It’s official — Afterpay is going to start offering banking!

That revelation in and of itself isn’t all that surprising, but their means are.

On Tuesday it was revealed that Afterpay would be teaming up with Westpac. Utilising the latter’s ‘banking as a service’ platform to provide savings accounts to Afterpay users…

That is a big deal indeed. With roughly 3.2 million Aussies now considered core users of Afterpay’s services. Users that will now have the ability to bank with Afterpay — even if it is fundamentally provided by Westpac.

Don’t underestimate just how important that distinction is though.

As most people are well aware, Afterpay is a hit with younger generations. A cohort that is rarely interested in — and often sceptical of — the traditional banks.

The perception between the two is like night and day. And for that reason, I suspect we’ll see quite a few people take Afterpay up on their banking offer. Even if it may not deliver any financial advantages over other banking products.

Make no mistake though, it’s all about branding. Something that is easily Afterpay’s greatest strength.

But with that said, I expect Westpac is likely to be the real winner here…

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Doing the dirty work

The key to this deal is the fact that Westpac will barely rate a mention to potential customers.

In fact, I’m sure that when the product launches many users won’t even realise Westpac is involved at all. Even though, strictly speaking, they will be a Westpac customer more than an Afterpay customer.

As the Australian Financial Review makes clear:

Any customer who takes up the white-labelled Afterpay banking services becomes a Westpac customer, in much the same way a mortgage customer originated through a broker is still a Westpac customer.

But crucially, Afterpay will control the customer relationship, using its knowledge of its customer base and customer experience expertise to deliver what will very much be an Afterpay experience.

This is the crux of the whole deal.

In order to make this work though, Westpac isn’t relying on its traditional banking model. As I said, they’re using their new-fangled ‘banking as a service’ platform called 10x. A digital only channel that relies on APIs and software exclusively.

Basically, it’s a fintech banking operation inside a traditional bank. And while we’ve known about it for close to a year now, Westpac had yet to onboard any big customers.

Now, thanks to Afterpay, that has all changed.

Not only will it give 10x a chance to flex its muscle, it will also give Westpac an insight into the fintech revolution. A glimpse at exactly why they need to be wary of the coming competition.

If you can’t beat them…

As it stands, we have little to no details on how either Westpac or Afterpay plan to profit from this venture.

That is something that will likely only become clear after it launches. With Afterpay being no stranger to embracing a loss-leader mentality. Prioritising the number of users first, and then reaping the revenues later.

Whether Westpac will be willing to stomach that though, is a good question.

They may end up having little choice in the matter. It all depends on just how willing they are to test the potential of 10x.

I suspect that it will become apparent fairly quickly that this will be a key turning point. Not just for Afterpay and Westpac — but for the whole banking sector in Australia.

Mark my words, digital banking platforms like 10x are the future. Systems that have typically been the domain of small fintech start-ups.

For Westpac though, 10x is a chance to shed themselves of the old banking model. A transition that could ensure they don’t die out with the rest of the traditional banking sector.

Because like it or not, banking is changing.

We can see it happening all around the world, but particularly in Asia.

Australia may be slower to the party, but it will happen eventually. So, by putting in place a system like 10x now, Westpac may just ensure their survival. Giving them the option to embrace the future when the time comes.

And having a partner like Afterpay to help flesh it out, certainly doesn’t hurt.

Now, it’s only a matter of whether they can execute the transition or not.

Because announcing the goal is easy; sticking the landing is another matter entirely. But either way, banking is in for a major overhaul.

An exciting time for all involved.


Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

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