Transformational Technological Changes Coming In Banking

Includes: BAC, BBT, C, HSBC, JPM, STI
by: John M. Mason

Commercial banking is more and more open to changes that are taking place in the global financial community and recent changes made in China are going to have a big impact.

The largest US banks have increased their efforts to remain competitive on a worldwide basis but still must move faster to keep up with the transformational changes taking place.

This changing scene should have major effects on how investors consider investments within the financial sphere where the real opportunities will come to those able to scale up.

The commercial banking industry in the United States has not been very progressive in the area of financial technology.

At a conference at MIT last year, which I wrote two posts on, US commercial banks were basically ignored because they just were not doing things that a “cutting edge” conference wanted to focus on.

One reason for the lag is the regulatory framework in the United States. US commercial banks have not had to be on the “cutting edge” because the regulatory framework was protecting the existing banking structure and this took the pressure off of banks to be more competitive in the technology space.

The situation is changing. The biggest reason for the change, I believe, is financial globalization.

United States commercial banks just cannot ignore what is going on in the rest of the world because, ultimately, they are going to have to compete with major banks from around the world and this means that they are going to have to move up to “cutting edge” technology if they are to really “play in the game.”

Take a look at what is happening in China, appearing on the front page of the Financial Times (subscription required).

“China’s biggest technology groups have won approval to launch digital banks in Hong Kong in a long-awaited assault on the financial sector that threatens local players such as HSBC (NYSE: HSBC) and Standard Chartered and heralds future challenges in London and New York.”

“Tencent and Alibaba were granted banking licenses by the Hong Kong Monetary Authority, along with Xiaomi, the world’s fourth-largest smartphone maker, and Ping An, the world’s largest insurer, in what the city’s banking regulator called a ‘milestone.’”

“Jes Staley, Barclays chief executive, has said banks need to defend themselves against encroachment from tech companies such as Amazon, Google and Apple.”

And, “Jamie Dimon, JPMorgan Chase chief executive, has warned that Silicon Valley wants to ‘eat our lunch’.”

These changes are seen as “transformational.”

“’Hong Kong is emerging as a ‘proving ground’, said James Lloyd, head of FinTech at consultants EY in Hong Kong. ‘It’s not hard to imagine that several of these players have local, regional and even global ambitions.’”

The US banking system is changing, but two questions still resonate.

First, how fast can the American system move to bring itself up-to-speed, technologically, with the rest of the world?

Things are changing in the US. For example, a dramatic change was just announced by the Bank of America (NYSE: BAC) as it “Considers Scrapping First Data Payments Partnership.”

Bank of America “is considering dissolving the huge payment-processing joint venture it has with First Data Corp. (NYSE: FDC) and developing its own business to move money between consumers and merchants….’”

“Like its rivals, Bank of America is rushing to meet demand from consumers and businesses for modern money-moving technology, which promises a steady stream of fees with each transfer or swipe.”

“Leaving the joint-venture would give the bank more control of its business that focuses on moving money for merchants.”

And, there is plenty of movement elsewhere in this space:

“Citigroup Inc. (NYSE: C) in March said it was starting a new unit to provide merchant-processing services for big clients. JPMorgan Chase & Co. (NYSE: JPM) has its own processing unit, which has struck lucrative partnerships with big merchants including Inc. (NASDAQ: AMZN), since ending its own joint venture with First Data in 2008."

There seems to be little doubt about where these large banks are moving. We particularly see this movement taking place in the largest banks as they move to build a business model based upon intellectual property.

The ability of the “new” Modern Corporation to build platforms and networks that can generate substantial scale economies is driving these banks to incorporate more and more “cutting edge technology.

And, as I have written many times, smaller commercial banks are now combining to form larger entities that can move into these higher circles of technology and achieve the economies of scale that are needed to compete with the largest banks, seen to be the survivors in this era of technology evolution.

A specific example of this latter effort is the combination taking place of BB&T (NYSE: BBT) and SunTrust (NYSE: STI) who specifically stated that they were combining forces so that they could achieve the scale needed to compete with the biggest banks in the market. See one of my latest posts on this combination of banks.

The bottom line to all this discussion is that the new technology is coming into the commercial banking system at a speed never before seen. And, the driving force is the competitive incentive of the banks to achieve scale in order to be competitive.

There are going to be fewer banks in existence, worldwide, and the banks are going to be bigger in size than we have experienced before. There will be investment opportunities evolving out of these changes but investors must be looking for them.

China has determined that it will be a force in the spread of information technology, and banking is one of the places that is being impacted. And, the impact will not be a minor one.

US banks, as well as other banks throughout the world, are going to have to respond to this thrust; in my mind, there is no getting around it.

This disruption is going to create many investment opportunities for those that are aware of what is going on. But, the environment will be different and investors' focus must be upon who is going to survive and develop the business model for the future; who is going to be acquired; and who is just not going to make it.

Disequilibrium creates opportunities, brings on missing markets, and crowns new leadership. My belief is that there is going to be plenty of opportunities, but one cannot just stand still.

Disclosure: I/we 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.