Westpac has announced a bold play to expand its digital offering, unveiling a new co-operative deal with UK-based fintech 10x to develop a standalone “banking-as-a-service” platform.  
 

The deal, announced during the bank’s full-year results review, will see the creation of a new ‘greenfield’, banking-as-a-service platform based on 10x’s core banking stack. 

The BaaS model, as explained by Westpac, effectively leverages APIs to allow non-licenced financial services to deliver services through an existing bank.
 
Touted as a “state-of-the-art, cloud-based” venture, the new ‘digital-only’ banking platform will initially be run separately from the bank’s existing businesses, enabling third parties – initially institutional customers and fintech partners – to distribute Westpac banking products to their customers. 

Should the BaaS “prove up” as hoped, Westpac chief executive Brian Hartzer said the platform may be folded back into the bank’s core operating environment, helping to “drive down our own costs and [increase] flexibility in a better direction”. 
 
Hartzer said he was confident the 10x venture would extend the bank’s capability beyond its core business whilst still “[complementing] the bank’s existing businesses”. 

Off the back of a disappointing FY19 profit result – with the bank forced to cut dividends for the first time in a decade – the partnership offers considerable growth potential for Westpac, particularly as it faces off against an emerging tide of neobank and digital banking upstarts raring to take their own platform offerings to market.

“This initiative builds on the significant investment we have made – and will continue to make – in modernising our platforms, including the Customer Service Hub and Panorama. Together this will mean we have the right systems to meet changing customer needs now and in the future,” Hartzer said.

Faced with “a challenging, low-growth, low interest rate environment”, with full-year revenue, earnings, interest margin and return on equity all falling and net profits nosediving by 16 per cent, Hartzer stressed the importance of Westpac’s technology program to not only “deliver great service” but to also “drive down costs through automation”.

Following an ambitious digital revamp last year, including an $800 million investment in “systems upgrades, digital transformation, and innovation”, operating expenses unsurprisingly jumped 3 per cent against last year’s figures, reaching $333 million for FY19. The bank nevertheless reaped productivity savings of $405 million, a 33 per cent jump on last years’ figures, with full time equivalent staff decreasing 1,741, or 5 per cent, off the back of an aggressive automation campaign.

As part of its 2018-19 tech overhaul, Westpac said it had pushed to simplify and automate its processes; this included a shift of more than 100 applications into the cloud and the creation of 120 APIs. Last year, Westpac also made migrated its core banking operations onto IBM’s private cloud.

Hartzer, in particular, praised the bank’s investment in its new Customer Service Hub, which he said had given it “the rails to automate all of our consumer origination and servicing capability”.

“Next year we’ll migrate other mortgage products and channels onto the platform and then begin to convert our other consumer products,” he added.

“80 per cent of mortgages are now settled electronically. And earlier this year we rolled out a new enterprise workflow system that allows us to automate our paper intensive processes.”

Given the bank’s “significant investment in digital”, the annual report stressed a concerted focus on ensuring a “medium to long term cost-to-income ratio of less than 40 per cent.”   

“We anticipate that investment in strengthening risk and compliance will see expenses increase in 2020 and remain high in 2021, before decreasing as the benefits from these programs and other productivity initiatives are delivered.”

Westpac’s general manager of corporate and business development, Macgregor Duncan said the 10x partnership will support the bank’s goal of improving customer service whilst lowering overall costs.

“A modern core banking stack allows you to support customer needs with new data and AI applications, while also significantly lowering the cost-to-serve. And that’s what 10x is,” he said.

“While it’s still young technology, we see this as a way for Westpac to test and explore new capabilities that might become directly relevant to Westpac’s core business in the future.”

As part of the deal, Westpac is also set to make a minority equity investment, an as-yet-undisclosed sum, in 10x.