In my imagination, traditional banking used to be the best business. You’d get to close up shop at 3pm on a Friday. This, despite the fact that bank customers get paychecks on Fridays. Sorry folks, we’re closed because we have to have our people inside the vault, counting all that sweet, sweet, money.
Lately, however, I wonder whether banks are going the way of the buggy whip business. I know it’s fashionable to bash banks, but I think that’s insensitive.
It’s not easy being a bank these days.
So much disintermediation is happening, at an accelerating pace, that the inside of a senior management meeting of a traditional bank must feel like the last hours at The Alamo. How will any of them survive these attacks from all sides?
So many banks
Meanwhile, the traditional US banking industry doesn’t act like it’s doomed. Or at least, the market has not caught up to my fears.
Approximately 6,800 FDIC-insured banks provide for our financial needs in this country – in addition to another 6,000 federally-insured credit unions. That’s one bank for 47,000 people (or one for every 25,000 people if you count credit unions.) By way of comparison, Canada has 29 banks for a population of 35 million, or one bank for every 1.2 million people.
We have 25 times as many banks per capita as Canada. That’s just weird, because banks hardly do anything essential anymore. At the same time, Silicon Valley ‘fintech’ firms keep popping up. Little by little they’re pecking away at traditional bank services, wringing out any remaining inefficiencies.
What’s left for the banking industry that they still do better than anyone else? I can only think of one essential thing my bank does for me, and one other thing banks do for local economies. I’ll mention those at the end of this post. But it’s slim pickings overall in terms of business opportunities.
Have you started to feel bad for them yet?
I’ll review the five things that ceased being business opportunities for banks.
I learned the following from watching Mary Poppins with my girls multiple times. About a century ago, you used to be able to put your tuppence into the bank, which would then offer a reasonable rate of interest, which would then compound your money over time, to help you get wealthy.
But the last century’s rise of easily accessible stocks and mutual funds, combined with more recent low interest rates, plus a slew of fintech investing solutions, all combine to make your bank a poor choice indeed for growing your money.
Nope. They’re gone. Since the 1980s, credit cards have taken care of that need, lending $10 to $30,000 at between 0 and 30 percent interest. Five banks, plus American Express and Discover, constitute 75% of the US credit card business.
Auto loans and mortgages
Nope, that also went away in the 1980s. I mean, you can go to your bank to underwrite these, and they can earn origination fees to do a mortgage, but banks don’t generally keep these loans on their books. Auto loans and mortgages get fed into the Wall Street sausage-making machine known as securitization, and banks aren’t really essential to the chain anymore. Auto-finance companies obviously take a big chunk of the auto business as well. Meanwhile, fintech startups like Lendinghome.com and Rocket push into home loans.
The federal government now guarantees more than eighty percent of the student loan market, rendering low rates for borrowers, but less opportunity for banks to set terms. That trend likely will not reverse soon for this $1 Trillion-plus loan market. Fintech startups like Earnest.com or Credible.com now seek to pick up the slack on student loan consolidation, further disrupting banks’ chances of making a buck.
Banks have never really been in the startup funding business, but formerly had a good shot at funding more mature local businesses. Now online lenders like Prosper and Lending Club, and a slew of smaller imitators – whether crowd-sourced or privately financed – can deliver a faster, possibly more competitive loan than a local bank. Relaxed rules for equity investments – still developing this year make banks even less useful to small businesses in need of capital.
The one bank function
These days I only really depend on my bank for one function, which is to take any of my leftover cash and safely hide it from both myself (so I don’t lost track of it) and from others (so they don’t steal it), and then have that cash be available to me immediately (like, tomorrow!) or any day I choose, with no risk of it disappearing overnight. Admittedly, that’s an important function, and I don’t have a reliable alternative right now.
Commercial Real Estate
For local economies, banks also still play the essential function of financing commercial real estate development. A bank’s commercial real estate underwriter who knows the local development scene can still carve out an important function that’s difficult to disintermediate, or securitize on Wall Street, or undercut from Silicon Valley.
But commercial real estate is about all they have. Is that enough to support 6,800 banks in this country? My magic eight-ball says the outlook is: Doubtful.
I Have a Dream
Having written all that, I still fantasize about owning my own bank. Not as a profitable business, mind you, but just as a thing to have. Friday afternoon parties in The Vault, with all the cool kids, after the 3pm close? Then we turn that powerful floor fan on High Blast to simulate a magic money machine?
That would be so awesome. Once I own my bank, you’re all invited.
A version of this post appeared in the San Antonio Express News.
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 Don’t forget “Majestic, self-amortizing canals!” “The Ships! Tell Them About the Ships!” “You can purchase first and second trust deeds. Think of the foreclosures! Bonds, Chattels, Dividends! Shares, Bankruptcies, Debtor Sales, Opportunities!” Dick Van Dyke and cronies describe my old business in vivid detail.
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