National Australia Bank’s
(NAB) online-only subsidiary UBank represents what some believe to
be the future of retail banking: branchless, low cost and decked
out with the industry’s most up-to-date kit. Will Cain discusses
the growth of NAB’s direct banking arm with UBank’s general manager
Alex Twigg.


Bar chart showing NAB growth rate compared to industry average in 2010UBank was set
up by National Australia Bank (NAB) in 2008 to snap up market share
from the country’s big four banks, including NAB itself – a
strategy still questioned within the industry.

Last month it launched UHomeLoan,
its first product on the assets side of the business and the latest
step in the online bank’s rapid development.

Critics say running a separate
business model and brand for online banking is in contrast to
sector-wide discussions on the need for integration of retail
banking channels. Separate online banking offerings became popular
in the late 1990s in the UK with the creation of brands like HSBC’s
first direct and Egg, now owned by Citi. But most banks now focus
on providing a seamless experience for customers across their
distribution network, including branch, internet and mobile
offerings. How can that be achieved at UBank, critics ask, when it
is designed to be completely separate – even competitive – with
NAB’s other channels?

“It completely runs in parallel,”
explained Alex Twigg, general manager at UBank.

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“We work hand-in-glove with
NAB Direct”

“I work really closely with the NAB
Direct team. We work hand-in-glove. We’re creating a very
integrated cross-channel strategy for NAB customers. But [NAB
Direct is] not going to be able to come to the party with the same
economic advantage and low-cost model that we can at UBank. Those
customers that prefer to have all of those channels available to
them, they’ll have a fantastic multi-channel offering [at NAB
Direct]. For those that would prefer to have a primary online
banking relationship, UBank has a fantastic offering.”

Another criticism is that the bank
pays too high a price for market share in Australia’s
ultra-competitive retail banking market. UBank offers
market-leading rates on its deposit and loan products, meaning its
interest margin is wafer thin.

Twigg said UBank was able to offer
better rates because it had a lower-cost business model than
traditional banks. He said return on equity (ROE) for a typical
UBank home loan would be in excess of the 30 percent achieved on
traditional mortgage-based applications in branches and the 20
percent typically achieved through broker channels.

“A UBank mortgage would probably be
the most profitable mortgage of all of those because you don’t have
the operating costs associated with those channels,” he said.

“We’re not paying broker commission
and we don’t have the large structural overhead of a branch network
and everything else that goes with it. The ROE on a UBank loan
would probably be the highest of the three. I can’t give you a
specific number [for ROE] – that is be competitively sensitive –
but it would be a very good set of numbers.”


Contributing up to a
half of NAB’s deposit growth

UBank’s performance so far has
silenced its critics: Deposits increased by A$2 billion ($2.1
billion) year on year to A$7 billion in the first quarter of 2011
alone. Customer numbers exceeded 125,000 and average deposit
balances were around A$40,000 as of 31 March.

Although figures are not publicly
available, these details suggest UBank contributed between one
third and a half of NAB’s entire A$7.5 billion deposit growth in
2010: Deposits at NAB increased 13.1 percent to A$64.7 billion for
the year to September 2010, compared to an industry average of 1.6

Replicating UBank’s success in
gathering deposits with its new home loan product would be some
achievement – and there have already been early operational
successes. UBank is one of the first parts of NAB to benefit from
the overhaul of a new core banking platform with vendor Oracle. It
is already operating on the Next Generation platform the rest of
the bank is in the process of migrating to, a system Twigg said
will revolutionise customer service at the bank.

UBank’s online model and use of the
new platform allows it to complete the entire process of providing
a mortgage – from application to settlement – in ten days or less,
compared to an industry average of around 30 days.

Twigg said he hoped home loans at
UBank would eventually become as successful as its deposits and
believed that there was a clear market in Australia for a low cost
and convenient online mortgage offering.


Only 31% of mortgage
customers happy with their bank

According to research commissioned
by UBank, 36 percent of all Australian home loan customers are
looking for a better deal on mortgages and are receptive to lower
interest rates and fees. Customers’ satisfaction with their current
bank is declining, with only 31 percent of customers saying they
are happy with their current lender. That compares to 45 percent in
October 2010.

The number of people considering
mortgage refinancing has gone up from 34 percent to 46 percent,
which all highlights a large potential market for UBank – and there
is evidence customers are already switching, said Twigg.

“They’re coming for the price
point,” he says. “We’ve got a market-leading rate and a loyalty
rate of 10 basis points off after three years. When you look at it
over the long term, for the life of a mortgage, that makes a
significant difference.

“People are starting to realise
that now. The headline rates and introductory rates are becoming
less and less relevant to people.”

Whatever its critics say, UBank looks likely to bring NAB
additional market share for both deposits and mortgages this year.
It remains to be seen whether it will prove a successful path for
NAB or UBank itself – the business has not yet turned a profit – in
the long run.