The question is so simple it seems silly: What is a bank?
Of course you know the answer. A bank pools savings and then allocates that capital. Simple, right? But that’s just the start.
In 2016 a big bank also doubles as an enterprise software company and a mobile-apps developer. It is a customer-service organization to big companies and individuals alike. It is a tool of government-mandated social policy. A shareholder-return engine. An international intermediary. A seller and trader of securities. A policeman of criminals. A policeman of itself. And, of late, a public vessel, dirtied by political feeling about everything from inequality to race to Congress to the U.S. Constitution itself.
In a series of stories over the coming week, The Wall Street Journal will explore the simple, if beguiling, conundrum about banks today: What are they now? And what will they become?
This is not a silly or idle question. The banks can’t answer it.
Having survived the financial crisis—with nearly $500 billion of taxpayer support—banks are today confused about their purpose. Shareholders are agitated. Revenue at the country’s three largest isn’t growing. (Bank of America had more revenue in 2010 than 2015.)
Costs and regulation have risen, which means the only way to improve profits is to cut still more costs. On Wall Street, bond traders are an endangered species. And the 1990s-era idea of the “global” bank has largely withered under these conditions. Citigroup, Barclays, Credit Suisse, Deutsche Bank, HSBC, UBS and Morgan Stanley are all in retreat.
To the side, a crop of regulation-averse small companies is trying to pick off bank functions and customers. Take just one of these—a smartphone app called Acorns that is changing how young people save money. With it, users automatically put pocket change into an exchange-traded fund each day. Will these users grow up to be Merrill Lynch customers? Probably not.
Lingering above, there is a regulatory and political culture that is methodically targeting what happens to be the banks’ most profitable lines, be it bond trading, selling branded mutual funds or overdraft “protection” loans. The mighty Goldman Sachs in the last 12 months delivered a return on equity of 5.06%, less than that of the beer-schlepping deliverymen of Molson Coors Brewing.
Big changes await. Most bank CEOs don’t agree with the idea that the biggest banks will be broken up. They prefer to use the term “rearrange” or “realign.” Whatever words they choose, it feels only a matter of time until shareholders—with the tacit or explicit support of Washington—cleave most into new combinations with different missions.
It’s most likely that the small fintech companies will be subsumed into the bigger maw, but one can’t underestimate the long-term impact of their ideas. Blockchain technology—which allows for secure, instantaneous record-keeping of loans or securities—is expected to wipe away office towers full of paper-pushing (and middle-class) back-office employees. Computerized portfolio managers will do much the same to the Lexus-driving broker-turned-“financial adviser” in your neighborhood.
It’s most likely that the small fintech companies will be subsumed into the bigger maw, but one can’t underestimate the long-term impact of their ideas.
A company such as PayPal will take on many of the functions of a traditional bank, even as it tries to elude actually becoming one. For the next generations, used to instantaneous gratification in everything from dating to transportation, these companies will have a built-in appeal.
For now, the banking industry remains traumatized by the crisis of nearly a decade ago. It is this experience of loss that perhaps impedes inevitable change.
There is a great creative surge coming, but it won’t truly happen until those who lived the crisis are gone. Their old way of life—of pay, influence, and breadth—isn’t coming back. There’s no use in trying to resurrect it. They must die so the banks might live.
First appeared at WSJ