When you think of tech changing banking what do you think of? Do you think of Venmo taking on the big banks in terms of peer to peer payments? Do you think of Apple Pay replacing your credit card? Maybe if you are in the banking industry, you think of Ripple replacing the disparate and segmented global payments system to send funds wizzing around the world in real time.
Source: Ripple
Those things may happen, but they likely won’t replace banks in the near future. The main reason is very simple. Banking is still a heavily government regulated industry. Tech companies can come up with every type of innovation, but most of it has been innovation that avoids the giant roadblock of obtaining a local banking license and putting themselves under the supervision of the Federal Reserve. Once you are under the banking world umbrella the Fed provides, they will come in and monitor all the mundane things like compliance, record keeping, capital ratios and customer deposits. They can fine you at any time for an infraction or even shut down your business. That is just one regulator though, you would also have to deal with the likes of the FDIC, which guarantees customer deposits and the Office of the Comptroller of the Currency (OCC).
To get a banking license in itself is a task, just take a look at the WikiHow on how to open a bank here. Basically you would need to get all the charters from the agencies mentioned above, develope a strategy, hire a board, establish a location etc. and have $20-$30 million dollars in capital. The process is estimated to take 1-2 years before you even can start operations. With that amount of time and money, someone could have invented and funded the next Uber. No wonder tech companies don’t want to get into the direct banking business.
More Than Just Loans and Deposits
However, there are a number of very large, sophisticated banks in the world, each with an army of employees spanning the globe and specializing in all types of niche areas that work together to “move the beast” as a friend of mine used to say. It’s these niche, non depository, quasi banking areas that are ripe to be peeled off of the banks and to have new and innovative tech companies run away with. We have already seen some examples of that with the advent of robo-advisors in wealth management which can slash the total cost of wealth advisors.
According to Kitces.com the all in cost of a human advisor for most people averages about 1.65% of assets. While robo-advisors can charge as little as 0.25%. Strangely enough though, this segment of wealth management has not really caught on. In fact only 14% of millennials surveyed would go to a financial advisor for help with money as opposed to 40% of non-millennials.
Source: The Wall Street Journal
So maybe robo-advisors will one day replace human advisors but it looks as if the older generation still prefers the human touch. It makes sense then, that this segment of the industry has been slow to change because guess who has most of the wealth? It’s the baby boomers. However as millennials get older, don’t be surprised with their comfort with tech to drive growth in the robo-advisor segment of the market.
As reported in The Financial Brand this trust of tech for banking moves across products when it comes to the younger generation, a quarter of millennials said they would switch their banking services to Amazon if they offered it.
Source: The Financial Brand
One area that banks seem to still have a strong hand though is research. The research department of many large banks employ dozens or even hundreds of researchers that provide market intel and analysis for institutional investors. The model has changed very little in the past 40 years for this type of business though. In exchange for the brokerage service business that the asset managers give banks, they provide their portfolio managers with research on everything from equity to fixed income to the macroeconomic outlook. Depending on the bank, they also may have a research department focused on wealth management that supplies financial advisors with research on various financial markets and products.
The Looming Change
This model completely ignores how the information landscape has rapidly changed in the past 25 years. As we have seen time and time again, the internet and media platforms like Facebook and YouTube provide a platform for anyone to reach an audience the likes of which they never could have dreamed of reaching at essentially little or no cost.
Information is no longer at a premium. More data has been created in the past 2 years than in the entire history of the human race according to Forbes. This Reddit thread debates the claim made by the BBC that the average person nowadays is exposed to more information in a day than the average person in the 15th century was exposed to in a lifetime.
So anyone with expertise now has an essentially free platform to disburse their knowledge to anyone who could need it. The key is to build a brand that will make your product or service stand out from the crowd. Established media companies like The New York Times and Bloomberg struggled to deal with the fact that a lot of the information they were providing could be disbursed freely away from print media or even their websites. After toying with different strategies, they focused on a model of luring people to an established brand, offering the content for free, and once that audience reached a critical mass, restricting the free content and offering a cheap monthly subscription for access to all of their stories.
One great site that I write for from time to time is Seeking Alpha. It’s a user contributed site that offer pretty sophisticated research and financial analysis of markets. After establishing a quality brand, they too now charge a monthly subscription for access to their user contributed analysis.
Given these developments and the ability for anyone with expertise to build their own brand, I am perplexed that I am not seeing research departments die out yet. What is to stop 3 or 4 equity analysts to just cover the 5-10 stocks they already cover but issue all their research for free to the same clients, build a brand and start charging a monthly fee for it?
There are people out there making blogs about golf, cooking, travel, that give their tips away for free and reach a core audience that advertisers will pay a premium to reach. There are literally soccer moms blogging about mom tips, making hundreds of thousands of dollars a year. There is no reason why research has to be different.
Source: Practical Golf
Why Hasn’t It Changed Yet?
Part of the reason this may not have changed yet is exactly what I mentioned, the branding. Bank research departments have a reputation for hiring smart people and producing quality research for institutional investors. A portfolio manager knows she can rely on Citibank to provide her with some insight but Joe’s Super Awesome Financial Research Co. is more of a gamble in terms of her time. With an abundance of information nowadays and so little time to dedicate to it, time becomes more valuable and a safe bet for research backed by a trusted brand has a higher likelihood that a busy portfolio manager or trader won’t be wasting their time reading it.
Give it Time
I would argue this is just the type of area that is ripe for change though. It would just take anyone who has an interest and patience to make the material and distribute it freely and build their brand up to a point where they can start to charge their audience directly, or keep it free and just get paid by advertisers.
A Reuters article last year talked about this phenomenon but asset managers made a funny decision, they decided to hire their own research teams rather than pay banks for theirs. A lot of this had to do with the MiFid II regulations that came into force in Europe, where banks had to separate research and could no longer bundle it as an add on for other services they offered to asset managers.
The model essentially stayed the same though but if you are in this industry, rather than fearing its dying out, there is a great opportunity for some research analysts to really upend the model of the industry. You just have to be willing to be that pioneer. Who knows maybe I will give it a shot myself?
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