Away in a major way – big banks

Back in 2009, taxpayers were calling for a break-up of the big banks after the authorities were forced to use their money to prop them up, to prevent a complete collapse of the financial system.

Just over a decade later, the break-up is well under way as family offices and wealthy individuals fund fintech opportunities set out to destroy the banking sector, niche by niche. 

Very few bank shares have recovered to the levels they achieved during the financial boom. Champion US banks like JP Morgan and Goldman Sachs should survive. But others are floundering. European bank shares have been flat on their back for years, leading to an urge to merge, even though downsizing is a better option. 

Banks have dominated consumer lending by their skill in loan assessment. But there are other ways to assess client risk. Ventures like Mission Lane and Petal assess spending and banking history for younger clients

In a review of the sector, data provider CB Insights says: “Core processes are being automated or commoditised. From IPOs, to M&A, to research and trading, investment banks are getting smaller, leaner and scrambling to keep up with innovation.” 

It says fintech deals are set to decline in 2020 but mega-fund raisings totalling 97 hit an all-time record as more established players raised their game.

It is inevitable that the banking sector will continue to lose influence and access to talent. Family offices will not mourn their arrogance, still less their insatiable hunger for fees.

Fintech pioneer PayPal, founded by Peter Thiel, has been working up its challenge to bank payment systems for nearly twenty years and now presents the banks with a considerable challenge.  TransferWise, lately valued at $5 billion, is expected to opt for a share listing early next year. 

Remitly, focused on helping immigrants send money back home, is expanding through deals with other payment providers, such as PayU.  Stripe has developed a powerful payments process and never needed to go to the stock market to fund it. 

Independent providers of research and data, like Sentieo, Koyfin and Mitech are challenging the market analysis provided by the banks, now that regulators have stopped this service being offered for clients for free, as part of a bundle of services to tempt clients to pay trading commissions.  

IPOs are less lucrative for investment banks because technology companies are slow to come to market. When they do turn up, they are likely to opt for a direct listing or a blank-cheque SPAC which do not require much input from the banks.  Traditional IPO fees range up to 7%.  Large technology companies can get away with 1%, according to CB Insights.

Takeovers in the tech sector have required less advice and a great deal of traffic has gone to specialist boutiques. Banks have also been harmed by a downturn in the number of deals, due to Covid-19.

Trading is no longer so lucrative either, now the Federal Reserve has put the squeeze on volatility by flooding the market with liquidity to prevent a Covid-19 crisis. This may not last forever, but it is squeezing commission income.

Trumid is supplying investors with direct access to corporate bond markets. It recently raised $200 million from Marc Stad’s Dragoneer investment group. Robinhood’s commission-free access to equities for retail subscribers continues to build.  

Michael Spencer’s family office IPGL has teamed up with R3 to use blockchain to revolutionise bond markets through a venture called Digital Debt Capital Markets. 

JP Morgan sees a big future in blockchain. But technology is democratising the opportunity. Family office Messika Holdings has funded a series of blockchain trading ventures, in areas such as grain trading and small company debt. Cryptocurrencies are also opening up the floodgates. 

Coinbase, the crypto trader, plans a stock market listing, with 9Yard, a venture capital firm led by former UK Chancellor George Osborne and brother Theo set to profit from their shareholding. 

The wealth and asset management arms of banking groups are meeting a fierce challenge from robo-advisers, plus an evolution in the way the market trades through quantitative and passive funds which are making the market in individual company shares less efficient and decreasing the opportunities for stock pickers to turn a profit. 

Vanguard and BlackRock exercise global domination of the passive ETF market. Addepar, led by former PayPal executive Joe Lonsdale, runs a particularly impressive investment and trading platform capable of winning business from the likes of UBS. Wealthfront, Betterment, Fount and Liqid are up-and-coming digital robo-advisers.

Core deposits and savings continue to be dominated by the banks, partly because they are tightly regulated and feel “safe” to older depositors. But startups such as Chime, Monzo, N26, Revolut, Varo Money, Current and Dave are all flexing their muscle by appealing to young, or niche, consumer groups. 

Banks have dominated consumer lending by their skill in loan assessment. But there are other ways to assess client risk. Ventures like Mission Lane and Petal assess spending and banking history for younger clients. UK-based Lendable uses machine learning to put together a lending profile. 

Landbay, Better and Blend operate digital mortgage platforms. Billionaire Orlando Bravo, once a Morgan Stanley banker, has just paid $10.2 billion for RealPage, a property management business. He recently sold Ellie Mae, a software provider to the mortgage market to the Intercontinental Exchange, for $11 billion. 

Both deals offer their owners access to the kind of customer data which used to be held by the banks. There are other ways to build up data, for sure. But banks are losing their grip on the situation. 

And that must really hurt.