Persistently high interest rates in Australia are impacting challenger banks and the private credit market. Explore how these institutions navigate the opportunities that arise in this environment, such as product diversification and partnerships with super funds.

Watch more from the New Monetary Order Video Series and discover how financial institutions are adapting to the evolving monetary landscape.

Catherine Downes

Hi, I'm Catherine Downes and I'm an associate in the Sydney office. I'm joined today by Rama Gollakota, a partner in our financial services practice in Sydney.

Rama Gollakota

Hi Catherine.

Catherine

Hi Rama. Thanks for joining us today.

Rama

Pleasure to be here.

Catherine

We are here to talk about the New Monetary Order, which you co-authored the paper for, which is characterized by higher for longer interest rates. One of the main groups of institutions we talk about in the paper is challengers. What do you think are some of the headwinds and tailwinds for challengers in the new monetary order?

Rama

The challenger players in this market have for a long time traded on their customer promise, being closer to customers and more community oriented. I think that will hold them in good stead over the next 12 to 18 months. From a perspective of tailwinds, the opportunity to broaden the consideration set for their offering as interest rates normalize – or at least more of a level playing field – will also help them respond to customer needs a little bit faster than some of the Big Four players. We’ve seen examples of that over the last few years.

Where I do think there’s headwind is around where they have lowered interest rates to compete with Big Four banks to continue growing over the last few years. Hopefully that hasn't set up for some bad debt challenges over the next 12 to 18 months, so that's a watch out for them. I believe from a perspective of their core promise or that customer promise they've traded on will continue to help them from the perspective of how they treat customers in a much better way than some of their competitors.

Catherine

More broadly in the paper, we touch on the private credit market in Australia where we've seen significant growth over the past decade. How do you think this will change looking forward in the new higher for longer interest rate environment?

Rama

I don't think the expansion of the private credit segment has really been anchored to interest rates. I think that has helped. Where I think, actually, the private credit market has expanded is because we've seen a greater need for diversity in lending solutions in the market. If you look at listed banks, particularly their core offering, it is a very traditional lending model. Where I think players like the non-banks have particularly played in is diversifying the type of lending structures that are offered to these customers. I think that is where we've seen material growth.

I believe that big banks will start to focus more on those from a perspective of being able to diversify their offer for customers, and we'll see in different ways how they attack that market. Historically it would've been to build that capability internally, but now it might be actually through partnerships with some of these specialist lending players.

Catherine

Thinking more broadly about partnerships, do you think super funds have a role to play in this change?

Rama

A hundred percent. Super funds already participate in the private credit market quite extensively from a perspective of either direct lending – that’s direct lending with partners that play in that ecosystem – and also a big asset allocation to fixed income. We'll continue to see that as interest rates and equity markets are facing the dynamics that they are.

Where I believe there is a massive opportunity that we'll start to see greater consideration for is opportunities like the green transition. The green transition is largely funding large fixed assets, large projects, and infrastructure projects, and that is where super funds have been really strong over the last few years and therefore, I dare see them wanting to play a greater role. Again, a bit like banks, you'll see some new ways of partnering to fund those opportunities that are complementary to what we've seen so far.

Catherine

How can we apply your insights to the industry?

Rama

There are a few different no-regret moves that I would say all players need to focus on. The first is very much around the use of analytics and data to actually understand where there’s opportunities to help customers. More so, because we are going to see a great deal more pressure on households so having analytics shared with customers to understand how they can manage their cash flows and their household budgets will be highly valued. The same can be said for applying those data analytics capabilities to their internal core lending and transactional account analytics and that will help them bolster the way they deliver these products to market at the moment.

Catherine

Those are some really interesting insights. Thanks for joining me today, Rama.

Rama

Pleasure. Thank you for having me.

Catherine

Thank you for watching.

Persistently high interest rates in Australia are impacting challenger banks and the private credit market. Explore how these institutions navigate the opportunities that arise in this environment, such as product diversification and partnerships with super funds.

Watch more from the New Monetary Order Video Series and discover how financial institutions are adapting to the evolving monetary landscape.

Catherine Downes

Hi, I'm Catherine Downes and I'm an associate in the Sydney office. I'm joined today by Rama Gollakota, a partner in our financial services practice in Sydney.

Rama Gollakota

Hi Catherine.

Catherine

Hi Rama. Thanks for joining us today.

Rama

Pleasure to be here.

Catherine

We are here to talk about the New Monetary Order, which you co-authored the paper for, which is characterized by higher for longer interest rates. One of the main groups of institutions we talk about in the paper is challengers. What do you think are some of the headwinds and tailwinds for challengers in the new monetary order?

Rama

The challenger players in this market have for a long time traded on their customer promise, being closer to customers and more community oriented. I think that will hold them in good stead over the next 12 to 18 months. From a perspective of tailwinds, the opportunity to broaden the consideration set for their offering as interest rates normalize – or at least more of a level playing field – will also help them respond to customer needs a little bit faster than some of the Big Four players. We’ve seen examples of that over the last few years.

Where I do think there’s headwind is around where they have lowered interest rates to compete with Big Four banks to continue growing over the last few years. Hopefully that hasn't set up for some bad debt challenges over the next 12 to 18 months, so that's a watch out for them. I believe from a perspective of their core promise or that customer promise they've traded on will continue to help them from the perspective of how they treat customers in a much better way than some of their competitors.

Catherine

More broadly in the paper, we touch on the private credit market in Australia where we've seen significant growth over the past decade. How do you think this will change looking forward in the new higher for longer interest rate environment?

Rama

I don't think the expansion of the private credit segment has really been anchored to interest rates. I think that has helped. Where I think, actually, the private credit market has expanded is because we've seen a greater need for diversity in lending solutions in the market. If you look at listed banks, particularly their core offering, it is a very traditional lending model. Where I think players like the non-banks have particularly played in is diversifying the type of lending structures that are offered to these customers. I think that is where we've seen material growth.

I believe that big banks will start to focus more on those from a perspective of being able to diversify their offer for customers, and we'll see in different ways how they attack that market. Historically it would've been to build that capability internally, but now it might be actually through partnerships with some of these specialist lending players.

Catherine

Thinking more broadly about partnerships, do you think super funds have a role to play in this change?

Rama

A hundred percent. Super funds already participate in the private credit market quite extensively from a perspective of either direct lending – that’s direct lending with partners that play in that ecosystem – and also a big asset allocation to fixed income. We'll continue to see that as interest rates and equity markets are facing the dynamics that they are.

Where I believe there is a massive opportunity that we'll start to see greater consideration for is opportunities like the green transition. The green transition is largely funding large fixed assets, large projects, and infrastructure projects, and that is where super funds have been really strong over the last few years and therefore, I dare see them wanting to play a greater role. Again, a bit like banks, you'll see some new ways of partnering to fund those opportunities that are complementary to what we've seen so far.

Catherine

How can we apply your insights to the industry?

Rama

There are a few different no-regret moves that I would say all players need to focus on. The first is very much around the use of analytics and data to actually understand where there’s opportunities to help customers. More so, because we are going to see a great deal more pressure on households so having analytics shared with customers to understand how they can manage their cash flows and their household budgets will be highly valued. The same can be said for applying those data analytics capabilities to their internal core lending and transactional account analytics and that will help them bolster the way they deliver these products to market at the moment.

Catherine

Those are some really interesting insights. Thanks for joining me today, Rama.

Rama

Pleasure. Thank you for having me.

Catherine

Thank you for watching.