Hey guys! It’s the Angry Retail Banker here!
I’m taking a break from offering “An Insider’s Take On Retail Banking” because the good people here at Modest Money begged me on their hands and knees to come here and talk to you guys about investing in financial equities (you can’t prove they didn’t).
What I really wanted to do is give my thoughts on the future of bank stocks, and whether they will be a good long term investment for 10-20 years from now and beyond. After all, technology is changing and disrupting traditional banks and financial institutions. Will banks still be the same decades from now as they are today? Will the banking sector still be massively profitable? Will the same banks still rule the financial space?
The View From The Ground Up
Now remember that I am a branch banker. The only thing that makes me different from all the employees at all the other bank branches is that I’m the only one that decided to complain about the job on the Internet.
But opening savings account and trashing customers on the Internet doesn’t make me a financial analyst. It doesn’t make me an expert on emerging fintech (financial technology). It doesn’t make me a banking or technology futurist. But it does give me a unique perspective on the situation that the analysts and futurists don’t have.
I’ve actually had this subject on my mind for awhile. In my article “Customer Experience And Retail Banking: Why Banks Need To Enter The Modern World”, I discussed a day where my district manager came to show us the ABSOLUTE IMPORTANCE OF LOBBY LEADERSHIP!!!!!!! I was rather underwhelmed by its importance, but overwhelmed by the fact that the banks were all putting such a heavy focus on greeting customers at the door and making each trip to the bank “an experience”.
You can read the article for my full commentary (tl;dr: I think it’s stupid), but it did make me think about how banks will adapt and change to shifting demographics, emerging technology, small startups and large tech companies suddenly becoming major competitors, and how this will all affect the profitability and investibility (is that a word?) of bank stocks in the future.
I think I was supposed to be thinking of better and more exciting ways to greet the customer, use their names, and “take ownership of the experience” (whatever that’s supposed to mean). I’m such a rebel.
Banks Are Slow To Change
One of the downsides of the future of banks—and one of the things that might compel someone to avoid bank stocks—is that they are slow to change. They are loathe to change.
Part of this is for good reason. Banks have so many regulations and regulatory bodies watching them, it’s ridiculous. Whether you support the regulations or whether you champion deregulation, it’s no secret that banking and finance is a highly regulated industry.
Other businesses are trying to please their customers. Banks are trying to please their regulators. Because customers don’t issue multi-million dollar fines on banks when they don’t get what they want.
Banks also have a very dangerous business model to a degree. The make money on loans. Their primary method of making money is to hand someone they’ve never met tens of thousands of dollars, wave to them as they walk out the door, and hope that they see this person again to get their money back.
At the same time, banks have been very profitable for hundreds and hundreds of years. Banca Monte dei Paschi di Siena has been operating continuously since 1472 and banking is much, much older than that. So do you think banks would be so willing to change their ways?
Banks are in the business of measuring risk. And as such, they are very risk adverse. And change invites risk. The risk of moving away from business practices that have generated centuries of stable and lucrative profits. The risk of running afoul of regulators. The risk that customers won’t adapt to the new changes and will want to do what they’ve been doing since the days of the earliest merchant banks. And so the end result is that banks lack a culture of innovation and change, because it’s more profitable and less risky to just stay the course. Why change what’s worked for centuries?
That last link was to an article by prominent bank futurist Jim Marous, co-founder of The Financial Brand and author of The Digital Banking Report. He spends a lot of time talking about the future of banking, specifically in regards to technology. And technology evolves at an exponential pace. Whereas it took hundreds of years for the first major piece of revolutionary technology to hit the banking world by storm (the ATM, which was first used in the US in 1969 by Chemical Bank and introduced in the UK two years earlier), now we have online and mobile banking invented within the same decade or so, and AI chatbots, IoT, and other technological revolutions on the way.
Technology evolves exponentially. Ironically, given the topic, it’s like an interest rate. It compounds, with one technological innovation building to the next. Now a new revolutionary technology that changes the way banking is done comes out every few years, rather than every few decades like in the previous century (and every few centuries in the time before that). Combine that with a growing customer base that sees technology as a figurative extension of themselves, and you now have an industry that may be in peril. You can’t rest in your centuries-old traditions, not in today’s world. Adapt or die.
That doesn’t bode well for bank investors, right? So I must think that banks are a bad place to invest, right? Well, I’m not done yet!
A New Challenger Has Entered The Battle!
Businesses always have competition within their field. Banks are no exception. Banks compete with other banks to provide their services to the global market. Chase tries to outdo Wells Fargo by offering a lower rate on a mortgage, Wells Fargo tries to outdo Citibank by opening fake accounts, so on and so forth.
Except now, with fintech growing at a record pace, banks face competition from small fintech companies and major technology giants such as Google and Apple. This is competition from players banks never thought they’d have to compete with in a space they never thought they’d have to compete in.
Small fintech startups seem to be popping up every other week and represent the sort of “small company taking on the big corporate giant” stories that make Americans cry red, white, and blue apple pie tears. Whereas small mom and pop coffee shops will never take down a Starbucks, a small fintech firm can disrupt the entire financial industry with a new technology that makes the banks’ products and services obsolete. They are also fast and nimble enough, being small companies and not large mega-corporations with various departments that every idea must be filtered through and approved by, to change and adapt to the needs of their customers right away.
We’ve seen companies like Lending Club take the world of lending and investing by storm with their peer-to-peer lending services. LendingTree has changed the way people shopped for mortgages, and LendKey is fast becoming a leader in student loans by acting as a broker for not-for-profit lenders and providing full after-funding services. I wrote a review about LendKey here.
For non-lending companies that aren’t brought to you by the letter “L”, there’s PolicyGenius (an online life insurance broker). There’s Acorns, a “micro investment” company that takes each of your debit card purchases, rounds them up to the nearest dollar, and invests the spare change into your investment portfolio. And of course, there’s PayPal, the legendary online payments/money transfer company.
There’s countless fintech firms springing up in different areas of finance (lending, investments, payment solutions, etc). These were considered by Entrepreneur to be the 12 top fintech companies to watch out for, but there’s way too many to count. Each of them are taking something that traditional financial institutions have done for generations (banks as well as insurance companies or investment firms) and are doing it better. And countless customers are moving towards these companies. They are disrupting the industry, creating a new game field with new key players.
Of course, the fintech firms aren’t even the largest future competitors! Ironically, it’s non-financial technology giants that pose the greatest threat to the future of traditional banks! The financial industry sees Google and Amazon as a bigger threat to retail banking than fintech companies and new banks, and it makes a surprising amount of sense when you stop to think about it for a few minutes.
As we said before, banks are slow to change and innovate. The tech companies are on the extreme opposite end of that spectrum. They must innovate if they want to still be around the next year. They must innovate and improve and come out with the Next Big Thing before the competition does. Now that may sound scary for a tech investor. Historically, I’ve always avoided tech stocks for that reason. But with technology being the future centerpiece of the financial industry, that constant innovation will be the key for survival.
The slow, stodgy banks will have to change their culture from one of legacy and tradition to one of fast paced change and innovation. As long as the image of marble columns and oak desks comes into your mind when you think of a bank, rather than sleek tablets and large flat screen monitors like when you think of a tech firm, banking will always lack the necessary ingredient to survive in a rapidly advancing technological world.
Why I Think Bank Stocks Are A Great Future Investment
After all this, you probably are about ready to sell off every bank stock you have. Sure, you’ve researched the safest banks to invest in and only have your money in banks that passed the Federal Reserve’s stress test. But after reading this, you’re about ready to sell all your bank stocks. Hell, you’re closing your accounts as we speak, you’re so freaked out.
But actually, I am as bullish as ever on bank stocks as a long term investment. Is it because I need you guys to invest to prop up the industry for as long as possible so I don’t lose my job? Ha! I’ll take the unemployment at this point, I don’t care.
No, I’m bullish on banks because I think that they will adapt, in their own unique way.
Banks have been slow to change, but they have done it and are doing it at a faster rate. Right now, if you walk into any bank branch, you will be pushed towards mobile banking. You will see ads all around advertising the convenience of mobile deposits. There is a reason for this. Banks are recognizing that Millennial customers value user-friendly technology over in-branch service.
Not my bank, of course. My bank still thinks we can differentiate ourselves by “being nicer” than the competition. “Being nicer” translates to getting all in your face and shaking your hand and using everyone’s names the second you walk into the bank. I find that obnoxious, personally.
But it must also be understood that fintech companies are still small startups. They may “disrupt” the banking sector, but “disruption” isn’t the same as “ending”. FlyWire isn’t about to put Bank of America out of business because it offers cheaper international wire transfers.
And that leads me to my next point. Bank of America is one of FlyWire’s partners. They proudly put that right on their homepage. This is the norm. Fintechs have been, for the most part, partnering with the big banks rather than competing with them.
It makes sense. The banks have the capital, global reach, and brand recognition that these small companies just don’t have. So instead, they partner up with the banks to ensure that their products are used by millions of customers worldwide, offered through the banks. And the banks are thrilled; they get that technological innovation necessary to compete without having to actually do it themselves.
Small fintech companies just can’t compete with the banks. Or more accurately, whatever strengths they do possess are outweighed by their lack of resources and reach. Lending Club and PayPal aren’t putting Chase out of business anytime soon. But by partnering, the fintech firms suddenly have access to a global financial institution that will provide the tools and resources needed for their tiny business to succeed, and banks will suddenly find themselves with access to the technology and outside-the-box thinking they need to adapt to in order to survive in tomorrow’s banking arena.
And, of course, the banks are so big that they will also just buy out these fintech firms. If TransferWise is so profitable and eating into the banks’ market share, Barclay’s or HSBC could just buy them out. Banks buy out other banks all the time. That’s actually my biggest fear in buying regional bank stocks. The idea of banks buying out their fintech competitors is pretty reasonable.
As for the big tech companies, while they’ve come out with their own products such as Google Pay and Apple Pay, they’ve either partnered with the banks in providing financial technology like the fintech firms did or they’ve avoided dipping their toes too heavily in the financial pool. Finance, unlike technology, is a heavily regulated industry. Regulations are stifling to innovation, and that can cripple technology companies. Tech companies, like any other, want to stay in their core business. Look at the hit General Electric took during the recession because most of its revenue was coming from GE Capital (now Synchrony Financial) instead of its appliances, engines, and the like.
I think that, in spite of the issues I discussed before, banks are a great long term investment for those looking to grow their money over the next 20-30 years. Banks may be slow to innovate in a sector that’s shifting towards exponential technological growth, but it’s not like they never have. Banks weren’t created in a vacuum; they evolved to what they are today, changing and adapting to different political and economic climates. Their competitors in the technology space are small startups who are either potential partners or buying opportunities, and tech giants who would be loathe to enter the regulator maze of the financial realm. A few decades from now, the big banks that dominate the S&P 500 will be the same ones that dominate the S&P 500 today, except that they will be offering branchless banking, P2P lending, and instant international mobile payments in their product/service lineup.
Banking will change, but bank stocks won’t. You’ll still be buying shares of Wells Fargo and HSBC on the stock exchange. You just won’t have to deal with me anymore when it comes time to move your money.
Author Bio: Angry Retail Banker is a licensed banker who works at a branch of [REDACTED]. With his 10+ years of experience in the banking industry, he has many insights into the realm of retail banking, financial management, and customer service. He offers “An Insider’s Take On Retail Banking”, and is also angry that you are not reading his blog right now.