The Apps Come For The Bankers

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Includes: AMTD, ETFC, GS, PG, SCHW, SQ, Z
by: Dana Blankenhorn

Summary

Banking and brokerage are being transformed by the app economy.

Both established and new companies are benefiting.

The economic story of the decade rolls on.

The big economic story of the decade is the collapse of middle men.

Agents, brokers, and bankers, who used to act as economic gatekeepers in the 20th century, are being replaced by apps linked to clouds.

The economics are compelling. Margins are crushed as friction is removed from the economy. Companies that have taken advantage of the trend, such as CarMax (NYSE:KMX), Progressive (NYSE:PGR) and Zillow (NASDAQ:Z), are prospering on the new, wafer-thin margins.

Seeking Alpha itself is part of the trend. Our readers are self-directed investors who use such advertisers as E*TRADE (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW), TD Ameritrade (NASDAQ:AMTD) and privately-held Scottrade. You will see small box ads for them all over this site. Our writers, editors and managers depend for our livelihoods on your patronizing these and other advertisers.

You can do worse than investing in them, not just with them.

Take Schwab, where I'm both a customer and a shareholder. Between early 2012 and late 2015, as Schwab rolled out its mobile apps, the stock appreciated 174%, while delivering nearly $1 in dividends on what would have been an investment of less than $12. Oh, revenues increased 30% during this period, and the company's margins on that business ticked up. Last year over 22% of that revenue flowed to the net income line.

The performance at the other discount brokers that have embraced the app economy are similar. E*TRADE was a $9 stock in early 2012. It rose to $30 by the end of 2015. A bad 2016 has hampered all brokers, making E*TRADE a bargain at $24.

The apps are also coming for bankers. Venture capital backed startups like Lenny and Lendified (to name just two) propose to take over lending and saving, using cloud-based algorithms to measure credit worthiness.

Bankers are finding their mainframe-based technology can't keep up. Established players like Goldman Sachs (NYSE:GS) are trying to stay relevant by buying startups like Honest Dollar.

A lot of investors have given up on Square (NYSE:SQ) because its cheap card readers don't handle chip-based cards and because it has had difficulty going beyond its small business niche. Well, how about if it becomes a small business banker? I visit a nearby shoe store because I know the owner, and casually one day asked how she was doing. Within 10 seconds she was able to tell me her day's receipts. But she also mentioned a need for new inventory. Maybe she can finance it off her iPad.

The question of how the value of banking apps' cost savings will be apportioned within society is a political question. It's not something for discussion on this thread. But it's the chief technology trend of this decade, and there is still time for you to get on board. You can take an aggressive approach with a relatively small company like Square or you can play it safer with a Schwab or E*TRADE.

However you choose to play, play.

Disclosure: I am/we are long SCHW.

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.