digital currency to retain any value.
That is the real essence of the question whether or not digital currencies will remain.
BitCoin’s price tracked an average of $5.44 in 2011, $8.29 in 2012, but has risen exponentially from October 2013. It peaked at $1,200, and has dropped back to $591 more recently, after regulatory changes in China.
The price spike indicates a surge of demand, and could be indicative of greater trust in the system and the brand itself. In translation, if BitCoin was to become widely accepted in Australia, its ‘brand’ would be considered just as trusted, and thus as legitimate, as the brand of the Australian government.
At that point the currency would become stable. Stability is the foundation of the success of BitCoin as a legitimate currency in which loans can then be made.
The real challenge to the stability of digital currency comes from the vested interests of governments and banks that stand to lose massive revenue streams if this was to occur.
In a recent RBA report, BitCoin was considered a threat because the agency will lose future revenue from seigniorage (profit the RBA earns when issuing currency; the profit being the difference between the face value of the note that is paid to the RBA by a buyer, and the extremely small cost of physically producing that note).
In 2013, Australian banks made a massive $27 billion in profits, 86 per cent of the revenue being income from loans. This income is threatened if an alternate form of currency is available. In an effort to destabilise and deligitimise the currency and protect its continued profits, in April 2014 the NAB banned a number of business customers that traded in BitCoins. The Commonwealth Bank also enforced a similar action against some of its business customers.
Whilst there is no doubt that our main banks will work co-operatively in an attempt to discredit and destabilize digital currency in the shorter term, will they continue to view digital currencies as a threat in the longer term?
The lenders that choose this self-serving approach risk losing loan market share to specialist lenders who will welcome the opportunity to capitalise on this policy.
With no central system per se, the BitCoin-funded mortgage lending industry will likely be initially provided through peer-to-peer lending – perhaps not dissimilar to how contributory funded private mortgage lending exists now. Borrowers wishing to borrow BitCoins via personal loans are already available in this manner, and provided through an ever-increasing number of third-party operated BitCoin online platforms. Whilst mortgages are the next obvious extension, there are a number of challenges that need to be dealt with first, including that of anonymity – one of the biggest attractions of the digital currency.
Either way, it will make for an interesting future when our first lender assesses, approves and extends a BitCoin-funded loan for an Australian property purchase.
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Troy McErvale is the founder and managing director of Freedom Home Loans and My Personal Lender, a combined mortgage broker and mortgage management business in Australia started in 2001. Since 2010, the company has offered an expanded service to include mortgages for foreign owners of US property, as well as US property consulting services to high net worth clients.
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