The last few days I have been writing about some of the challenges that big American banks face. See this article on branch banking and this one on capital requirements. A lack of trust may be an even greater hurdle to sustained profitability.
At the banking conference I attended recently, one of the speakers asked the participants to name the financial companies they trusted. Vanguard and Schwab (SCHW) were mentioned. No banks. (Yes, Schwab owns a bank, but that is incidental.) The speaker asked for companies that participants trusted or admired. Apple (AAPL) was the name that prominently came up. The speaker asked about PayPal (a subsidiary of eBay (EBAY)). Did participants trust PayPal to process their transactions? Yes, was practically the universal opinion. What about the Google (GOOG) wallet? Would people trust that? Yes, again. The speaker went on to discuss some newer entrants into the electronic payments field and some of the new technologies. She concluded by wondering why the banks had yielded the trust factor, even in the space where they have such natural dominance- the payments system.
I and other participants shared a series of emails after the conference wondering why the banks had ceded the trust factor. We could see quite readily how their actions had eroded the public's trust. But why had they paid so little attention to this crucial attribute of financial advisers and intermediaries? A few of our suspects were:
The large banks are legacy companies that have grown by mergers. They have no guiding ethos. By contrast, the companies that we mentioned as being trusted or respected still have living (or, in the case of Apple, recently deceased) founders whose guiding principles remained dominant.
The process by which top management of large banks comes to the top requires different skills from the type of vision that makes founders succeed. Those who rise to the top of the big banks focus more on the specifics of profit than on the concept of the enterprise and how it relates to its customers.
Regulation makes bankers focus more on minutiae than they should.
In recent years, investment banking and trading have been the focus of the largest banks, not their relationships with their clients. Even in the consumer banking field, the advent of portfolio theory has made the large banks focus on portfolio results rather than on their individual customers.
We may have missed a few logical suspects. But this is, at least, an interesting list. Whether the big banks can shake off these apparently natural impediments, I do not know. Perhaps one great new leader will propel one large bank in a new, productive direction and the others will follow. (Banks usually follow the same strategy, whatever the strategy du jour may be.) But more likely, the large banks will remain caught up in their strategic conundrums and will not soon retake the payments space and the personal advisory space.
That will keep the world of e-commerce and e-payment open to the newcomers. Apple, Google and PayPal are the most readily identifiable beneficiaries. They have the public's trust, they have the financial muscle, and they are technologically- and customer-focused. They are creating new products that are designed to serve both the individual customer and the merchant. Those products are designed to be universal. I doubt that banks will be able to catch up, especially since they have no trust advantage. That could have serious consequences for Mastercard (MC) and Visa (V) that depend largely on the bank card issuers for their volume. If the technological providers offer cheaper or easier alternatives, the Mastercard and Visa volumes may shrink. For the time being, I believe the technological providers will ride the ubiquity of the credit card and built-in credit judgment and protection. But longer term, they may not need the credit card issuers, except for customers that genuinely are seeking credit rather than payments processing.
The same thing probably will continue to occur in the personal advice and investment space. The legacy companies like Merrill Lynch (now a subsidiary of Bank of America (BAC)) and Salomon Smith Barney (now a subsidiary of Citigroup (C)) will not likely be able to increase their market share, in part because they will be identified with their parent banks that the public does not like, trust or respect. Twenty years ago, Citi and BofA were respected companies, still bearing the imprints of founders or strong leaders. (The current BofA is not the old BofA, of course. It bears the BofA name but it is the amalgam of companies built by National Bank of North Carolina, whose strong leader emphasized deal-making, not the retail customer. The old Citi was a leading wholesale bank that did not have a strong consumer service culture, either.) With the decline in the public's respect for the legacy brokers, newer, more nimble companies have come to the fore.
My bottom line here is that companies like Apple, Google and eBay- and newer companies as well, will continue to take over the payments space as long as they continue to understand their customers' needs and continue to earn their customers' trust and respect. Banks therefore will continue to lose market share in the payments space. That is likely to have serious consequences for the banks long-term, as their markets gradually erode one-by-one and the regulatory burdens that they have brought on themselves continue to mount. More about the mounting regulatory burdens soon.
Disclosure: I am long AAPL.
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