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Monday, 10th August 2020
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The internet and Irish financials Back  
Goodbody Stockbrokers undertook compiling a major report entitled ‘@gony or e-cstasy?’ which examined the potential impact of the internet on financial institutions in general and on Irish ones in particular. Here are some extracts.
With information content and no physical fulfilment required, it is clear the distribution of financial services products is ideally suited to the internet. Aggregation of data on commodity-type products, instantaneous analysis and comparisons, and persuasive access is helping to create an almost ‘perfect market’, as defined by economic textbooks.

In this sense the wider use of the internet is gradually removing structural inefficiencies from the financial services marketplace. Thus while online distribution costs are substantially lower than the offline equivalent, it is clear margins are also under pressure.

We believe that pricing pressure can be alleviated, however by increasing product customisation, adopting risk-based pricing and through ‘bundling’ of services in such a way that cross-market pricing comparisons become less relevant.

Customers, profits and channels
At present the key focus of most retail banks is to report as high a number of online customers as possible - it is evident that little attention is currently being paid to individual customer profitability.

A key challenge for individual banks is to identify the appropriate combination of online business model and delivery channels.

What is apparent, however, is that the technological capability exists to give customers the ultimate in convenience - essentially combining the key elements of price, convenience and choice.

Standalone virtual banks offering only their ‘own’ financial products have yet to prove a substantial threat to the core franchises of incumbent banks.

Adding ‘one stop’ convenience to the value of perfect market information in the context of a vertical portal appears, on paper at least, to offer the greatest combination of value to the customer.

As time goes on, however, we expect an ongoing reappraisal of strategies and exploration of potential alliances and partnerships as a way of enriching the online platform and reducing risk.

From a valuation perspective, the relationship between the perceived impact of the internet and market ratings is driven more by an assessment of strategy than short to medium term earnings forecasts.

Domestic financial institutions
The current main focus of all the domestic institutions is the defence of their existing franchises against new direct entrants.

Given a substantial physical infrastructure, strong technical skills and high market share in a relatively small market, it is likely that the incumbent institutions will be largely successful in defending their core franchises.

A logical consequence of the successful migration of customers to direct channels is a reduction in the capacity of offline channels.

While the expansion of product offerings internally is certainly a possibility for some institutions, the lack of brand recognition outside Ireland will hamper ambitions to leverage the domestic platform in external markets.

We currently see no compelling evidence that the domestic institutions are willing to develop their existing online presence into vertical portals. The competitive outlook and demand for online access in the domestic market is such that time would still appear to be on their side - nonetheless the environment is fast changing and the ability to react quickly to competitive developments will be key to survival.

AIB
AIB has a well-developed internal infrastructure in its core domestic operations, which should facilitate ongoing enrichment of its online functionality.

AIB is assessing other online business models and has shown the greatest willingness to consider radical options.

While lack of brand currency outside Ireland will prove a limitation in its attempts to leverage its online skills for external growth, it also has the most diversified physical geographic presence of the Irish sector.

Bank of Ireland
BoI has shown a willingness to look for potential online growth outside of its traditional markets. Its web-enabled business banking functionality, however, is unique in the Irish market.

Beyond defending its core franchise and improving customer service, there appears to be limited opportunity in the domestic market to leverage the technology either in geographic terms.

Lack of brand currency outside of Ireland will prove a limitation in its attempts to leverage its online skills for external growth.

Irish Life & Permanent
With life, pension and asset management activities accounting for 75 per cent of its product earnings, ILP is relatively protected from negative implications of the internet.

It has also shown a willingness to consider building a destination portal in its approach to online distribution of car finance and we believe that it will also attempt to aggregate the property market.

First Active
With an increasing monoline focus on a commodity product, relatively small scale and low efficiency, First Active is potentially the most exposed of the domestic institutions to the negative implications of the internet.

In the context of this strategy its ability to survive profitably in the longer term will depend on if, and how quickly, it can develop a ‘best of brand’ speciality provider. Its UK operation has a relatively sophisticated online presence and has recognition beyond its size given its focus on flexible niche products.

Anglo Irish Bank
With a focus on relationship banking in a niche national market, Anglo is potentially the least impacted, positively or negatively, by the internet.

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