Google will soon offer checking accounts, The Wall Street Journal reported this past week. For parent
that’s the most exciting venture since drone-based delivery. Or balloon-based broadband. Or kite-based wind power.
To get off the ground with its version of the centuries-old financial product, Alphabet (ticker: GOOGL) won’t need gliders, zeppelins, or rockets. It will just need a centuries-old bank.
(C) will handle the financial plumbing and branding. To keep things folksy, the credit union at Stanford University will pitch in.
In related news,
(AAPL) has a new credit card that’s really from
(GS). “It’s the first card that actually encourages you to pay less interest,” read an email pitch I received this past week. But the fine print mentions annual percentages I wouldn’t wish on a Bond villain. OK, maybe Oddjob or Jaws, but that’s it.
Is it just me, or is Big Tech’s promised reinvention of traditional banking moving with the speed of my 1994 Prodigy internet connection? That year, Bill Gates, fresh off passing Warren Buffett as the richest American, famously said that “banks are dinosaurs.” If so, we must have entered a neo-Jurassic Period. Bank assets have nearly tripled since 1994, and profits have multiplied fivefold. Money invested then in the predecessor company to
(JPM) has turned into more than twice as much as money put in the S&P 500.
Bank bears still abound. A year ago, corporate strategy consultants cg42 pointed out that 20% to 25% of millennials in surveys said they would be open to leaving their banks if Amazon, Google, or Apple went into the business, versus few baby boomers. It predicted that
Bank of America
(WFC) would lose deposits over the coming year, but called JPMorgan relatively well insulated because of its elevated spending on technology. All three banks have since gained deposits. BofA stock has done about as well as JPM, and both have beaten the market.
Of course, fintech—including smaller software-driven upstarts in financial services—is no passing fad. In September, Canaccord Genuity counted $37 billion in private capital invested there over the prior 24 months. Mobile payment platforms in particular are taking off.
Just this past week, I had a near brush with one. A colleague collecting money for an office gift suggested using Venmo for contributions. I did the analog equivalent, which is handing cash to another co-worker to drop off. First, of course, I asked what others were giving, so as to come in comfortably, but not garishly, above the median. It was more Vain-mo than Venmo, but I’m still counting it as alternative banking.
Consider a few things, however, before writing off big bank stocks over disruption risk. First, banks arguably make too much money for what they do, but they have done so at a remarkably stable rate for the past 130 years, according to a study published last year by award-winning economist Thomas Philippon at New York University. Philippon argues that fintech will have a difficult time unseating big industry incumbents, for a variety of reasons. Complex regulations favor experienced players with vast scale, for example.
Banks aren’t especially popular with customers, it is true. But lending and lovability have always been awkward companions, something Apple recently experienced. A wealthy Apple Card customer tweeted that his wife had received a much lower credit limit than he had. Gender bias at Apple, cried some. Never mind that Goldman runs the credit business, and that it says it doesn’t consider gender, and that it is looking for ways for family members to share a single account. “I feel like I’m a customer of Apple,” the outraged tweeter told CNBC this past week.
For fintech insurgents, there is a big leap from offering cheap, hands-off checking to taking on credit risk and running a profitable loan book—where the real money is made. San Francisco–based Chime says it has grown to five million accounts, versus a million in May 2018, by offering low-fee, app-based banking with debit cards. It’s backed by an FDIC-insured bank, so customer accounts are covered. A spring funding round valued Chime at $1.5 billion, and a pending one could raise that to $5 billion. But Cornerstone Advisors, a consulting firm, estimates that the number of customers is millions lower than the number of accounts, and that many accounts are either unfunded or are secondary accounts for customers who bank elsewhere. Chime says it will eventually move into lending. For now, it relies on debit-card transaction fees and doesn’t report revenue.
For a fintech investment, stock buyers could do a lot worse than JPMorgan and Citi. JPMorgan spends $11 billion a year on technology, trades at 12 times this year’s projected earnings, and pays a 2.8% dividend. The main knocks against it are that it has already had a good run, and that with the Federal Reserve having brought interest rates back down, earnings growth for banks is likely to slow. Long term, the company has shown an ability to grow through diverse conditions. Citi is just behind JPMorgan in tech spending, and sells for less, at just under 10 times earnings. It also pays 2.8%.
“Finance has benefited more than other industries from improvements in information technologies,” Philippon wrote in his study. “But, unlike in retail trade, for instance, these improvements have not been passed on as lower costs to the end users of financial services.” Sure haven’t. They have been passed on to shareholders as profits. I wouldn’t bet on that ending just yet.
Email: Jack Hough at JackHough@barrons.com