FCC And Net Neutrality

Net neutrality is important because it means that internet service providers need to make all content available from providers to consumers without any differentiation in terms of charging or quality of service for different types of traffic. It can apply to content including telephony, web browsing, video, television, and other digital services. Following legal battles in the USA, the Federal Communications Commission has set sustainable rules of the roads that will protect free expression and innovation on the Internet and promote investment in the nation’s broadband networks. It is an important stake in the ground, and means the internet will be more open, not less. So far as Australia is concerned, we think it is time to consider the right neutrality settings here. Today we have rules which assume television broadcasting is different from other content, and various barriers which limit competition, consumer choice, and keep content pricing higher than they should be. Given the emerging role of the NBN, It’s time that Australia carried out a broad based review into net neutrality and how it should be applied to the local telecommunications and content provider industries.

Here are details of the US announcement.

The FCC has long been committed to protecting and promoting an Internet that nurtures freedom of speech and expression, supports innovation and commerce, and incentivizes expansion and investment by America’s broadband providers. But the agency’s attempts to implement enforceable, sustainable rules to protect the Open Internet have been twice struck down by the courts.

The Commission—once and for all—enacts strong, sustainable rules, grounded in multiple sources of legal authority, to ensure that Americans reap the economic, social, and civic benefits of an Open Internet today and into the future. These new rules are guided by three principles: America’s broadband networks must be fast, fair and open—principles shared by the overwhelming majority of the nearly 4 million commenters who participated in the FCC’s Open Internet proceeding. Absent action by the FCC, Internet openness is at risk, as recognized by the very court that struck down the FCC’s 2010 Open Internet rules last year in Verizon v. FCC.

Broadband providers have economic incentives that “represent a threat to Internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment,” as affirmed by the U.S. Court of Appeals for the District of Columbia. The court upheld the Commission’s finding that Internet openness drives a “virtuous cycle” in which innovations at the edges of the network enhance consumer demand, leading to expanded investments in broadband infrastructure that, in turn, spark new innovations at the edge.

However, the court observed that nearly 15 years ago, the Commission constrained its ability to protect against threats to the open Internet by a regulatory classification of broadband that precluded use of statutory protections that historically ensured the openness of telephone networks. The Order finds that the nature of broadband Internet access service has not only changed since that initial classification decision, but that broadband providers have even more incentives to interfere with Internet openness today. To respond to this changed landscape, the new Open Internet Order restores the FCC’s legal authority to fully address threats to openness on today’s networks by following a template for sustainability laid out in the D.C. Circuit Opinion itself, including reclassification of broadband Internet access as a telecommunications service under Title II of the Communications Act.

With a firm legal foundation established, the Order sets three “bright-line” rules of the road for behavior known to harm the Open Internet, adopts an additional, flexible standard to future-proof Internet openness rules, and protects mobile broadband users with the full array of Open Internet rules. It does so while preserving incentives for investment and innovation by broadband providers by affording them an even more tailored version of the light-touch regulatory treatment that fostered tremendous growth in the mobile wireless industry.

Following are the key provisions and rules of the FCC’s Open Internet Order:

New Rules to Protect an Open Internet

While the FCC’s 2010 Open Internet rules had limited applicability to mobile broadband, the new rules—in their entirety—would apply to fixed and mobile broadband alike, recognizing advances in technology and the growing significance of wireless broadband access in recent years (while recognizing the importance of reasonable network management and its specific application to mobile and unlicensed Wi-Fi networks). The Order protects consumers no matter how they access the Internet, whether on a desktop computer or a mobile device.

Bright Line Rules: The first three rules ban practices that are known to harm the Open Internet:

  • No Blocking: broadband providers may not block access to legal content, applications, services, or non-harmful devices.
  • No Throttling: broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.
  • No Paid Prioritization: broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration of any kind—in other words, no “fast lanes.” This rule also bans ISPs from prioritizing content and services of their affiliates.

The bright-line rules against blocking and throttling will prohibit harmful practices that target specific applications or classes of applications. And the ban on paid prioritization ensures that there will be no fast lanes.

A Standard for Future Conduct:

Because the Internet is always growing and changing, there must be a known standard by which to address any concerns that arise with new practices. The Order establishes that ISPs cannot “unreasonably interfere with or unreasonably disadvantage” the ability of consumers to select, access, and use the lawful content, applications, services, or devices of their choosing; or of edge providers to make lawful content, applications, services, or devices available to consumers. Today’s Order ensures that the Commission will have authority to address questionable practices on a case-by-case basis, and provides guidance in the form of factors on how the Commission will apply the standard in practice.

Greater Transparency:

The rules described above will restore the tools necessary to address specific conduct by broadband providers that might harm the Open Internet. But the Order recognizes the critical role of transparency in a well-functioning broadband ecosystem. In addition to the existing transparency rule, which was not struck down by the court, the Order requires that broadband providers disclose, in a consistent format, promotional rates, fees and surcharges and data caps. Disclosures must also include packet loss as a measure of network performance, and provide notice of network management practices that can affect service. To further consider the concerns of small ISPs, the Order adopts a temporary exemption from the transparency enhancements for fixed and mobile providers with 100,000 or fewer subscribers, and delegates authority to our Consumer and Governmental Affairs Bureau to determine whether to retain the exception and, if so, at what level. The Order also creates for all providers a “safe harbor” process for the format and nature of the required disclosure to consumers, which the Commission believes will lead to more effective presentation of consumer-focused information by broadband providers.

Reasonable Network Management:

For the purposes of the rules, other than paid prioritization, an ISP may engage in reasonable network management. This recognizes the need of broadband providers to manage the technical and engineering aspects of their networks.

  • In assessing reasonable network management, the Commission’s standard takes account of the particular engineering attributes of the technology involved—whether it be fiber, DSL, cable, unlicensed Wi-Fi, mobile, or another network medium.
  • However, the network practice must be primarily used for and tailored to achieving a legitimate network management—and not business—purpose. For example, a provider can’t cite reasonable network management to justify reneging on its promise to supply a customer with “unlimited” data.

Broad Protection

Some data services do not go over the public Internet, and therefore are not “broadband Internet access” services (VoIP from a cable system is an example, as is a dedicated heart-monitoring service). The Order ensures that these services do not undermine the effectiveness of the Open Internet rules. Moreover, all broadband providers’ transparency disclosures will continue to cover any offering of such non-Internet access data services—ensuring that the public and the Commission can keep a close eye on any tactics that could undermine the Open Internet rules.

Interconnection: New Authority to Address Concerns

For the first time the Commission can address issues that may arise in the exchange of traffic between mass-market broadband providers and other networks and services. Under the authority provided by the Order, the Commission can hear complaints and take appropriate enforcement action if it determines the interconnection activities of ISPs are not just and reasonable.

Legal Authority: Reclassifying Broadband Internet Access under Title II

The Order provides the strongest possible legal foundation for the Open Internet rules by relying on multiple sources of authority including both Title II of the Communications Act and Section 706 of the Telecommunications Act of 1996. At the same time, the Order refrains – or forbears – from enforcing 27 provisions of Title II and over 700 associated regulations that are not relevant to modern broadband service. Together Title II and Section 706 support clear rules of the road, providing the certainty needed for innovators and investors, and the competitive choices and freedom demanded by consumers, while not burdening broadband providers with anachronistic utility-style regulations such as rate regulation, tariffs or network sharing requirements.

  • First, the Order reclassifies “broadband Internet access service”—that’s the retail broadband service Americans buy from cable, phone, and wireless providers—as a telecommunications service under Title II. This decision is fundamentally a factual one. It recognizes that today broadband Internet access service is understood by the public as a transmission platform through which consumers can access third-party content, applications, and services of their choosing. Reclassification of broadband Internet access service also addresses any limitations that past classification decisions placed on the ability to adopt strong open Internet rules, as interpreted by the D.C. Circuit in the Verizon case. And it supports the Commission’s authority to address interconnection disputes on a case-by-case basis, because the promise to consumers that they will be able to travel the Internet encompasses the duty to make the necessary arrangements that allow consumers to use the Internet as they wish.
  • Second, the proposal finds further grounding in Section 706 of the Telecommunications Act of 1996. Notably, the Verizon court held that Section 706 is an independent grant of authority to the Commission that supports adoption of Open Internet rules. Using it here—without the limitations of the common carriage prohibition that flowed from earlier the “information service” classification—bolsters the Commission’s authority.
  • Third, the Order’s provisions on mobile broadband also are based on Title III of the Communications Act. The Order finds that mobile broadband access service is best viewed as a commercial mobile service or its functional equivalent.

Forbearance: A modernized, light-touch approach

Congress requires the FCC to refrain from enforcing – forbear from – provisions of the Communications Act that are not in the public interest. The Order applies some key provisions of Title II, and forbears from most others. Indeed, the Order ensures that some 27 provisions of Title II and over 700 regulations adopted under Title II will not apply to broadband. There is no need for any further proceedings before the forbearance is adopted. The proposed Order would apply fewer sections of Title II than have applied to mobile voice networks for over twenty years.

• Major Provisions of Title II that the Order WILL APPLY:

  • The proposed Order applies “core” provisions of Title II: Sections 201 and 202 (e.g., no unjust or unreasonable practices or discrimination)
  • Allows investigation of consumer complaints under section 208 and related enforcement provisions, specifically sections 206, 207, 209, 216 and 217
  • Protects consumer privacy under Section 222
  • Ensures fair access to poles and conduits under Section 224, which would boost the deployment of new broadband networks
  • Protects people with disabilities under Sections 225 and 255
  • Bolsters universal service fund support for broadband service in the future through partial application of Section 254.

• Major Provisions Subject to Forbearance:

  • Rate regulation: the Order makes clear that broadband providers shall not be subject to utility-style rate regulation, including rate regulation, tariffs, and last-mile unbundling.
  • Universal Service Contributions: the Order DOES NOT require broadband providers to contribute to the Universal Service Fund under Section 254. The question of how best to fund the nation’s universal service programs is being considered in a separate, unrelated proceeding that was already underway.
  • Broadband service will remain exempt from state and local taxation under the Internet Tax Freedom Act. This law, recently renewed by Congress and signed by the President, bans state and local taxation on Internet access regardless of its FCC regulatory classification.
    Effective Enforcement
  • The FCC will enforce the Open Internet rules through investigation and processing of formal and informal complaints
  • Enforcement advisories, advisory opinions and a newly-created ombudsman will provide guidance
  • The Enforcement Bureau can request objective written opinions on technical matters from outside technical organizations, industry standards-setting bodies and other organizations.

Fostering Investment and Competition

All of this can be accomplished while encouraging investment in broadband networks. To preserve incentives for broadband operators to invest in their networks, the Order will modernize Title II using the forbearance authority granted to the Commission by Congress—tailoring the application of Title II for the 21st century, encouraging Internet Service Providers to invest in the networks on which Americans increasingly rely.

  • The Order forbears from applying utility-style rate regulation, including rate regulation or tariffs, last-mile unbundling, and burdensome administrative filing requirements or accounting standards.
  • Mobile voice services have been regulated under a similar light-touch Title II approach, and investment and usage boomed.
  • Investment analysts have concluded that Title II with appropriate forbearance is unlikely to have any negative on the value or future profitability of broadband providers. Providers such as Sprint, Frontier, as well as representatives of hundreds of smaller carriers that have voluntarily adopted Title II regulation, have likewise said that a light-touch, Title II classification of broadband will not depress investment.

We’re Most Likely To Use Multiple Devices – Survey

Reported in eMarketer, according to H2 2014 research from Asia-Pacific programmatic buying service provider Appier, digital device users in Australia are the most likely of those in any country in the region to own more than two—and more than three—devices. Nearly half of multidevice users in Australia reported using three or more digital devices, vs. 28% of those in last-place Japan or Taiwan, for example.

Multidevice users can be a headache for marketers trying to work out multichannel campaigns. Appier sought to determine how similarly—or differently—multidevice users behaved on their various internet access channels. The research found that more than half of users in Australia had completely different behaviors on each device—while 27% exhibited identical behaviors across devices. There was no discernible relationship between penetration of many devices in a market and users’ likelihood of using them similarly.

That can make it difficult for marketers to, first, identify individuals across all their devices, and second, deliver relevant and timely messages to them based on the device they are using. But there were also some patterns across populations in terms of device-related behaviors.

Appier found that across Asia-Pacific, PC traffic was higher on weekdays than weekends. Smartphone traffic, meanwhile, tended to spike on Saturdays, though users in Australia, Hong Kong, Singapore and Japan actually used smartphones most on Wednesdays. Tablet traffic tended to fall most on weekends. And across devices, men were more active than women.

60% of Australian Internet Users Use a Tablet – eMarketer

Australia enjoys the highest tablet penetration rates in Asia-Pacific, in terms of both internet users and the general population, according to eMarketer’s latest estimates of tablet usage around the world. By the end of this year, tablet penetration among internet users will be more than 10 percentage points higher than in second-place China, and among the population at large, the difference will be more than 20 percentage points.

With a projected 10.3 million tablet users this year, Australia is the only country in Asia-Pacific to have tablets reach a majority of the internet population already, and also the only country in the region where we expect a majority of the total population to use tablets at any point during our forecast period. Even other mature markets in the region, like South Korea and Japan, will have relatively low penetration throughout our forecast period, due to several factors including aging population and high usage of phablets. Australia’s relatively small population, however, means that in absolute numbers, the tablet population is the second-smallest in Asia-Pacific, ahead of South Korea.

Digital Banking Gap Is Accelerating

Using the latest data from the DFA channel preferences survey, last published in the report “The Quiet Revolution“, today we chart the top line digital banking scorecard, from the demand side, looking at different household groups, and on the supply side what banks are doing to embrace digital. The rate of change in terms of bank participation in digital, is tracking the rate of adoption of those who are Digital Migrants, and they are moving faster than those households in the Digital Luddite segments. However, it appears that whilst the Australian banking sector is moving towards digital, those who are digitally literate – the Digital Natives – have ever more enhanced desire to do more digitally. Indeed, the digital gap between expectations and delivery is widening. You can read about our digital segmentation here.

DigitalBankingExpectationsNov2014The rate of digital migration is closely tracked by the uptake of smart phones and tablets. Digital Natives are the most likely to be using one of these smart devices, and they have a strong desire to manage their entire financial service footprint digitally. This is true whether it is buying a mortgage, making a payment, or checking a transaction. We know from our profitability analysis that Digital Natives are on average more valuable to the industry, tend to be younger, and better educated, and are significantly less likely to enter a bank branch for any purpose. They use social media and online search tools, and trust these information channels more than a typical bank. They also have high expectations in terms of customer service delivery, and personalization. Many banking players are not meeting these expectations.

DFA is of the view that banks need to accelerate their rate of migration to the digital world, and position to respond to the rising number of new entrants which have the potential to disrupt significantly. We recently discussed Apple Pay, PayPal and Ratesetter. Each of these have potentially disruptive impact. As we said recently:

“DFA has just updated the 26,000 strong household survey examining their channel preferences. This report summarises the main findings.

We conclude that the move towards digital channels continues apace, facilitated by new devices including smartphones and tablets, and the rise of “digital natives” – people who are naturally connected.

We outline the findings across each of our household segments, and also introduce our thought experiment, where we tested household’s attitudes to the various existing and emerging brands in the context of digital banking. We found a strong affinity between digital natives and the emerging electronic brands, and a relative swing away from the traditional terrestrial bank players.

These trends create both threat and opportunity. The threat is that traditional channels, especially the branch, become less relevant to digital natives, and becomes the ghetto of older, less connected, less profitable customers. The future lays in the digital channels, where the more profitable and digitally aware already live. Players need to migrate fast, or they will be overtaken by the next generation of digital brands who are looking towards becoming players in financial services. The game is on!”

Apple and the Payments Revolution

Apple’s latest product announcements included some details about their Apple Pay service, which as we highlighted previously is clearly part of an innovation strategy which will potentially have a profound impact on the payments business and consumer behaviour. Whilst initially US based, Apple Pay is something which has potentially broader consequences. To day we outline the main features of Apple Pay, and reflect on the future impact.

Apple Pay will be built into its new iPhone 6, iPhone 6 Plus, and Apple Watch devices to pay for items via Near Field Communications (NFC), which works by transmitting a radio signal between the device and a receiver, when the two are fractions of an inch apart or touching and will also enable online payments as well. Apple’s motivation, as explained by Tim Cook, was to completely change the current old payments technology, and remove the need to own a physical credit card. Apple said it will speed up the check out process, make payments more secure and ultimately replace physical wallets. Volumes and value of mobile payments are set to rise according to market analysts. Here is a summary from the WSJ.

MobilePaymentsWSJSep2014Here are some of the public comments from Apple:

Gone are the days of searching for your wallet. The wasted moments finding the right card. The swiping and waiting. Now payments happen with a single touch. Apple Pay will change how you pay with breakthrough contactless payment technology and unique security features built right into the devices you have with you every day. So you can use your iPhone 6 or Apple Watch to pay in an easy, secure, and private way.

One touch to pay with Touch ID. Now paying in stores happens in one natural motion — there’s no need to open an app or even wake your display thanks to the innovative Near Field Communication antenna in iPhone 6. To pay, just hold your iPhone near the contactless reader with your finger on Touch ID. You don’t even have to look at the screen to know your payment information was successfully sent. A subtle vibration and beep lets you know.

Double-click to pay and go. You can pay with Apple Watch — just double-click the button below the Digital Crown and hold the face of your Apple Watch near the contactless reader. A gentle pulse and beep confirm that your payment information was sent.

Convenient checkout. On iPhone, you can also use Apple Pay to pay with a single touch in apps. Checking out is as easy as selecting “Apple Pay” and placing your finger on Touch ID.

Passbook already stores your boarding passes, tickets, coupons, and more. Now it can store your credit and debit cards, too. To get started, you can add the credit or debit card from your iTunes account to Passbook by simply entering the card security code.

To add a new card on iPhone, use your iSight camera to instantly capture your card information. Or simply type it in manually. The first card you add automatically becomes your default payment card, but you can go to Passbook any time to pay with a different card or select a new default in Settings.Every time you hand over your credit or debit card to pay, your card number and identity are visible. With Apple Pay, instead of using your actual credit and debit card numbers when you add your card, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element, a dedicated chip in iPhone and Apple Watch. These numbers are never stored on Apple servers. And when you make a purchase, the Device Account Number alongside a transaction-specific dynamic security code is used to process your payment. So your actual credit or debit card numbers are never shared with merchants or transmitted with payment.

Protect your accounts. Even if you lose your device. If your iPhone is ever lost or stolen, you can use Find My iPhone to quickly put your device in Lost Mode so nothing is accessible, or you can wipe your iPhone clean completely.

Apple doesn’t save your transaction information. With Apple Pay, your payments are private. Apple doesn’t store the details of your transactions so they can’t be tied back to you. Your most recent purchases are kept in Passbook for your convenience, but that’s as far as it goes.

Keep your cards in your wallet. Since you don’t have to show your credit or debit card, you never reveal your name, card number or security code to the cashier when you pay in store. This additional layer of privacy helps ensure that your information stays where it belongs. With you.

Apple Pay works with most of the major credit and debit cards from the top U.S. banks. Just add your participating cards to Passbook and you’ll continue to get all the rewards, benefits, and security of your cards.

Reading further about the service, clearly security is a big focus because instead of storing your card on the phone, Apple Pay creates a dynamic security code. You can add in a new card just by taking an image of it. Touch ID will be used to confirm transactions (fingerprint reading technology) for added security).

Apple Pay will start in the U.S. with Visa, American Express, and Mastercard. As with any e-wallet, the key is getting business to adopt it. Apple has six banks on board and thus far including Bank of America, Capital One Bank, Chase, Citi and Wells Fargo, with more banks later, including Barclaycard, Navy Federal Credit Union, PNC Bank, USAA and U.S. Bank. In terms of merchants, they have named Bloomingdales, Panera, Sephora, Groupon, Subway, Disney, Target, McDonald’s, Whole Foods, Macy’s, and Walgreens. Apple will also accept payments and they will integrate Apple Pay into the Apple ecosystem.

This is Apple’s first foray into NFC payments, in the USA, payments have evolved more slowly than in other countries. For example in Australia, we can use VISA’s PayWave, and Mastercard’s PayPass, collectively known as PayWave.  Just touch your card and pay for anything to a limit of $100. Beyond that, you will still need to enter your PIN to confirm the payment. There have been a few phantom payments, and there is a risk of fraud if someone gets hold of your card, but it is highly convenient. In the Apple video about Apple Pay, they suggest existing PayWave devices will be able to handle Apple Pay. The current terminal standards (Ingenico and ViVOPay) are based on global standards and if Apple Pay is compliant to these, no updates to existing systems will be needed.

Consider this, already PayWave looks likely to supplement and even replace the current dedicated smartcards on transport systems like the Oyster card in London, where from mid September, PayWave will be implemented. It could be a simple step to using you phone to pay for trips directly.

There is no word on if and when Apple Pay may arrive in Australia, but the writing is on the wall for a significant shakeup, perhaps. For example, will the NSW Transport Opal transport card now be subsumed? But the real insight is the integration of consumer data, merchant data and the rest, as we highlighted in out earlier post the payments revolution around the corner.


Update On Mortgage Broker Commissions

Yesterday Mortgage Choice (MOC) released their 1H14 results, and it gave us another perspective on the mortgage industry. We have updated our industry model. MOC is a significant player, clearly benefiting from the buoyant market, company revenue grew 4.4% in 1H14, their loan book reached $46.4 billion, home loan approvals increased by 21.6% to $6.2 billion, settlements rose by 18.8% to $5.3 billion and market share was steady at 3.9% for all new home loans written.

With around 500 brokers within 394 franchises, they disclosed the uplift in commissions which we had previously highlighted:

MOC1..and the trail commission, which show the impact of book run off and new business:MOC2They reproduced an interesting chart from UBS showing the majors relative broker shareMOC3Finally, they revealed their commission rates (bear in mind commissions are bi-lateral agreements so other players may have different rates):

MOC4We have updated our industry modelling, to take account of this data and the recent results season. We continue to see growth in volume and share via the broker channel (this is number of loans, not value, which is shown in the APRA numbers) :

Broker-ShareJan13Finally, we adjusted our commission model to take account of recent changes.

Broker-CommissionJan13We see continued growth in the third-party sector, as momentum, especially for investment loans continues. In 2013, mortgage brokers pocketed about $1.5bn in commissions, including both upfront and trails.




The Rise and Rise of the Internet

The ABS today published its latest data on internet use in Australia. The data shows the continual rise in internet penetration and usage, spread across all demographic groups. We highlight some of the most significant findings, highly relevant in the context of our recently released report “The Quiet Revolution”, which studies household channel preferences for banking, and underscores the online migration underway.

First we look at trend growth. We see ACT persons have the highest penetration, at close to 90%. TAS is the lowest, a little below 80%. But from 2006 onwards, we see continued growth.

InternetTrend1Turning to City versus Country, we do see higher penetration in the cities, but people in rural areas are also trending up. The gap is actually closing.

InternetTrend2Turning to the data to December 2012, there are significant age differences. Those 65 and older are less likely to be internet users, but most younger people are.

InternetDemo1Those in the lower income groups are less likely to be connected. There is a large “unknown income” group in the ABS data though.

InternetDemo2Those with higher levels of education are more likely to be connected. However, a very significant number of people with more limited education also access regularly.

InternetDemo5The state and remoteness data highlights the fact that internet penetration is strong in all states, and geographies. NSW has the largest number of non-internet users, thanks to its larger population.

InternetDemo4 InternetDemo3Turning to purchasing on-line, we see a considerable proportion of people are willing to buy good or services.

InternetPurch1The range of goods and services does vary by age, with clothes and cosmetics most sought out by younger groups, whilst travel, accommodation and tickets are strongly represented in older groups.

InternetPurchSo, drawing this together, we see how mainstream the internet has become. Evidence of a digital divide is less strong, as penetration rates improve, though it is still true that less well off and poorly educated people are less likely to connect. However, the strongest determiner is age, with those over 65 still less likely to be connected.

In our “Quiet Revolution” report, we highlighted that age was key in determining how connected people are.

TimeConnected1We also showed that younger people were connected more intensely.

TimeConnectedThe revolution which the internet represents in well underway, but in our opinion many businesses have yet to understand the full implications and opportunities which are represented by the seismic shift.  Read more in “The Quiet Revolution”.

Latest Household Channel Preference Report “The Quiet Revolution” Released

DFA has released its latest report “The Quiet Revolution”, a study of household banking channel preferences, which is available free on request. The report examines preferences across customer segments, and across the sales and service value chains and also looks at how new online players may disrupt the status quo. From the introduction:

QuietRevCover“DFA has just updated the 26,000 strong household survey examining their channel preferences. This report summarises the main findings.

We conclude that the move towards digital channels continues apace, facilitated by new devices including smartphones and tablets, and the rise of “digital natives” – people who are naturally connected.

We outline the findings across each of our household segments, and also introduce our thought experiment, where we tested household’s attitudes to the various existing and emerging brands in the context of digital banking. We found a strong affinity between digital natives and the emerging electronic brands, and a relative swing away from the traditional terrestrial bank players.

These trends create both threat and opportunity. The threat is that traditional channels, especially the branch, become less relevant to digital natives, and becomes the ghetto of older, less connected, less profitable customers. The future lays in the digital channels, where the more profitable and digitally aware already live. Players need to migrate fast, or they will be overtaken by the next generation of digital brands who are looking towards becoming players in financial services. The game is on!”

Request the report [25 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

Note this will NOT automatically send you our research updates, for that register here. You can find details of our other research programmes here.

Mortgage Brokers Day In The Sun

We just updated our mortgage broker models, to take into account recent transaction patterns and commission changes. Our last snapshot was in November last year. Brokers are doing very well at the moment, thanks to increases in the average mortgage transaction value, lifting volumes, and more generous commission rates from the banks who are actively competing for business in the low interest rate environment. In addition, more households are turning to mortgage brokers for assistance, especially those seeking deals for investment loans. You can see our research on household attitudes to brokers here.

The overall share of new loans via the broker channel is up, reaching 46% of loan applications. We expect volumes to continue to grow.

BrokerJan14Mortgage broker commissions took a hit following the GFC, with volumes down, and commission rates cut. But through 2013, we saw some upward tweaks to mortgage broker commissions.

Most mortgage brokers are aligned with one of the 50 or more aggregators, who provide services for the brokers, marketing support, and negotiates bi-lateral commissions with individual banks. The MFAA maintains a list of aggregators here. Commission structures vary between lenders and broker groups, and individual rates are not always easy to find. Some aggregators, like Mortgage Choice maintain a fixed commission payment to brokers, irrespective of deals with the banks, others pass-through commissions to brokers as they change, perhaps retaining a cut. In addition to hard commissions, aggregators may negotiate tiered structures based on specific volumes or product types, and may receive special deals from individual lenders at different times as well as soft benefits including bank sponsorship of conferences, holidays for top brokers, and other benefits. Most brokers will choose to align with a single aggregator, although some maintain multiple relationships for different types of loans.  A small number of aggregators rebate some commission back to borrowers, but this is relatively unusual. The number of lenders on individual aggregator panels varies.

In July 2013, Bankwest increased its upfront commissions from 50 basis points to 70, whilst scrapping its trailing commission for the first year of 15 basis points. This was in response to Westpac offering to pay 10 basis points extra to September in an attempt to stimulate broker led deals, offering 60 basis points upfront. Others followed, with St George, AMP and Rock Building Society lifting rates of commission. Macquarie Group in November raised its up-front and trailing commissions for business written via Mortgage Choice, one of the biggest aggregator groups.

In 2013, mortgage brokers pocketed commissions of about $1.5bn, including both upfront and trails.

BrokerPool14Factoring in the recent changes, we see that commissions received by brokers overall are up. We baseline our model to the previous commission peak in 2007, before the GFC, and we see that commissions are now back over 80% of the previous high levels. We expect commissions to continue to grow.

BrokerComJan14How do changes in commissions impact the dynamics of the market?  Commissions must be disclosed to prospective borrowers, and the loan must not be unsuitable – a weaker level of protection than being the “best” loan. It is clear though that the industry believes they can get competitive advantage from tweaking broker commissions, and our research confirms that brokers will consider the commissions they receive, along side factors like speed of decision and broker service when selecting a lender from their panel.

Commissions are paid to brokers by the lender, based on the value of the transaction, so it could be argued there is no cost to potential borrowers. Actually, many lenders incur more costs originating a loan via their branch network than via a broker. The truth is, origination and commission costs are all scrambled in the banks books, and the costs have to be recovered somewhere, so it will flow into overall margins and fees. Whether a prospective purchaser gets a better deal via a mortgage broker compared with negotiating direct with a bank is a moot point. Brokers with a good panel of lenders may be able to find a better deal. That said, brokers often do the heavy lifting when it comes to managing and tracking a loan application and many customer think this is worthwhile.

At the moment, brokers are enjoying their day in the sun as momentum in the mortgage market continues to build.

The next big thing will be the continued rise of direct digital channels which has the potential to disrupt the mortgage broking model. Digital Natives expect to use their mobile devices instead of face2face interactions, and as yet brokers are yet to rise to the challenge of the digital revolution. We discussed this yesterday.

Banking’s Digital Elephant

A quiet revolution is under way as digital device take-up continues to rewrite the rules of banking. We have just completed a thought experiment with our survey participants as part of our channel preference study, and the findings are significant for current and potential players in the banking sector. This post provide some of the high level findings.

We began by separating our households into Digital categories, based on a series of questions concerning their digital usage. These are the three top-level categories:

DigitalCh1No surprisingly, we see the segments change by age group, with young households more likely to be Digital Natives.

DigitalCh2We then completed our thought experiment, in which we asked households to consider a scenario where a range of well known brands might offer banking services, alongside current players. We used well known brands like Google, Microsoft, Apple, Samsung, as well as Coles, Australia Post. Visa, Mastercard, PayPal and Telstra. We have no insight as to whether any of these players are considering extending their footprint into banking but we wanted to test the relative attractiveness to our digital segments, and see if there were differences between the segments, and across the companies.

We asked questions about Brand, Banking Capability, Customer Service, Technical Capability, Privacy and Trust. We then scored these and created a series of datasets. The survey comprised 26,000 households.

The top-line findings are interesting. Digital Luddites favour the existing fleet of players, but are also potentially interested in Australia Post or Google offering banking services.

DigitalCh3Digital Migrants would be interested in Google or Microsoft offering banking, and these scored ahead of all but CBA from amongst existing players.

DigitalCh4Digital Natives are much more aligned to the new global high-tech brands than to the traditional players, with CBA in first place amongst the traditional players, and Microsoft the highest scoring player of all, followed by Apple, Google and PayPal. Many of the other existing banking players were well down the list!


There is a significant shift towards high-tech, and the following chart shows all three top-line scores on the same chart.

DigitalCh6I won’t go into the detailed findings around brand, service and technology capability here, but I will summarise some of the results from the segments in terms of relative importance of different banking capabilities in the chart below:

DigitalCh7Whilst it was only a thought experiment, the message is clear. Existing players need to be thinking about how they will deploy appropriate services through digital channels, as their customers are rapidly migrating there. There is an opportunity for truly digital brands to gain mind-share and disrupt the status quo.

One final piece of data relates to income distribution. We see this migration to digital more advanced amongst higher income households. So players which are slow to catch the wave will be left with potentially less valuable customers longer term.


The true elephant in the room is the need for players to adapt more quickly to the digital world. We are past an omni-channel (let them choose a channel) strategy. Digital migration needs to become central strategy because the winners will be those with the technical capability, customer sense and flexibility to reinvent banking in the digital age. Existing brands will be under the hammer in the transition. Privacy and trust will take centre stage.