Consumer Dissatisfaction And Disruption Threaten 'Too Big To Fail' Banks

Includes: AXP, BAC, C, COF, DFS, JPM
by: Lenny Grover


Too Big To Fail (TBTF) banks losing market share in mortgage origination and credit card issuing.

CFPB data shows TBTF banks have more complaints relative to market share than competitors.

Crowdlending, crowdfunding, and online-first banking threaten to disrupt legacy business models.

TBTF break-ups would create value for shareholders and consumers, while promoting stability.

Entrenched management teams unlikely to voluntarily act in shareholders’ interests.

Executive Summary

The "Too Big to Fail" banks, in addition to threatening the stability of the financial system, appear to be "jacks of all trades and masters of none" as it relates to retail banking. Collectively, they have been losing market share in mortgage origination and credit card issuing while representing a disproportionate share of complaints to the Consumer Financial Protection Bureau (CFPB), relative to their market share, for these products. Furthermore, while building a national footprint was the initial impetus for many retail bank mergers, the value of a having a large branch network has diminished as more transactions can be completed online. Meanwhile new "crowdfunding" and "crowdlending" platforms threaten the legacy retail banking business model.

Large, diversified, companies are inherently less nimble and more difficult to manage through periods of rapid innovation than smaller ones. While industry observers have suggested that we should separate retail/commercial from investment banking activities, to prevent banks from gambling with FDIC insured customer funds, such a policy might also improve the long-term competitive position of the less "sexy" retail/commercial operations within these banks. In their 2013 10-Ks, Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and Citigroup (NYSE:C) reported consumer and business banking, consumer and community banking, and global consumer banking to be their highest revenue and net income business segments, respectively.

Breaking up the too-big-to-fail banks would enable dedicated management to focus on shoring up the competitive position of their retail/commercial banking divisions and better serve consumers. It would unlock shareholder value while taking taxpayers "off the hook." However, MKM Partners' David Trone summarized the obstacles to such an outcome:

"Clearly, current management teams do not agree with us, and are consistently defending the model, despite all evidence to the contrary. This simply represents the age-old "agency problem," whereby managements do what's best for them, not shareholders. However, in due course, we believe shareholder value will win out. We believe it is only a matter of time before activists come knocking on the door of one of the universal banks."

I am less optimistic than MKM Partners; I believe competitive threats to the banks' legacy business models will take their toll long before a "white knight" activist investor syndicate shows up ready to gamble on a $150+B market cap bank (i.e. BAC) facing disruption and related secular decline. Only regulatory intervention can save the banks from entrenched management teams that are fiddling while their cash cows are being slowly slaughtered by new entrants. While I would not recommend initiating a short position in the banks at this time, I would reconsider any long position in the too-big-to-fail banks.


The too-big-to-fail banks have been losing market share in mortgage origination and credit card issuing. A December 3, 2013 article on reports that increased information availability on pricing and underwriting is leveling the playing field for local and regional banks:

"You have more lenders offering mortgage products at a localized basis," said Guy Cecala, chief executive and publisher of Inside Mortgage Finance. "Instead of having to go to Wells Fargo, now you've got every one of your community lenders and you can compare on pricing and on underwriting."

The same article reports that:

"As of the third quarter [2013], smaller mortgage players held a 60% market share of the U.S. origination market, up from 39% in 2009, according to industry publication Inside Mortgage Finance."

Meanwhile, a February 2014 infographic from The Nilson Report shows that, between 2008 and 2013, AmEx (NYSE:AXP), Capital One (NYSE:COF), and Discover (NYSE:DFS) have each gained market share in outstanding credit card receivables while Bank of America, Chase, and Citi have each lost market share.

An analysis of a comma-separated-values export of the CFPB complaint database, as of 6/1/2014, containing 243,470 individual consumer complaints, shows the following credit card and mortgage complaint volume shares relative to market shares for the three too-big-to-fail banks relative to the total number of complaints:

Credit Card Complaints

Relative to Market Share

# of Complaints

Complaint Share

Market Share












Capital One





JP Morgan Chase





Bank Of America













* Includes "credit card" complaints only

* Market share of receivables from Nilson Report infographic

All of the major banks underperform AmEx under this measure of customer satisfaction, and BoA underperforms both AmEx and Discover. Meanwhile Citibank (and Capital One) is a clear negative outlier, generating substantially more complaints that than market share would predict. Chase actually posts relatively strong performance in this measure of customer satisfaction.

The mortgage data tells a different story:

Mortgage Complaints



Relative to Market Share

# of Complaints

Complaint Share

Market Share


Bank of America





JP Morgan Chase













* Includes "mortgage" complaints only

Source of 2013 Market Share

While the 2013 mortgage market shares may be a bit misleading (as the earlier cited data shows that the too-big-to-fail market shares have been in long term decline, and mortgages can remain outstanding for a longer period of time), the data is pretty clear. Not only are the large banks facing increased competition from smaller lenders, and being pressured by increased transparency on pricing and underwriting, but they all seem to have products that generate a disproportionate share of complaints relative to their market share.

Meanwhile, the larger banks, by virtue of offering larger networks of ATMs and branches, have been able to grow their share of deposits. However, new technology that allows checks to be deposited via smartphone, and the long term secular shift away from paper checks and cash (in favor of electronic transfers/direct deposit and credit or debit cards), makes having local branches less of a competitive differentiator. Just as Internet-only savings accounts (that tend not to have many transactions) were able to disrupt traditional savings accounts in the Web 1.0 world, virtual checking accounts are likely to be disruptive going forward. Less overhead, and a direct-to-consumer model bolstered by better remote customer support, could make a compelling competitive offering. Already, new startups like Simple are headed in this direction.

Banks are also facing disruption in payment processing/merchant acquiring (from Square, PayPal, Bitcoin, etc.) and even consumer and business lending. Hedge funds are starting to deploy capital in peer-to-peer lending marketplaces that promise to disintermediate traditional lenders. Industry leader LendingClub recently raised capital at a $3.76 billion valuation and has originated over $4 billion in loans. Prosper, and others, are also making headway in this market. At the same time, the passage of the JOBS Act in 2012 and promises to legalize equity crowdfunding-which could ultimately challenge bank-originated small business loans as a source of startup capital for emerging businesses (which does not necessarily require a personal guarantee from the founders).

Larger organizations can be more effective than smaller ones at ensuring consistency and making incremental improvements, while benefiting from economies of scale. However, the banking industry is facing disruption and needs to react nimbly to the new competition that is nipping at its heels. Few would argue that larger, diversified, companies are better than smaller, focused, ones at innovation…and innovation is coming to banking whether the incumbents like it or not! Break-ups that allow for a renewed focus on consumer and commercial banking can create shareholder value while enabling the banks to better serve and retain their customers.

Despite all of the bad news that has been facing these banks (failed stress tests, large fines/settlements, etc.), there hardly seem to be any efforts by boards or shareholders to hold senior executives accountable. Given the prospect of technological disruption from new entrants, the size of the banks, their entrenched management teams, and the fact that regulatory intervention is unlikely, it is probably best to look for better risk/reward opportunities elsewhere.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.