Banks Have to Grow to be Competitive

As I reflect on my time at Bank Director’s Growing the Bank conference, I can’t shake the fact that many banks across the United States continue to struggle to grow their deposits and/or expand asset bases.  What follows is a piece authored by Tim Melvin, a gifted writer who joined us at the Four Seasons outside of Dallas.  Tim specializes in value investing and has written numerous articles in various publications on the subject of value investing, the stock market and the world around us.  With his permission, I’m sharing his perspectives on our event.

I just returned from the Bank Director 2016 Growing The Bank Conference in Dallas and I have to say it was one of the more interesting meetings I’ve attended this year. This conference covered everything from the 30,000 foot view of the rapidly changing banking industry to the nuts and bolts of day-to-day stuff and I came away with an even deeper appreciation of the industry and the opportunity.

The threats and potential posed by what are commonly known as Fintech companies was heavily featured during the two-day event. Nobody is quite sure if they’re friend or foe yet and there was a lot of wary circling like a road weary cowboy and an unsure Indian trying to decide to break bread together or lock hands on throats. Mobile and cybersecurity were also topics on everyone’s minds, as both are going to play an enormous role in deciding if a bank grows or withers away to obscurity.

Closer Look At Fintech

The Fintech discussion was perhaps one of the most interesting of the meeting. While banks may see some of the Fintech lenders like LendingClub (NYSE: LC), Sindeo and On Deck Capital (NYSE:ODNK) are seen as a real threat to traditional lenders, I think we will find that it’s not as big a threat as we might currently think.

The first time we have a credit hiccup or recession, these lenders will find out just how important to success a core deposit-based funding source can be. When markets dry up in the bad times, investors aren’t going to as easy a source of funds as they are in the current benign and yield starved markets. I think what’s far more likely to happen is the technology that allows for high-speed decision making, easier underwriting and razor focused marketing will end up being sold to the banks to improve their offering.

As Steven Hovde of the Hovde Group warned the crowd in Dallas, “Fintech and banks are going to end up marrying up. It’s the only way you are both going to survive. If you think you can do it on your own, you are sadly, sadly mistaken.”

Naomi Snyder, the editor at Bank Director, put a little differently when she wrote an article for the magazines website following the conference: “The tech companies have something many banks lack: innovative products and simple, customer-friendly digital solutions for a changing world. Meanwhile, the banks have some things many of the tech companies lack: actual customers and a more stable funding base.”

Although the fast-moving high tech kids of Fintech and the stuffy old bankers may at first appear to be as mismatched, as James Carville and Mary Matalin may need to find a partnership that has worked out as well as theirs has. They may not initially like each other but they need each other.

Mobile Banking

I think Dave Defazio of Strategycorps scared a lot of community bankers when he talked about the future of mobile banking in his session. He pointed out the tremendous lead that the bigger banks have in this space and the competition from apps like Apple Pay, Venmo and other apps that, to be honest, I’ve never even heard of before but are increasingly popular for managing finances and making payments among the millennial set. For folks who think the ATM and drive-up window are newfangled innovations the world of mobile banking is a bit frightening. What makes it even more frightening is that if you don’t compete well in the mobile space, you won’t retain the next generation of customer. They expect everything to be done on the fly and right now using mobile devices.

The millennial customer is just different. The use their mobile device to pay for their Starbucks (NASDAQ: SBUX), pay their share of the bar tab, watch movies, read books, pay bills and manage their finances. Apparently you can even use an app to collect your boarding pass, as I found out after running out of the bar after the first day to get to the business center and print out my boarding pass exactly 24 hours before takeoff. When I returned and expressed my disappointment at getting a B slotting on Southwest (NYSE: LUV) I was told that I should just get the app to avoid this in the future.

I didn’t even know there was an airplane app, but now I can count myself among the airplane app aristocracy thank to my slightly younger and far more tech savvy friends at Bank Director.

I caught up with Defazio on Tuesday morning and we chatted a bit more about the challenges and opportunities of mobile banking. He told me over coffee, “Banks are not just competing against other banks’ mobile apps, but instead against the very best apps on the planet, apps like Uber to Amazon (NASDAQ: AMZN) to Waze. Customer expectations are very high, and banks must make it their mission to have an app that people can’t live without. Community banks must do a better job of responding to changes in customer behaviors and expectations. The big banks have raced out to a big lead. The time is now for banks to go beyond transactions and do a better job of connecting with their customers’ mobile lifestyles. In particular, I’m seeing the big banks add mobile tools that assist people with their shopping tasks. They know that helping people save a dollar is just as good as helping them make a dollar of interest.”

I chatted with several bankers and the discussion of mobile frankly scares many of them. One banker said if this is the future of banking, then community banking is just dead. I think he overstated the case, but community banks are going to have to aggressively look for partners like Strategycorps to build and offer a much better mobile experience. Those that can’t, or don’t want to, should consider hanging out the for sale sign right away as they simply won’t be competitive in the future. They can probably get a better multiple in a deal now than in a few years when deposits are bleeding out to more mobile sensitive banks at a rapid rate.

Steven Hovde gave a talk on the search for efficiency in the industry. Hovde is an investment banker serving community banks, a majority owner of several smaller banks and is part owner of a real estate development company that borrows from banks so he sees all sides of the industry. He pointed out that the more efficient a bank is the higher then returns on assets and the higher valuation of the institutions stock. Both of these make for happier shareholders. He said the best way to gain efficiency in the banking industry today is to grow the size of the bank.

Right now, we have historically low net interest margins, growing regulatory costs and a huge need to spend money on technology, especially in mobile and cyber security. GDP growth is slow and there are no real signs that it will improve dramatically anytime soon. The loan markets are increasingly competitive and the regulators are focusing on the one area where community banks had an edge, commercial real estate. It really is a “grow or die” world and the majority of banks need to get to $1 billion in assets to quit operating in survival mode and the $5 billion level to thrive in the current economy.

The best way to grow remain via mergers and acquisitions. Hovde told us, “As the regulatory environment becomes increasingly difficult to maneuver for smaller banks, we expect deal activity for smaller institutions to continue as they search for greater efficiencies.” While this is not necessarily great news for bankers running smaller banks, it’s good news for me as bank stock investor and I continue to seek out and buy smaller publicly traded banks.

That’s A Wrap

The Growing the Bank Conference is more of a nuts and bolts, but I walked away with two overriding insights. First banks must look to partner with or even buy the innovative aggressive fintech companies. They cannot compete with them without disastrous consequences so they must partner with them. For their part, most of the fintech competitors need the banks and their large customer base and deposit funding. It may be a shotgun wedding in some cases, but nuptials will be needed for both to survive and thrive.

My second takeaway is that although it sounds like a slogan, “Grow or Die” is a real thing. To thrive in today’s difficult markets, banks need to grow to at least that $5 billion asset level. With the exception of a few niche small town and rural banks the $1 billion asset level is really needed just to be a viable competitor. The best way to grow in a slow growth economy is to buy smaller banks or engage in a merger of equals that increases returns for the ban, as well as shareholders. All of this is good news for us as small bank investors.

The Trade of the decade in community bank stock rolls on.

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To read more of Tim’s work on Benzinga, click here and to follow Tim on Twitter, his handle is @timmelvin.

Five Reasons Why Banks Might Consider Selling in 2016

You might think every bank CEO I meet wants to talk about buying another institution; truth-be-told, some recognize that tying up with another makes a lot of sense.  So this post looks at why now may be the right time for a bank’s CEO and board to consider a sale.  It plays off the idea that in many markets, organic growth options are limited and times are tough for banks, especially those under $1Bn in asset size.

By Al Dominick, President & CEO, Bank Director

Over the past three years, a number of bank executives and board members have struggled with whether to buy or sell their bank — or pursue growth independently.  Over the same time, Bank Director has welcomed more than 1,300 bankers — from more than 500 financial institutions — to our annual M&A conference to explore their short- and long-term options.

This year, those numbers go up in a BIG way. Indeed, we have 600 bankers from 300+ banks joining us at the Arizona Biltmore for “AOBA” this upcoming Sunday through Tuesday.  To me, this signals that more potential buyers & sellers are getting off the sidelines and into the bank merger and acquisition game.  So in advance of Bank Director’s 22nd annual conference, here are five challenges that a bank’s CEO and board might want to consider.

  • Peer-to-peer lenders, credit unions and some — not all — FinTech startups either are (or will be) fierce competitors to community banks.  In addition, non-bank giants in technology, retail, media, entertainment and telecom are making noise about entering banking.
  • When margins decline, bankers try to compensate by improving operational efficiencies.  While slow growth + strong cost controls may allow for short term survival, such an equation doesn’t bode well for the long-term viability of many institutions where investors expect more significant gains.
  • The pressures prompting larger banks to innovate — sluggish loan demand, depressed revenue, higher compliance costs — are the same ones that will continue to force smaller banks to pursue a sale.
  • Let’s face it: the typical bond between a bank and a customer is is not personal nor very strong and the absence of real customer loyalty undermines the traditional business model most banks operate from (*and yes, I know that banks with dedicated customer bases enjoy significant advantages over any potential competitors. But let’s be honest about how dedicated such customers really are).
  • Finally, at many community banks, older management teams and a dearth of local talent mean there may be no one to hand over the reins to in the coming years.

Now, it has been said that business is not about longevity, it is about relevance.  So as Bank Director’s team continues to gear up for this year’s Acquire or Be Acquired conference, these five questions merit serious conversation and consideration both leading up to, and at, our 22nd annual event. For those not able to join us — but interested in following conversations such as these — I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, and search & follow #AOBA16 to see what is being shared by (and with) our attendees.

While Everybody’s Talking About the Future of Banking…

It seems like everyone has an opinion about what the future holds for banking… but what does banking actually look like today?

By Al Dominick // @aldominick

For the past few years, Bank Director magazine’s Editor-in-Chief, Jack Milligan, has spearheaded our Bank Performance Scorecard, a ranking of the largest U.S. publicly traded banks and thrifts. The most recent version, which appears in our third quarter issue, ranked all banks and thrifts listed on the New York Stock Exchange and Nasdaq OMX.  Jack and his team sorted them into three separate asset categories: $1 billion to $5 billion, $50 billion to $50 billion and $50 billion and above — and we ranked them using a set of metrics that measured profitability, capitalization and asset quality based on 2014 calendar year data.

While this data shines a light on some of banking’s standout performers, my last few months of travel across the U.S. has revealed less familiarity with the banking industry then I expected. So today, instead of focusing on economic, political, demographic or technological forces reshaping the banking landscape, allow me to share some statistics I think are important to know:

  1. Banks with less than $10 billion in assets have lost over half of their market share in the past 20 years.
  2. The corollary? The five largest banks now hold almost 44% of all banking assets in the country.
  3. Despite totaling 89% of all banks, institutions under $1B in assets hold only 8.3% of the industry’s assets.

With competition coming from both the top of the market and from non-traditional players, I have talked with numerous bank CEOs and various members of their executive teams who tell me how imperative it is for them to really focus on improving efficiencies and enhancing organic growth prospects.  In addition, as big banks invest in customer acquisition, and non-traditional players continue to eat away at earnings potential, it strikes me that of all of the risks facing a bank’s key leadership team today (for instance, regulatory, market and cyber) knowing when to buy, sell or grow independently has to be high on the list. After all, the most profitable financial companies are often those whose strategies are intentional, focused and differentiated… and are showing current revenue growth with strong visibility towards future performance.

Of course, any discussion about the world in which banks live today has to acknowledge two significant business threats. Since most banking products tend to be commodities that are available at any number of bank and non-bank providers, the first concerns customer acquisition costs. Personally, I believe such costs will increase as existing customers become less likely to refer their bank to others. This leads to the second threat; namely, banks will lose revenue as customers leave for competitors and existing customers buy fewer products.

So a high-level look at where things are today. I realize this takes a very broad brush to a mature industry. Still, to understand where banks might be heading, I find it helpful to be grounded in where they are today.

Quick Guide: 2015 Growth Strategy Survey (Bank-specific)

Recently, Business Insider and the Wall Street Journal picked up Bank Director’s 2015 Growth Strategy Survey.  The research project reveals how many financial institutions continue to recognize growth in traditional areas — most notably, loans to businesses and commercial real estate — while struggling to attract a decidedly untraditional digital generation.  So in case you missed it, today’s piece highlights key findings from this annual research project. 

By Al Dominick // @aldominick

Over the weekend, our friends at the Wall Street Journal ran a very telling story about the efforts being made by the San Francisco 49ers to better engage with their millennial employee base.  Clearly, the NFL franchise’s challenge to “relate to a generation — generally described as 18-to-34-year-olds — that has been raised on smartphones and instant information” parallels that of most banks in the U.S.  In addition to being a fascinating behind-the-scenes look at what’s happening out in Santa Clara, it also sparked today’s post.

You see, as a 38-year old who runs a great privately-held company that employs quite a few folks under the age of 30, I have to admit that I am tiring of the broad strokes being used to describe millennials’ needs and ambitions.  However, I will admit to being surprised to learn that there are approximately 75 million people in the U.S. under the age of 34.  This is a huge number, especially when you hear that every day, for the next 15 years, 10,000 people will turn 65 (h/t to the CEO of Boston’s Chamber of Commerce for making me aware of this reality).

Surprisingly, 60% of the executives and board members that responded to Bank Director’s 2015 Growth Strategy Survey say their bank might not have the right products, services and delivery methods to serve the vast majority of this demographic.  While I haven’t run this by our very talented Director of Research (*hello Emily McCormick), to me, this shows that the relationships that community bankers nurtured for decades will be increasingly of less value with this emergingly-influential generation who have grown up in a digital world and who, stereotypically, value the speed with which it operates.

As the Wall Street Journal shared when reporting on our research results, “banks have watched less regulated finance companies ranging from mortgage lenders to private-equity firms encroach on many of their main businesses.  But ask an executive or board member at a bank what nonbank company they most fear, and they’re likely to name the world’s biggest technology company, Apple Inc.”  So what were our key findings?  Glad you asked…

Three key findings (click this title link to access the full report):

  1. Apple is the nonbank competitor respondents worry about most, at 40%  — just 18% of respondents indicate their bank offers Apple Pay.
  2. Bank mobile apps may not keep pace with nonbank competitors. Features such as peer-to-peer payments, indicated by 28% of respondents, or merchant discounts and deals, 9%, are less commonly offered within a traditional bank’s mobile channel. 49% of respondents indicate their bank offers personal financial management tools.
  3. Despite the rise of P2P lenders like Lending Club and Prosper in the consumer lending space, just 35% of respondents express concern that these startup companies will syphon loans from traditional banks.

Instead of millennials, banks have been finding most of their growth in loans to businesses and commercial real estate.  Yes, 75% of respondents want to understand how technology can make their bank more efficient… and 72% want to know how technology can improve the customer experience.  But I find it telling that today, loan growth remains the primary driver of profitability for the majority of responding banks.  In fact, 85% of respondents see opportunities to grow through commercial real estate loans.  As we found, executives and board members also expect to grow through commercial & industrial (C&I) lending, for 56%, and residential mortgages, at 45%.  So for those looking to predict the future of banking, I think findings like these are quite telling.  Indeed, it would appear what’s worked in the past may be what to bet on for the future.

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The 2015 Growth Strategy Survey, sponsored by technology firm CDW, reveals how bankers perceive the opportunities and challenges in today’s marketplace, and technology’s role in strategic growth. The survey was completed by 168 chief executive officers, independent directors and senior executives of U.S. banks with more than $250 million in assets in May, June and July of this year.  Ironically, last year’s survey found that credit unions, not Apple, were the “non-bank” competitor that banks were most worried about.  In fact, can you believe that Apple didn’t even make the cut?  My, how quickly times can change.

Reaching For The Summit

When you say the word summit, what do you think of?  For me, it is a book; specifically, Let My People Go Surfing by Patagonia’s founder, Yvon Chouinard. I was reminded of Yvon’s thoughts while flying home to DC from last week’s Bank Board Growth & Innovation conference in New Orleans.  While there, I had a chance to share time and ideas with some 150 bank CEOs, board members and executives. As most banks wrestle with the concept of banking a generation that doesn’t necessarily see the need for a bank, I think Yvon’s opinion that “how you climb a mountain is more important than reaching the top” is a strong reminder for bankers that the little things really do count with customers today.

By Al Dominick // @aldominick

Having been on numerous airplanes over the last few weeks, I have enjoyed the luxury of time without phone calls and sometimes emails and instant messages.  This digital solitude afforded me a chance to really dive into a number of thought-provoking white papers, analyst reports and research pieces.  Three, in particular, stand out, for looking ahead to what banking might become, not merely stating the obvious that bankers are being challenged as never before.

The World Retail Banking Report (from Capgemini Financial Services and Efma)

Abstract: Retail banking customers today have more choices than ever before in terms of where, when, and how they bank—making it critical for financial institutions to present options that appeal directly to their customers’ desires and expectations.

Growing the Digital Business / Accenture Mobility Research 2015 (from Accenture)

Abstract: The emergence and adoption of digital technologies has rapidly transformed businesses and industries around the globe. Mobile technologies have been especially impactful, as they have enabled companies to not only streamline their operations, but also engage more effectively with customers and tap into new sources of revenue.

Disrupting Banking: The FinTech Startups That Are Unbundling Wells Fargo, Citi and Bank of America (from CB Insights)

Abstract: Banks run the risk of being out-innovated and may lose their edge not because of their incumbent, large competitors, but because emerging startups inflict upon them a death by a thousand cuts.  And because a picture is worth more than 1,000 words:

source: CB Insights
source: CB Insights

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Finally, a welcome to our friends at KBW who just hopped into the Twitter pool yesterday. With so many talented men and women working there, I have no qualms suggesting a follow of their handle – @KBWfinthink (h/t to our Emily McCormick for the heads up)

Looking for Great FinTech Ideas

A fundamental truth about banking today: individuals along with business owners have more choices than ever before in terms of where, when and how they bank. So a big challenge — and dare I suggest, opportunity — for leadership teams at financial institutions of all sizes equates to aligning services and product mixes to suit core customers’ interests and expectations.

By Al Dominick // @aldominick

Sometimes, the temptation to simply copy, paste and quote Bank Director’s editor, Jack Milligan, is too much for me to resist. Recently, Jack made the case that the distinction between a bank and a non-bank has become increasingly meaningless.  In his convincing words:

“The financial service marketplace in the United States has been has crowded with nonbank companies that have competed fiercely with traditional banks for decades. But we seem to be in a particularly fecund period now. Empowered by advances in technology and data analysis, and funded by institutional investors who think they might offer a better play on growth in the U.S. economy than traditional banks, we’re seeing the emergence of a new class of financial technology – or fintech – companies that are taking dead aim at the consumer and small business lending markets that have been banking industry staples for decades.”

Truth-be-told, the fact he successfully employed a word like ‘fecund’ had me hunting down the meaning (*it means fertile).  As a result, that particular paragraph stuck in my mind… a fact worth sharing as it ties into a recent Capgemini World Retail Banking Report that I devoured on a tremendously turbulent, white-knuckling flight from Washington, D.C. to New Orleans this morning (one with a “minor” delay in Montgomery, AL thanks to this morning’s wild weather).

Detailing a stagnating customer experience, the consultancy’s comprehensive study draws attention “to the pressing problem of the middle- and back-office — two areas of the bank that have not kept pace with the digital transformation occurring in the front-office. Plagued by under-investment, the middle- and back-offices are falling short of the high level of support found in the more advanced front-offices, creating a disjointed customer experience and impeding the industry’s ability to attract, retain, and delight customers.”

Per Evan Bakker for Business Insider, the entirety of the 35-page report suggests “banks are facing two significant business threats. First, customer acquisition costs will increase as existing customers are less likely to refer their bank to others. Second, banks will lose revenue as customers leave for competitors and existing customers buy fewer products. The fact that negative sentiment is global and isn’t limited to a particular type of customer activity points to an industry wide problem. Global dissatisfaction with banks is likely a result of internal problems with products and services as well as the growing number of non-bank providers of competing products and services.”

While dealing with attacks from aggressive, non-bank competitors is certainly not a new phenomenon for traditional banks, I have taken a personal interest in those FinTech companies looking to support (and not compete with) financial institutions.  So as I set up shop at the Ritz-Carlton New Orleans through Wednesday for our annual Bank Board Growth & Innovation conference, let me shine the spotlight on eight companies that may help address some of the challenges I just mentioned. While certainly just the tip of the FinTech iceberg, each company brings something interesting to the table:

As unregulated competition heats up, bank CEOs and their teams need to continue to seek ways to not just stay relevant but to stand out.  While a number of banks seek to extend their footprint and franchise value through acquisition, many more aspire to build the bank internally. Some show organic growth as they build their base of core deposits and expand their customer relationships; others see the value of collaborating with FinTech companies.  To see what’s being written and said here in New Orleans, I invite you to follow @bankdirector, @aldominick + #BDGrow15.

The Fight for Relevancy

I’m sure it is really simple for those not invested in the future of banking to write that CEOs, their boards and executive teams should cut branches and full-time employees to make their banks more efficient.  But I’m of the belief that you can’t save your way to long-term profitability and viability — and not everyone can be like Capital One and reinvent their business model from digital to analog on the fly.

Last October, Richard Fairbank, the Chairman and CEO of Capital One, expressed the following opinion on an earnings call: “Ultimately, the winners in banking will have the capabilities of a world-class software company. Most of the leverage and most of our investment is in building the foundational underpinnings and talent model of a great digital company. To succeed in a digital world (you) can’t just bolt digital capabilities onto the side of an analog business.”  Now, I am a big believer that many banks have immediate opportunities to expand what banking means to individual and business customers. Heck, I wrote as much to open a special supplement to Bank Director magazine that highlights a number of interesting technologies that have re-shaped the fortunes of banks across the U.S.  As you can see in the graphic above (produced for and by our team), the intersection of financial services with technology tools is immense.

Nonetheless, the interaction, communication, coordination and decision-making in regulated banks is vastly different than those of an up-and-coming technology company.  No matter how much both sides want to work with the other (to gain access to a wider customer footprint, to incorporate emerging technologies, etc.), the barriers to both entry and innovation are high.

Keep in mind that there has been an enormous shift in asset concentration and customer loyalty during the past two decades. Today, the ten biggest banks in the U.S. now have more assets than all of the other institutions combined. Concurrently, major consumer brands such as Apple and Google have emerged as significant non-bank competitors while “upstarts” like LendingClub and OnDeck jockey to provide loans to traditional bank customers.

So to stay both relevant and competitive, I believe a bank’s leadership team needs to develop a culture of disciplined growth that encourages creativity and yes, risk taking.  For a leadership team, this requires a combination of knowledge, skill and courage — all things we designed our annual Bank Board Growth & Innovation Conference at the Ritz-Carlton New Orleans to provide (*fwiw, this is a complement to our annual M&A conference — Acquire or Be Acquired).

In the coming days, I’ll be looking at how the processes of interaction, communication, coordination and decision-making in a regulated bank are vastly different than those of a tech firm.  Cleary, the fight for relevancy is on in the banking space… and to see what’s being written and said, I invite you to follow @bankdirector, @aldominick + #BDGrow15.

How the Math Works for Non-Financial Service Companies

As you probably deduced from the picture above, I’m in Chicago for Bank Director’s annual Chairman & CEO Peer Exchange.  While the conversations between peers took place behind closed doors, we teed things up with various presentations.  An early one — focused on FinTech — inspired today’s post and this specific question: as a bank executive, what do you get when you add these three variables:

Stricter capital requirements (which reduces a bank’s ability to lend) + Increased scrutiny around “high-risk” lending (decreasing the amount of bank financing available) + Increases in consumer product pricing (say goodbye to price-sensitive customers)

The unfortunate answer?

Opportunity; albeit, for non-bank financial services companies to underprice banks and take significant business from traditional players.  Nowhere is this more clear then in the lending space. Through alternative financial service providers, borrowers are able to access credit at lower borrowing costs. So who are banks competing with right now? Here is but a short list:

  • FastPay, who provides specialized credit lines to digital businesses as an advance on receivables.
  • Kabbage, a company primarily engaged in providing short-term working capital and merchant cash advance.
  • OnDeck, in business to provide inventory financing, medium-term business loans.
  • Realty Mogul, a peer-to-peer real estate marketplace for accredited investors to invest in pre-vetted investment properties.
  • BetterFinance, which provides short-term loans for consumers to pay monthly bills and purchase smartphones.
  • Lenddo, an online platform that utilizes a borrower’s social network to determine credit-worthiness.
  • Lendup, a short-term online lender that seeks to help consumers establish credit and avoid the cycle of debt.
  • Prosper, an online marketplace for borrowers to create and list loans, with retail and institutional investors funding the loans.
  • SoFi, an online network helping recent graduates refinance student loans through alumni network.

As unregulated competition heats up, bank CEOs and Chairmen continue to seek ways to not just stay relevant but to stand out.  Unfortunately, the math isn’t always in their favor, especially when alternative lenders enjoy operating costs far below banks and are not subject to the same reserve requirements as an institution.  As we were reminded, consumers and small businesses don’t really care where they borrow money from, as as long as they can borrow the money they want.

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Thanks to Halle Benett, Managing Director, Head of Diversified Financials Investment Banking, Keefe, Bruyette & Woods, A Stifel Company for inspiring this post. He joined us yesterday morning at the Four Seasons Chicago and laid out the fundamental shifts in banking that have opened the door for these new competitors.  I thought the math he shared with the audience was elegant both in its simplicity — and profound in its potential results.  Let me know what you think with a comment below or message via Twitter (@aldominick).

Is Walmart the Next Big Bank

Part four of a five piece series on emerging threats to banks from non-financial companies. To read parts one through three, click on “For Banks, the Sky IS Falling,” “PayPal is Eating Your Bank’s Lunch” and “The Bank of Facebook.”

At the risk of crashing through an open door, did you know that the retail juggernaut Wal-Mart Stores Inc. launched Bluebird in partnership with American Express late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks?  Yes, customers also have access to mobile banking, which includes features like remote deposit capture and person-to-person (P2P) payments.  So does this position Wal-Mart as the next SIFI (*no disrespect to CIT following their announced acquisition of OneWest in a $3.4Bn stock & cash deal earlier this week)?

Walmart bank logo.001

Cue Robin Thicke

According to Wal-Mart, 95% of Americans live within 15 miles of one of its stores.  So I think its fair to say that Wal-Mart continues to blur lines between banking and shopping as it added yet another financial service to its stores across the country.  Indeed, the retailer announced this spring that customers can transfer money to and from any of its 4,000 stores in the U.S. and Puerto Rico.  As this article in Forbes highlighted, low income workers who don’t have traditional bank accounts are turning to prepaid cards and alternatives to checking accounts.  Banks like JPMorgan Chase and Wells Fargo are trying to fill that gap with prepaid and reload able cards — something Wal-Mart has been offering for years.

Where Is That Achilles Heel?

Unlike online competitors to a bank, Wal-Mart enjoys huge brand recognition and an established customer base that feels comfortable walking into their local “branch.”  In fact, banks that already operate inside Walmarts reap among the highest fees from customers of any banks in the nation, according to a WSJ analysis.  But the very demographic the retail company serves — one that expects and demands rock-bottom pricing — may not favor a “B of W.”

Indeed, banking at Wal-Mart is a lot more expensive than shopping there.  As noted by in the WSJ, most U.S. banks earn the bulk of income through lending.  Among the 6,766 banks in the Journal’s examination, “just 15 had fee income higher than loan income — including the five top banks operating at Wal-Mart.”  Would the company really want to race to the bottom in terms of pricing its financial products (ones that would not be federally insured) and compete with its own tenants?

If At First You Don’t Succeed…

It is worth noting that Wal-Mart has tried to get into banking since the late 1990s.  It was thwarted in attempts to buy a savings-and-loan in Oklahoma and a bank in California — and later dropped a bid for its own banking charter in 2007.  While I’m not suggesting the new logo depicted above is anything more than a simple rendering by yours truly, it wouldn’t surprise me if the company explored even more creative ways to compete with financial institutions in the future.

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To comment on this piece, please click the white plus sign in the bottom right gray circle on this page or share your thoughts with me via Twitter (I’m @aldominick).  Next up, how crowdsourcing sites like Kiva and Kickstarter allow customers to bypass their bank to get funding for a business idea.

For Banks, the Sky IS Falling

The first in a five part series on emerging threats to banks from non-financial companies.

For bank executives and board members, competition takes many forms.  Not only are banks burdened with regulation, capital requirements and stress testing, they now have the added pressure of competition from non-financial institutions.  In case you haven’t been paying attention, companies such as Paypal, as well as traditional consumer brands such as Walmart, are aggressively chipping away at banks’ customer base and threatening many financial institutions’ core businesses.  So today’s piece tees up my next four columns by acknowledging the changes taking place within — and immediately outside — our $14 trillion industry.

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The race is on…

A few months ago, at Bank Director’s annual Growth Conference in New Orleans, I polled an audience of CEOs, Chairmen and board members and found the vast majority (a whopping 91%) have real concerns about non-banks entering financial services.  These bankers aren’t alone in their concerns about competition from unregulated entities.  Just days after polling this audience, Jamie Dimon, the CEO of JPMorgan Chase, warned an audience of investors that he sees Google and Facebook specifically as potential competition for the banking giant.  As he notes, both offer services, such as P2P, that could chip away at income sources for banks.

…and its not pride coming up the backstretch

As Emily McCormick wrote, Facebook is already a licensed money transmitter, enabling the social media giant to process payments to application developers for virtual products. Likewise, the retail behemoth Wal-Mart launched Bluebird in partnership with American Express late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks.  This makes the results of a recent TD Bank survey about millennials banking online and on their mobile devices more frequently than in a branch so relevant.  Specifically, 90% of survey respondents said they use online or mobile tools for their everyday banking activities, such as checking balances or paying bills, and 57% said they are using mobile banking more frequently than they were last year.

Along the lines of “what is the industry losing”: eventually you’re going to have a generation that has learned how to live without a bank.  That’s a very sky-is-falling, long-term consequence of not adapting.  But there’s also an opportunity for retail banks to do more than simply allow the same types of services digitally that were once only available in-person.  Banks could actually expand what banking means to consumers by offering online services that go beyond their legacy business model.

What I am hearing

Of course, non-banks can, conceptually, expand what banking means to consumers by offering online services that go beyond legacy business models too.  However, the sheer complexity of entering this market is one reason why we have yet to see a startup that truly rebuilds the banking industry brick by brick.  At least, that is the perspective shared by Max Levchin, founder and CEO of online payments startup Affirm, a company with the goal of bringing simplicity, transparency, and fair pricing to consumer credit.  As the co-founder and former CTO of PayPal, Levchin is one of the pioneers within the payments industry.   In a recent piece in Wired magazine (The Next Big Thing You Missed: Startup’s Plan to Remake Banks and Replace Credit Cards Just Might Work), he notes

I don’t know if I want to own a bank. But I do want to lend money in a transparent way, and I want to create an institution people love… I want to be the community bank equivalent for the 21st century, where people say: ‘I trust my banker. He’s a good guy who’s looking out for me.’

Coopetition anyone?

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To comment on this piece, click on the grey circle with the white plus sign on the bottom right.  Next up, a look at PayPal, a the e-commerce business that is “eating the banking industry’s lunch.”