The Future Of Banking: JPMorgan Chase & Co. And Others

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

The banking system is changing, both globally and nationally, and the response of US banks to the technology behind the change is picking up, even accelerating.

The changing structure of the payments system is driving much of this change because the payments system provides the platform for bringing together many bank products and services.

Investors need to be aware of the changes that are taking place and keep a close eye on how these impact bank performance so that they can make good decisions.

Bottom line: the banks, as they move from a 'linear" business model to a "platform" based model are going to look different and perform in a different way.

"The future of banking is going to come out of payment companies."

Guillaume Pousaz, founder and Chief Executive Officer, made this statement at Checkout.com, a London-based processor for fast-growing internet companies, and was quoted in the Wall Street Journal.

Mr. Pousaz continued,

"I believe that 50 percent of financial-services brands that we know today will not be here in 20 years, maybe 10 years."

Checkout.com is a leading international provider of online payment solutions and has just raised $230 million leading to a valuation of nearly $2.0 billion, "a higher mark than all by three other companies achieved on their first-ever venture rounds going back to 2002…."

Mr. Pousaz works globally, something that cannot be ignored in the battle to build banking platforms that span the world. And, in building an international brand, scale cannot be forgotten.

And, it was this insight that Mr. Pousaz capitalized upon as he established Checkout.com in London in 2012 and then expanded into the Middle East. This allowed him to focus on geographic areas that were less competitive and in so doing, establish the scale, without which, the "new" Modern Corporation cannot thrive.

So, the threat to US banking comes not from just within the United States itself but comes from the existence of global competition that adapts modern technology to develop the intellectual capital upon which the platforms of the "new" Modern Corporation are built.

As I have written many times over the past six months, the biggest US commercial banks seem to be picking up on the threat.

Just last week, I have written about what JPMorgan Chase & Co. (NYSE:JPM) is doing and what the implications of this development means for the financial services industry. The impact of technology on banking and the resulting scale effects this has on individual organizations cannot be ignored.

But the other large banks are getting into the game. For example, Citigroup, Inc. (NYSE:C) is starting up a new unit to provide merchant-processing services for big clients.

Bank of America Corp. (NYSE:BAC) is also thinking about leaving its payments processing arrangement with First Data Corp. to build its own payments system.

The threat to these organizations has become very real, according to JPMorgan CEO Jamie Dimon who wrote in his shareholders letter in April,

"Companies like Square and PayPal have done things that we could have done but did not."

But, as alluded to above, JPMorgan and the other big banks also face international threats and cannot afford to stay out of the battle.

More and more business is moving to the internet and to smartphones, and merchants want providers with the access to better data from transactions and the ability to integrate easily with popular apps. In addition, online platforms that operate across many geographical areas and currencies want payments companies that can coordinate money flows between many different end users, customer, as well as supplier.

And, the investment community recognizes what is happening. Dow Jones VentureSource indicates that, in 2018, more than $22 billion in venture capital funds went into payments startups globally. A lot is happening,

And, since scale is a big definer of success in this space, we see banks now moving to position themselves to better compete with the financial giants, like JPMorgan Chase.

The example here is the BB&T (NYSE:BBT)/SunTrust (NYSE:STI) combination, whose managements seem to be justifying the merger on the basis achieving the scale necessary to pay the high technology game. If this combination goes through, the resulting bank will be the sixth largest commercial bank in the United States.

And, Mr. Pousaz presents the picture of how he built his payments system and how the modern platform expands:

"You build all these transactions on payment processing and control the revenue, and then you build incremental products on top of it. There's an emergence of new brands that are going to be actually distributing financial services, and a lot more than just payments."

That is the platform is an evolving network, described by some as an ecosystem that just expands and expands and expands. Note that the movement does not have to be led by the lending function.

Mr. Pousaz says that the shrinkage will come in twenty years, maybe only in ten.

The only thing I will say pertaining to the timing is that the transition has finally really begun for the banking industry, it will only pick up speed, and, if this transition is anything like other similar movements, the changes will take place must faster than we can imagine.

Furthermore, as I have argued previously, the banking industry will be dominated even more by the larger institutions. As we have already seen in some areas, the existing large banks will either work with a payments provider, like Apple (NASDAQ:AAPL) Pay, or will acquire a payments provider to bring the system up to current standards. The other remaining banks, call them "local" or "regional" banks, will maybe operate like a correspondent banking system because they cannot build, maintain, or sustain their own payments system.

Investment wise, I am very confident that this is how the banking system as a whole will evolve and that considerations like the ones that I have presented above will pay a big role in the performance of the individual banks.

I am still looking for the best performers to earn 12 percent to 15 percent return on shareholders' equity, but I am also looking for a change in makeup of a bank's balance sheet and income statement.

The difference here is that as these banks move to more of a platform type of operation and get away from their "linear" model of product and service delivery, the scale effects of the "new" Modern Corporation will take over.

This is what the investor needs to look for. And, it is something that I will write more about as we move further into this new banking system.

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.