The US banking system is the largest and was once one of the most dynamic in the world. It enabled a generation of growth fueling the biggest economic boom known in modern history. But as the world changes, the US Banking system is aging and the big banks aren't looking to repair it anytime soon.
We're not the only one with this opinion, others have chimed in on this trend:
Performance of major bank stocks reflected a bearish stance over the last five trading sessions. New political uncertainty and continued ambiguity over trade conflict and several other geopolitical matters weighed on investor sentiments.
Anyone can look up the financials of Bank of America (BAC) - it's a 264 Billion market cap behemoth with a low P/E ratio of 10. In this article we're going to focus on things you might not find in other articles, such as issues with their core business, lack of strategy by the management, and consumer issues (that may turn into complaints).
BAC is covered widely in the financial media, and is held by many mutual funds. One could even say that it's over-covered. What we're looking at in this article isn't bashing, it's the word on the street. Anecdotal evidence is powerful, as we have watched the Cryptocurrency market grow from nothing to a multi-billion dollar industry. Unfortunately, it hasn't taken off as expected. But we believe it will. We believe that the problem was Crypto had few champions that were publicly traded companies. People like Tim Draper are Private Equity guys. Overstock.com (OSTK) is something we're not even going to get into as it's the topic for an entire article. The reason for us writing this is not a hit job on BAC. Not at all. We are merely pointing out a major demographic shift. The experiences and opinions presented in this article are the reasons that people will choose alternative banking services in the future, and not use BAC; which ultimately will hurt it's bottom line.
Bank of America's abusive consumer practices
If you google Bank of America reviews you will not see many 5 star positive reviews. Why is this? We contacted some consumers to learn why.
Bank of America charges customers $35 overdraft fees, but doesn't provide any way to turn this service *off* meaning if you have a low balance and use your card for small charges for Apple (AAPL) or Microsoft (MSFT) you're going to be charged $35 for every $4.95 email account charge. If you have a few addresses, Microsoft will charge you a few times (not at once) so you'll be paying $35 per charge. These overdraft fees can quickly go into the hundreds of dollars. See an example from a customer who sent us their statement.
This is particularly difficult to manage if you are a small business and you may have many bank accounts, or accounts for different purposes. If we take this customer as an example, the fees of $70 would represent an annualized interest rate of 53,203% on a daily lend to cover the 2 $17.17 charges. That's assuming they don't charge interest on weekends and holidays, if interest were charged 365 days a year the annualized interest rate would be 74,403%.
In a decision issued on March 26, the Court of Appeals for the First Circuit found that appellee Citizens Bank’s “Sustained Overdraft Fees” do not qualify as interest under the National Bank Act (“NBA”) and the Office of the Comptroller of the Currency’s (“OCC”) related regulations, rules, and interpretive letters that provide guidance with respect to the term “interest.”..Citizens charges the customer $35 to either return the check or honor the check. If Citizens chooses to honor the check, in addition to the $35 “Overdraft Fee” previously mentioned, Citizens charges a $30 “Sustained Overdraft Fee” if the account remains overdrawn for a period of four consecutive business days. Citizens then charges an additional $30 if the account remains overdrawn after the seventh business day and the tenth business day. In total, Citizens could choose to charge a customer up to $90 to honor the overdraft. Fawcett alleged this $90 difference that could occur if Citizens chooses to honor a check rather than to return the check was greater than the 21% per annum maximum interest rate set forth under Rhode Island law.
However, we're not hung up on what the law says banks can do and not do. Let's imagine there are no Usury laws at all. Bank of America charges customers 50,000% interest. How many people will continue to use the bank in the future? Our point is that if Bank of America is relying on things such as egregious overdraft fees, and other abusive practices we'll get into shortly, that's not a sustainable business model. Overdraft fees are not the worst example of how Bank of America abuses its customers, see this other example.
Bank of America 'used it's authority' to withdraw $-2,913.42 from a business account in order to satisfy a credit card debt to which the account owner was a co-signer.
But do others feel this practice is abusive? According to Marketwatch.com they do:
In the U.S. the average household pays over $329 in bank fees every year, which equates to just over $3,000 every ten years. In fact America's three biggest banks alone collected an estimated $6 billion from people in overdraft and ATM fees in 2015 according to a report by SNL Financial and CNNMoney, with the average overdraft fee $34 – despite transactions usually being a withdrawal of $24 or less. It's highway robbery, to say the least. So much so that the issue has been a political talking point for several years now, with Clinton himself having labelled ATM fees "usurious" and unreasonable.
However, readers should note that this consumer example falls in line with a 2018 $66 Million settlement for the same practice:
If you Incurred One or More $35 Extended Overdrawn Balance Charges in Connection with your BANK OF AMERICA consumer checking account, between February 25, 2014 and December 30, 2017, you may be entitled to benefits from this proposed class action Settlement.
These are consumer issues that are unsettled. Thousands or perhaps millions of Bank of America customers are angry and waiting for other solutions. But are there any other solutions? Yes there are, and the number of alternatives is growing by the day. Let's dive in and look at some of them.
Who will benefit from the decline of BAC?
PayPal (PYPL) and other banking alternatives. PayPal isn't a bank, but you can use it like one. They provide loans, and even credit cards. A PayPal debit card works just like a debit card from a bank. So who needs banks? PayPal has other benefits, such as the ability to manage subscriptions all in once place, merchant accounts for businesses, and much more. And of course PayPal isn't the only bank alternative, there are many.
For the purposes of this article we investigated the question: Are there any real choices, or do the banks just have us locked down?
The answer is there are many choices, they are just no so obvious, but they will be soon. One of them is Money Lion. We need to disclose that before researching for this article we had only heard about Money Lion featured in private equity news:
Mobile banking platform MoneyLion has raised a $100 million Series C funding round. The amount is more than double the $42 million raised in a Series B just 18 months ago. MoneyLion would not go on the record about its valuation, but sources claim it’s “near unicorn status.”
MoneyLion has now raised a total of $227.5 million since its inception in 2013. Investors in the latest round included a combination of strategic investors—Capital One and MetaBank —and existing financial investors Edison Partners, Greenspring Associates, and FinTech Collective.
Despite saying the company was seeing “hypergrowth,” CEO and co-founder Dee Choubey declined to provide any metrics regarding the company’s revenue growth over time. The company does say it has “over 5 million members” currently. That compares to over 4 million back in April and more than 3 million last October. The startup also said its bank membership has grown “at an annualized rate of greater than 1,000% with respect to both accounts and daily average transactions.”
Describing itself as a “Costco/Netflix” of the financial industry, MoneyLion offers an array of services to its customers using a membership model: new mobile online banking and managed investment services, a no-fee checking account, savings, credit-building, cash advances, and personal loans. Membership costs depends on the services used. MoneyLion says it uses AI and machine learning to “deliver personalized money-saving recommendations” and do things like help people improve their credit scores. Looking ahead, the company said it plans to launch a trading platform in Q4 of this year.
MoneyLion is a private company so we aren't going to be going long this stock anytime soon. As is the case with these companies typically, it could be years before an IPO is considered. But we are not making an argument about the stock, we are making an argument about the business case. Do angry BAC customers have choices? Yes, they do. And the choices are very good. MoneyLion will accept you with bad credit, and they even offer a 'credit builder' product that gives you a second chance. You can open an account with your mobile phone in about 5 minutes. It's all powered by Artificial Intelligence and works in the cloud. Sounds like a bank of the future? To make it even more appealing, they offer a referral program to new account holders, which puts money in your pocket for trying them out:
Get $10 when you use my referral link to join MoneyLion Plus and start investing! Learn more in the MoneyLion app.
They offer loans, investments, savings, and checking. No fees. Sounds like a dream come true. But does MoneyLion have competitors? They do! From Crunchbase:
For the argument against BAC, that doesn't spell well. The more popular these alternative platforms are, the less popular BAC will be.
But MoneyLion is only one alternative, there is also ChimeBank, which isn't publicly traded yet, but according to Pitchbook.com the valuation is $1.5 Billion making it a Unicorn, which soon will be popular on Pre IPO Markets.
Chime is one of several fintech banks that are rapidly disrupting the industry and challenging the long-standing domination of traditional banks. As regulators become increasingly comfortable with applications from financial technology startups offering consumers overdraft protection, direct deposit services and savings accounts, we are beginning to see their corresponding growth – and domination – in the banking sector. In 2017, Chime in fact lead the U.S. Challenger Banking Category, reaching 750,000 bank accounts and helping members save $72 million accumulatively.
As with Crypto, it took Bitcoin years to finally take off. Could the critical mass be coming soon? The argument here is not to bash BAC, it's to point out that we may be near a tipping point, whereby there is mass adoption of Chime, MoneyLion, and other services. Consumers are tired of fees and hassles. Look how Robinhood transformed stock trading, just by offering simple free trading (but with a huge catch - they sell your data to HFT shops). Anyway, years later that resulted in major brokerage houses going to commission free trading. We see the banks doing the same thing, perhaps not this year - but sometime in the near future.
Can they reinvent themselves?
BAC has had a number of chances to reinvent themselves and haven't. The management doesn't grasp the demographic changes happening across the broader economy, and has no idea how FinTech is taking over finance. To their credit, BAC has filed a ton of patents in the Crypto space, such as:
United States-based investment banking company Bank of America (BofA) has filed a patent for a digital currency wallet with multiple layers of asset access. The proposed wallet would accept different passwords for different amounts of funds requested. The United States Patent and Trademark Office published BofA’s application on Aug. 15. Per the filing, this technology would comprise a computing platform with a digital wallet interface. The platform would be configured to operate within a peer-to-peer network for blockchain management — which could potentially be public or private.
But if BAC is such a technology leader, why are they still back in the 1950's regarding their day to day business practices? To compare them with their brokerage cousins, Charles Schwab Corporation (SCHW) and other online brokers have slashed their fees to zero:
Price wars have been going on in the brokerage world for decades. But the latest battle just may be the last, at least when it comes to trading commissions. Almost all of the major brokerage firms—Charles Schwab (ticker: SCHW), E*Trade Financial (ETFC), Interactive Brokers Group (IBKR), and TD Ameritrade Holding (AMTD)—slashed equity-trading commissions to zero this week. (Fidelity and Vanguard seem to be holding out—for now.)
So why can't the big banks do the same? Wells Fargo (WFC) is reeling from a slew of lawsuits and fines which are still unresolved. Internal restructuring isn't going to cut it. The big banks, led by BAC need to step outside and re-evaluate themselves.
They really are too big to fail, they have 67 Million customers. That's a huge organization no matter how you look at it. So we aren't suggesting this is an 'easy' fix, managers will have to work hard for their $20 Million salaries. But they've had a long time and have seen the writing on the wall, meanwhile they do nothing. The CEO once even said something really crazy like "It's difficult to make money in a low interest rate environment" seemingly to indicate that he knows nothing about the financial system.
Here are some suggestions for management:
- Cut the fees - reduce fees to zero like MoneyLion.
- Invest in Research & Development instead of marketing.
- Upgrade the horrendous and annoying phone system, fraud detection system, mobile banking app, and other failed I.T. projects that cause more harm than good.
With such a big user base, BAC could flip the switch anytime. But management seems unwilling to do anything about problems that plague the bank, so we believe that BAC is going lower. The strategy is to sell into strength. Take a look at BAC 1 Year chart:
Stuck in this range, we would be sellers here and as it moves to 30. Price target is below 15 as this slug sinks into the cesspool it has created for itself.
What to go Long?
PYPL is the best bet, as they are not only leading the FinTech revolution for a very long time, they are buying into it. Recently they acquired Asian payment shop GoPay:
PayPal (NASDAQ: PYPL), the online payment processing juggernaut, recently purchased a 70% stake in the China-based online payment services company GoPay. The move gives PayPal a controlling interest in GoPay, and more importantly makes PayPal the first foreign company to be granted a license to provide online payment services in China.
PayPal's acquisition of GoPay, also known as Guofubao Information Technology Co., is expected to close in the fourth quarter of this year, and is being carried out through PayPal's China-based subsidiary, Yinbaobao Information Technology (Shanghai) Co., Ltd. The financial details of the deal weren't disclosed.
This is a sign, unlike other companies - that they are willing to change and invest in the future. Recently we covered a company Money Gram International (MGI) which similar to BAC is plagued by generational problems, and living off the market position they have. Our argument is that FinTech has started a decade long technology overhaul that is only beginning. BAC and friends are leading the charge lower, whereas PYPL is rising to the top. That might not be reflected in the stocks yet, but it will be. Let's take a look at PYPL chart 10Y:
Looks like a good pullback to buy some here. We would be long PYPL and short BAC, as a technology curve hedge. We admit, we are biased - we are FinTech. However, it would have been unwise to bet against the Bitcoin bull run. Picking tops is not easy, but we are far away from a FinTech top it's only starting to get interesting.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PYPL over 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.