WFC - Wells Fargo

[cameronfen]

I tend to agree with you Cameron but at what pace will the disruption happen?  There was a book written in 1999 talking about how the internet would disrupt banking.  So they were right and internet banking has taken off but banks are still around 20 years later.

 

I wonder if there's a demographic role. All my finance needs are met with discount banks and brokers.  However my older family think I'm crazy and still use traditional services.

 

Disruption can’t be quick, because so much capital is needed to run a bank. Sure online only banks exist like Ally or several credit unions (which are quasi online banks, be sued they have so little branches)  and they do Ok, growing 10% /year perhaps. at that pace and starting from a small  base, it will take decades to take substantial market shares away from the major banks.

I do think they small community banks they rely on offline customers are screwed in the long run.

 

I agree it will be slow.  The problem is typically like in the case of the newspapers, the stock doesn't go down for a while as the moat is eroding and when people finally have the "oh sh*t" moment it plunges 30-40% in a year.  I think the moat is already steadily eroding.  WFC, community banking revenues have been consistently trending down very slowly but steadily, maybe this is due to the whole scandal, but they were growing well below GDP before the scandal hit.  And yeah the first companies to feel the pain will be the community banks, but they will hit the big guys eventually as well. 

[RuleNumberOne]

WFC's moat is forever (which is why Buffett owns it.) The fundamental banking principle has not changed: issue IOUs and buy assets with the money. Lot of regulations get in the way, because once in 20 years, there is a big blowup and regulations need to be increased again and again.

 

The S&L crisis was caused by banks hiking deposit rates to attract deposits, reaching for higher yield and losing money in the end.

 

The 2008 crisis: issue commercial paper, trade mortgages, mortgage derivatives, derivatives of derivatives, ... When the commercial paper stopped (because the players reached for yield and assets went bad) - Lehman, Bear, GE went broke. Companies like AXP switched to online CDs but have not gained traction in the 11 years since.

 

2018: Robinhood floated a 3% checking account and got shut down.

 

2019: JPM is back to trading mortgages. According to BofA CEO, BofA looks every borrower in the eye, whereas JPM buys loans in the "wholesale" market.

 

GS wants to replace commercial paper with high interest CDs. They probably want to buy mortgages whole sale like in 2008.

[RuleNumberOne]

I got into contract to buy a house and had to pay the 3% deposit. All my money was in "Etrade bank." Etrade branch said they don't verify photo IDs or issue cashiers check in the branch, i.e. a bank without branches.

 

They said they could mail a cashiers check to me. And then wait for the cashiers check to arrive in the mail.

 

But you would have to scan your photo ID, fill out a form and fax it, get on the phone, authenticate yourself and ask for the form to be processed. Same process for a wire transfer.

 

WFC and BAC have 40 million checking accounts each, giving them very low cost funding. There have been online CD competitors for a very long time, haven't made a dent.

 

WFC had a NIM of 4.8% even in 2006-2007 when Fed rates were at 5% and the yield curve was inverted.

 

 

 

[RuleNumberOne]

Another problem is mismatched maturities and interest rate fluctuations.

 

Suppose Robinhood makes loans when rates are low and holds them. If rates go up, it has to match them on the deposit side, but is left holding loans paying a low rate.

 

Conversely, if it issues CDs when rates are high, and rates come down, it can only make loans at lower rates.

 

All of this makes it very difficult to compete with someone who has low deposit costs. A 28-year-old with an "Internet bank" will get shutdown by regulators very quickly.

 

Even experienced bankers such as Hudson City Bank got marooned because of mismatched interest rates. Hudson City had very low default rates and low LTVs, but that was not enough. Interest rate cycles can be very dangerous.

 

Bank stock picking is best left to Buffett. I just copy him.

[cameronfen]

^The main cost for a bank to get deposits, is not the interest they charge but in the cost of building out the branches and hiring employees.  This is why branchless deposit gathering institutions have an advantage and why they can offer higher interest rates and still have higher roe's than traditional banks.  Schwab, I think, has zero branches pays all your atm fees and has a ROE of 20% despite it not participating in the loan market and having a weighted average interest on assets of 2.6%.  Imagine something like Marcus (and the many other Marcus clones that are not lucky enough to be run by gs) which is branchless and so has the same cost structure in terms of deposits, but also lends money through the loan market.  There is no way, long term a bank that is built on a branch based cost structure can compete with that. 

 

Again NIM is misleading, as cashless banks cost advantage is further down the income statement (operating expenses).  Just looking at bank of the internet (now axos bank) their net interest margin is lower than WFC, which is not a surpise as their deposits need higher rates to attract customers, but looking at net profit margin which takes into account opex, subscale bank of the internet has a profit margin of 35+% while WFC is at 22%.  Even if WFC went wild and started issuing the riskiest loans, they would never get even to 30%. 

 

Sure disruption will take a while, but with a cost advantage that's significantly better than incumbent banks and a way to pass that down to the customer, and with big players like GS Marcus, their moat will erode.  It's just a matter of time (how long? depends how long it takes for people to change habits). 

[cameronfen]

Just to add on, you don't need to issue CDs as an online bank to attract customers.  You can just create an online checking account with the typical floating yield.  Then you can match duration to your heart's content.  You can also offer higher yield and other perks like paying all atm fees because you have that superior cost structure. 

[RuleNumberOne]

SCHW can only buy short-term securities, that is the catch. If the Fed cuts rates, you will see SCHW's revenues go down very quickly. SCHW's stock price has hit a wall for this reason.

 

SCHW is regulated as a bank by the Federal Reserve. Since its funds can easily take flight (cash balances in brokerage accounts), they are probably restricted to short-term securities by regulators.

 

Customers willingly leave their money in the 120 million checking accounts that WFC, BAC, JPM have. A few thousand in each account and the occasional fifty-thousand checking account is all that WFC, BAC need. Very low deposit costs ranging from 20bp - 50bp over the last several years. Operating expenses are easily covered by the difference in deposit costs.

 

Branchless institutions have to pay a higher rate on deposits to attract depositors, and then they have to pay a markup on wholesale loans. No room for error.

[RuleNumberOne]

"In 2018 Bank of Internet USA provided Dr. Kanodia, a plastic surgeon, with a $180 million loan for his Spec house.[34]"

 

This is what happens when they aggressively reach for yield to cover their deposit cost. 2% of their assets are in Kanodia's house, which was featured in the news. Kanodia is underwater in a big way, cut his asking price, and yet no buyers. If there is a downturn, and Kanodia walks, 20% of shareholder equity is in trouble.

 

20% of shareholder equity is in Kanodia's crazy project. No buyers even with price cuts:

https://www.architecturaldigest.com/story/celebrity-plastic-surgeon-struggling-to-sell-180-million-dollar-bel-air-home

 

So Axos Bank a.k.a. Bank of the Internet, is following in the footsteps of the S&Ls of the 1990s.

[Jurgis]

I have an idea: some online lender should make a loan for someone to buy Kanodia's house. Everyone would be happy: Bank of Internet would be saved, Kanodia would have sold his house, online lender would have made a yuge loan showing a yuge growth for its shareholders and buyer would have a 180mln dollar house. Talk about win-win-win-win.

[RuleNumberOne]

And then they should IPO to raise capital at 50x revenue. "Cloud banking IPO."

 

I have an idea: some online lender should make a loan for someone to buy Kanodia's house. Everyone would be happy: Bank of Internet would be saved, Kanodia would have sold his house, online lender would have made a yuge loan showing a yuge growth for its shareholders and buyer would have a 180mln dollar house. Talk about win-win-win-win.

[kab60]

I don't have a strong view as to where interest rates will go, but if one expects the US to follow Europe, banks are gonna be much "cheaper" on a price/book basis (since they're much worse businesses). Europe is swimming in banks that have a hard time to earn a double digit return on equity and thus trades at a sizeable discount to book value since NIM is getting compressed by negative rates. What happens if rates turn negative in the US?

[Dalal.Holdings]

WFC's moat is forever (which is why Buffett owns it.) The fundamental banking principle has not changed: issue IOUs and buy assets with the money. Lot of regulations get in the way, because once in 20 years, there is a big blowup and regulations need to be increased again and again.

 

The S&L crisis was caused by banks hiking deposit rates to attract deposits, reaching for higher yield and losing money in the end.

 

The 2008 crisis: issue commercial paper, trade mortgages, mortgage derivatives, derivatives of derivatives, ... When the commercial paper stopped (because the players reached for yield and assets went bad) - Lehman, Bear, GE went broke. Companies like AXP switched to online CDs but have not gained traction in the 11 years since.

 

2018: Robinhood floated a 3% checking account and got shut down.

 

2019: JPM is back to trading mortgages. According to BofA CEO, BofA looks every borrower in the eye, whereas JPM buys loans in the "wholesale" market.

 

GS wants to replace commercial paper with high interest CDs. They probably want to buy mortgages whole sale like in 2008.

 

Thank you for posting some unusually valuable insights...really unusual to see on this board.

 

It shouldn't be too hard to fathom what will happen to these "online only" banks that are basically paying their depositors more than the 2 year U.S. treasury yield to hold their deposits at their banks and meanwhile, the long end of the yield curve is flat and even inverted...

 

The "online only" banks also have no moats vs. each other. Depositors can easily move money from Marcus to Ally to Discover Savings (or whatever new bank is providing higher rates). When rates move higher, one can just start a new bank that providers superior rates, steal customers from these online banks and wipe out their depositor base in one fell swoop.

 

Lol on the "Head of Marcus" saying that traditional banking is doomed. You know what Munger says about a man-with-hammer syndrome...

[sleepydragon]

WFC's moat is forever (which is why Buffett owns it.) The fundamental banking principle has not changed: issue IOUs and buy assets with the money. Lot of regulations get in the way, because once in 20 years, there is a big blowup and regulations need to be increased again and again.

 

The S&L crisis was caused by banks hiking deposit rates to attract deposits, reaching for higher yield and losing money in the end.

 

The 2008 crisis: issue commercial paper, trade mortgages, mortgage derivatives, derivatives of derivatives, ... When the commercial paper stopped (because the players reached for yield and assets went bad) - Lehman, Bear, GE went broke. Companies like AXP switched to online CDs but have not gained traction in the 11 years since.

 

2018: Robinhood floated a 3% checking account and got shut down.

 

2019: JPM is back to trading mortgages. According to BofA CEO, BofA looks every borrower in the eye, whereas JPM buys loans in the "wholesale" market.

 

GS wants to replace commercial paper with high interest CDs. They probably want to buy mortgages whole sale like in 2008.

 

Thank you for posting some unusually valuable insights...really unusual to see on this board.

 

It shouldn't be too hard to fathom what will happen to these "online only" banks that are basically paying their depositors more than the 2 year U.S. treasury yield to hold their deposits at their banks and meanwhile, the long end of the yield curve is flat and even inverted...

 

The "online only" banks also have no moats vs. each other. Depositors can easily move money from Marcus to Ally to Discover Savings (or whatever new bank is providing higher rates). When rates move higher, one can just start a new bank that providers superior rates, steal customers from these online banks and wipe out their depositor base in one fell swoop.

 

Lol on the "Head of Marcus" saying that traditional banking is doomed. You know what Munger says about a man-with-hammer syndrome...

 

Many years ago I got a letter from GS asking me to close my brokerage account with them because my account had less than 1 million. Now I got emails and ads asking me to open an account at Marcus. No, thanks.

[coc]

Another thing not being discussed is how banks like WFC "tie" your accounts together.

 

For example, with a jumbo mortgage, I believe WFC reduces mortgage costs 1/8th or 1/4 point for every 250K you have in an account with them. Someone sticking a million bucks at WFC may save themselves 1%/yr or $10,000 on a million dollar mortgage. That would save you $200,000 over the life of a 30 yr mortgage.

 

From there, Wells can make you a deal on brokerage, get your business a loan, help you buy an apartment building, etc. etc.

 

A. That is hard to replicate

B. It creates sticky money - most people just aren't looking around to change their bank

 

For those trying to make the obvious point that branches cost money, my question to you (rhetorically) is - why didn't branchless banking disrupt the big lenders years ago? There's no magic to the Internet - and even that has been around for 25 years in usable form with no dent made on traditional banking.

 

Branchless banking is not a new concept, and didn't arrive with the internet, even if the UI of the Internet makes certain things easier. There's a reason JPM, for example, has been opening branches in certain markets. Dimon isn't stupid.

 

[cameronfen]

WFC's moat is forever (which is why Buffett owns it.) The fundamental banking principle has not changed: issue IOUs and buy assets with the money. Lot of regulations get in the way, because once in 20 years, there is a big blowup and regulations need to be increased again and again.

 

The S&L crisis was caused by banks hiking deposit rates to attract deposits, reaching for higher yield and losing money in the end.

 

The 2008 crisis: issue commercial paper, trade mortgages, mortgage derivatives, derivatives of derivatives, ... When the commercial paper stopped (because the players reached for yield and assets went bad) - Lehman, Bear, GE went broke. Companies like AXP switched to online CDs but have not gained traction in the 11 years since.

 

2018: Robinhood floated a 3% checking account and got shut down.

 

2019: JPM is back to trading mortgages. According to BofA CEO, BofA looks every borrower in the eye, whereas JPM buys loans in the "wholesale" market.

 

GS wants to replace commercial paper with high interest CDs. They probably want to buy mortgages whole sale like in 2008.

 

Thank you for posting some unusually valuable insights...really unusual to see on this board.

 

It shouldn't be too hard to fathom what will happen to these "online only" banks that are basically paying their depositors more than the 2 year U.S. treasury yield to hold their deposits at their banks and meanwhile, the long end of the yield curve is flat and even inverted...

 

The "online only" banks also have no moats vs. each other. Depositors can easily move money from Marcus to Ally to Discover Savings (or whatever new bank is providing higher rates). When rates move higher, one can just start a new bank that providers superior rates, steal customers from these online banks and wipe out their depositor base in one fell swoop.

 

Lol on the "Head of Marcus" saying that traditional banking is doomed. You know what Munger says about a man-with-hammer syndrome...

Of course im getting slaughtered here, but i dont understand why. 

 

1. So of course online banks have no moats versus each other but the whole point is that they have a huge advantage versus traditional banks which allows them to take share.  Branchless banks don't need to take share from each other, they can take share from incumbent banks which have most of the business anyway. 

 

2.  My point with axos has nothing to do with loan losses or risk on that end, it was to point out that Axos has a higher net profit margin than the incumbent banks due to there deposit gathering ability.  NIM is lower for Axos and the asset quality is worse.  I'll give you that.  But my point was even if almost go long commerical paper you can be profitable with a branchless bank as in the case with schwab.  Axos has just choosen to write more risky loans, but thats a knob that axos choose that has nothing to do with its cost strucure.  For example even if axos earned 4.79% on loan which is what wfc earned (compared to 5.66%), it would have a net profit margin of 33% something wfc could never touch.  If you still dont like the fact that Axos has lower asset quality, pick any of the myriad other fintech and branchless institutions doing this.  ADS and sychrony are sort of incumbents with this ability, Marcus is another, tinkoff on Russia is a forth, there are plenty of other branchless banks a quote google search could find.  Some of them are going to have comperable asset quality as WFC as loan quality is just a knob a bank turns.  Those that do, will still have a lower cost structure than WFC making them no riskier than wfc but much more profitable and able to take share. 

 

3.  Nothing will happen to them even if they pay more than 2% on there deposits and CDs.  Why? because they have little opex.  NIM is the wrong metric to use because it doesn't include opex which branch banks have a lot of and branchless banks do not.  As the thought expirement with Axos showed, you can have much lower net interest margin and still much higher profitability because you don't have to operate any branches. 

[cameronfen]

Another thing not being discussed is how banks like WFC "tie" your accounts together.

 

For example, with a jumbo mortgage, I believe WFC reduces mortgage costs 1/8th or 1/4 point for every 250K you have in an account with them. Someone sticking a million bucks at WFC may save themselves 1%/yr or $10,000 on a million dollar mortgage. That would save you $200,000 over the life of a 30 yr mortgage.

 

From there, Wells can make you a deal on brokerage, get your business a loan, help you buy an apartment building, etc. etc.

 

A. That is hard to replicate

B. It creates sticky money - most people just aren't looking around to change their bank

 

For those trying to make the obvious point that branches cost money, my question to you (rhetorically) is - why didn't branchless banking disrupt the big lenders years ago? There's no magic to the Internet - and even that has been around for 25 years in usable form with no dent made on traditional banking.

 

Branchless banking is not a new concept, and didn't arrive with the internet, even if the UI of the Internet makes certain things easier. There's a reason JPM, for example, has been opening branches in certain markets. Dimon isn't stupid.

 

I will say this is the most reasonable response imo from the other side.  What other people seem not to understand is you literally can't argue about cost structure.  But I will respond:

 

1.  Tieing deals together can be done by anyone.  I think WFC and WB like to talk about this, but just from gut instinct i can't believe it moves the needle (for example do you really think tying deals is even resposible for 500m in earnings?).  At least it doesn't pass the smell test for me. 

 

2.  Internet banks have been around for a while and they have taken share from traditional banks:  Banking is not a business where fast growth is good.  You need to maintain asset quality so you can only grow at a very slow rate.  Also people are sticky for banks.  It's not so easy peeling away customers but people are slowly leaving as branchless banking becomes the obviously better choice for consumers.  That being said branchless banks are a thing and the cats out of the bag.  They have a cost structure advantage and will continue to do so for now until eternity, slowly taking share.  also most branchless banks were no name firms that people didn't trust.  With bigger names getting in taking share will accelerate. 

 

3.  As regards to Dimon opening up branches, I could say the same thing about GS opening up Marcus.  The GS management team is arguebly better than the JPM one and they decide to go with the strategy.  I think the real answer is like someone said "someone with a hammer..." GS has no branches and JPM does.  They see different nails and have different hammers. 

 

edit: I'd like to add the assault on deposits is only one dimension of the disruption big banks are facing.  You have more effective competitors on the wealth management side. You have emerging competition on the loan issuance side, credit cards....  Banks are risking distruption not just from branchless banks but basically from the vast majority of the fintech space against virtually every aspect of their business (except maybe IB). 

[CorpRaider]

I would never have significant assets, say more than like $10K, with a financial institution that did not have a physical presence that was reasonably convenient for me. 

 

Schwab has a physical location which they refer to as a "branch" right down the street.  So does Fido. 

 

The big banks are putting together another new potential moat in their new payment system Zelle.  Reminds me a little of when they put together MasterCard.

 

[RuleNumberOne]

Things to think about:

- The IOUs a bank can issue is limited by the capital they have.

- Bank profits are an opinion, whether it is a fact won't be known until the next recession.

- When a recession occurs, the default rate among the Kanodias is not proportional to the higher interest rate on the loans. It can be 100%.

 

Example:

- Suppose Axos issues CDs for 3%.

- WFC can offer mortgages for 3.25% if you move money into their brokerage accounts and put 20% down with enough income.

- Axos has to find the Kanodias of the world, because normal mortgages where the payments are 45% of income are taken up by BAC and WFC.

- Axos has to compete with GS and everyone else in offering better terms to Kanodia. Even if Kanodia is paying 3% more on his mortgage now, he is guaranteed to walk away as soon as the next recession appears.

 

I asked WFC for a construction loan in the past for an investment. They said they don't make such loans (even if you buy the land with cash yourself.) LTV doesn't matter - they won't make even a 30% LTV for a construction project.

[RuleNumberOne]

The detailed CPI reports on the BLS website show how crooked the data is. I picked a random month - June 2017.

The inflation rate for San Francisco-Oakland-San Jose was 1.7%. That is completely bogus. Every kind of wage has doubled here over the last 9 years - construction labor, restaurant workers, software engineers.

 

The 10-year in Portugal is 0.5% and France is 0%. But home prices in both countries are booming. I think it is the same in other European countries like Spain.

 

Fake inflation data is used to justify low rates. Central banks have an impeccable record in generation inflation in home prices.

Governments use imputed rents, hedonic adjustments and other crooked tricks to report a low inflation number.  The CPI never identified the housing bubble in the US either.

 

A big problem with European banks is they own a lot of sovereign debt, whether by choice or compulsion.

 

I don't have a strong view as to where interest rates will go, but if one expects the US to follow Europe, banks are gonna be much "cheaper" on a price/book basis (since they're much worse businesses). Europe is swimming in banks that have a hard time to earn a double digit return on equity and thus trades at a sizeable discount to book value since NIM is getting compressed by negative rates. What happens if rates turn negative in the US?

[cameronfen]

I would never have significant assets, say more than like $10K, with a financial institution that did not have a physical presence that was reasonably convenient for me. 

 

Schwab has a physical location which they refer to as a "branch" right down the street.  So does Fido. 

 

The big banks are putting together another new potential moat in their new payment system Zelle.  Reminds me a little of when they put together MasterCard.

 

Sure thats your preference.  However I think most people under 35 don't mind having no physical preference.  We do it for ecommerce.  We do it increasingly for entertainment.  Why wouldn't the averge person be confortable without going to a physical location?

 

Sure Schwab has "branches" like Fido mainly for there brokerage business.  Just like bonobos has retail stores.  But the ratio of branches to deposits is not comparable to wfc.

 

So zelle is a response to venmo and paypal eating there lunch in money transfer and payments.  I wouldn't call it a moat and its more like (slight exaggeration) a act of despiration. 

[CorpRaider]

WFC's ratio will trend toward Schwab's.  Margins to come. 

 

Online only banks have been around since like 1990.  If the website is down or I need to move real money, I think people want the option to look a human in the eye and they want to be able to place a lien on the bank's real property if needed.  I agree that a lot of retail peon accounts from credit unions and small banks will go online.  They can't match the tech.

 

Yeah Zelle is the response to venmo, like Mastercard and Visa were the response to Diner's club and AXP.

 

They could get displaced but they are basically utilities, now more than ever in my mind, so I would not bet on that.

 

I've looked at some SoFi products and rates were not as good as other options. 

 

I think Zillow and Redfin would have a better chance disrupting that industry and impacting mortgage finance but it seems they are failing.

[cameronfen]

Things to think about:

- The IOUs a bank can issue is limited by the capital they have.

- Bank profits are an opinion, whether it is a fact won't be known until the next recession.

- When a recession occurs, the default rate among the Kanodias is not proportional to the higher interest rate on the loans. It can be 100%.

 

Example:

- Suppose Axos issues CDs for 3%.

- WFC can offer mortgages for 3.25% if you move money into their brokerage accounts and put 20% down with enough income.

- Axos has to find the Kanodias of the world, because normal mortgages where the payments are 45% of income are taken up by BAC and WFC.

- Axos has to compete with GS and everyone else in offering better terms to Kanodia. Even if Kanodia is paying 3% more on his mortgage now, he is guaranteed to walk away as soon as the next recession appears.

 

I asked WFC for a construction loan in the past for an investment. They said they don't make such loans (even if you buy the land with cash yourself.) LTV doesn't matter - they won't make even a 30% LTV for a construction project.

 

So axos has a weighted average interest on liabilities of 1.5% which is nowhere close to 3%.

 

Axos can also offer mortgages at 3.25% and would still have a profit margin of 20% which is where WFC is now currently with a weighted average ir on loans yielding 4.79%.  You are right though thats bc the libilities are higher yielding its more leveraged to a decrease in asset yield. 

 

As far as loan quality, this is a fair point.  However, Axos bank has a higher equity tier 1 capital ratio than WFC at somewhere around 12.5 versus 11.7.  Addtitionally LTV for Axos is 55% which is likely below WFC even though I couldn't find an exact value (but I found a table with LTV buckets). If Axos offered loans comperable to the average WFC loan yielding 4.79% at 3.25% I think most customers would choose Axos giving them lots of choice to pick the best customers.  Keep in mind while there is some moat in banking its basically a commodity business.  Depositers flock to the highest interest rates and borrowers flock to the lowest.  In commodity businesses the low cost producer ultimately wins.  So even though Axos is writing riskier loans, it seems likely that Axos could write pretty safe loans and still earn their cost of capital. 

 

Just to illustrate: when calculating imagined profits on an interest rate, I multiply the imagined ir on loans and subtract that amount from the actual loan return.  Multiply that by 2/3 (taxes) and subtract that from current net income to get adjusted net income then calculate net profit margin in the same way (by dividing by adjusted revenue now). 

 

 

[cameronfen]

WFC's ratio will trend toward Schwab's.  Margins to come. 

 

Online only banks have been around since like 1990.  If the website is down or I need to move real money, I think people want the option to look a human in the eye and they want to be able to place a lien on the bank's real property if needed.  I agree that a lot of retail peon accounts from credit unions and small banks will go online.  They can't match the tech.

 

Yeah Zelle is the response to venmo, like Mastercard and Visa were the response to Diner's club and AXP.

 

They could get displaced but they are basically utilities, now more than ever in my mind, so I would not bet on that.

 

re looking people in the eye: Sure they said the same thing about retail or movies.  It's true for some people but happens to not be true for most. 

 

re zelle I dont know what the tpv is for zelle, but I'm guessing its only a fraction of paypal.  It's true second movers have displaced entranched first movers, but I think the onus is on you to tell my why zelle with a fraction of tpv as paypal will displace the dominant payment platform in the us. 

 

re utilities: this is a valid point, with governemnt help etc. However, banking is still a commodity business.  You have a low cost operator competing against a business that can't slim down its cost structure.  Progress will be slow but who will ultimately win?  Compared to these incumbents there is little moat other than name recognition and too big to fail.  I'm also not saying wfc will go bankrupt only a large part of its business will be disrupted. 

 

Not that I don't want to continue but I gotta do more productive things with my time then arguing on the internet.   

[coc]

I will say this is the most reasonable response imo from the other side.  What other people seem not to understand is you literally can't argue about cost structure.  But I will respond:

 

1.  Tieing deals together can be done by anyone.  I think WFC and WB like to talk about this, but just from gut instinct i can't believe it moves the needle (for example do you really think tying deals is even resposible for 500m in earnings?).  At least it doesn't pass the smell test for me. 

 

2.  Internet banks have been around for a while and they have taken share from traditional banks:  Banking is not a business where fast growth is good.  You need to maintain asset quality so you can only grow at a very slow rate.  Also people are sticky for banks.  It's not so easy peeling away customers but people are slowly leaving as branchless banking becomes the obviously better choice for consumers.  That being said branchless banks are a thing and the cats out of the bag.  They have a cost structure advantage and will continue to do so for now until eternity, slowly taking share.  also most branchless banks were no name firms that people didn't trust.  With bigger names getting in taking share will accelerate. 

 

3.  As regards to Dimon opening up branches, I could say the same thing about GS opening up Marcus.  The GS management team is arguebly better than the JPM one and they decide to go with the strategy.  I think the real answer is like someone said "someone with a hammer..." GS has no branches and JPM does.  They see different nails and have different hammers. 

 

edit: I'd like to add the assault on deposits is only one dimension of the disruption big banks are facing.  You have more effective competitors on the wealth management side. You have emerging competition on the loan issuance side, credit cards....  Banks are risking distruption not just from branchless banks but basically from the vast majority of the fintech space against virtually every aspect of their business (except maybe IB).

 

It just isn't as simple as math -- that is what everyone is trying to argue . Not having branches is a very easily replicated cost structure advantage. All can add 2+2 and see that branches cost money.

 

If branchless banking is so obvious and the math is so shockingly easy, why isn't even going that way? Why doesn't every bank just close its branches? For a total no-brainer, why isn't every bank copying these internet bank? Might there be a reason?

 

A well run, well located bank branch both makes money and reduces overall costs and risk. The actual "cost" of running a branchless model is the cost of A. Having to often buy loans at wholesale prices, as well as taking on risk of representation by the seller (i.e., you didn't do the underwriting yourself), B. The cost and risk involved with quickly moving deposits (fast money). C. Reputational/trust issues (as shown by many here).

 

The big banks also have mindshare. When I drive around town, I see B of A, Wells Fargo, a few local banks, Chase. When I drive around a town in another state I see... B of A, Wells Fargo, Chase, a few local banks...

 

This drives banking relationships - and the banks know it.

 

There is also the tie between personal and commercial banking. (These discussion about internet banks typically revolve around consumer savings accounts -- that's one piece of a much greater overall pie.)

 

If I run a $10 million manufacturer and I need somewhere to put my business' checking account, and go to for a commercial loan as well as personal loans, do I go to Internet Bank X, or down the street, where my friend from high school is a loan officer and there's a branch I drive by every day? And once they've captured that, don't you think they make it easy and sensible for me to put my personal money there?

 

You had an aside that this "tying" is minimal -- I disagree. It might be a minority by number of people. But there's an 80/20 rule and, I'm sorry, a minority of people have a majority of the money and banking needs.

 

I don't mean to disparage the online-only model, it has a place and value for sure. The idea that everything's headed there is, I think, a mistake. Silicon Valley people really think everyone else is dumb and they're smart and that's that. Well, sometimes true, sometimes not.

 

All good discussion -- dissent makes markets.

[Guest eatliftinvestgolf]

I will say this is the most reasonable response imo from the other side.  What other people seem not to understand is you literally can't argue about cost structure.  But I will respond:

 

1.  Tieing deals together can be done by anyone.  I think WFC and WB like to talk about this, but just from gut instinct i can't believe it moves the needle (for example do you really think tying deals is even resposible for 500m in earnings?).  At least it doesn't pass the smell test for me. 

 

2.  Internet banks have been around for a while and they have taken share from traditional banks:  Banking is not a business where fast growth is good.  You need to maintain asset quality so you can only grow at a very slow rate.  Also people are sticky for banks.  It's not so easy peeling away customers but people are slowly leaving as branchless banking becomes the obviously better choice for consumers.  That being said branchless banks are a thing and the cats out of the bag.  They have a cost structure advantage and will continue to do so for now until eternity, slowly taking share.  also most branchless banks were no name firms that people didn't trust.  With bigger names getting in taking share will accelerate. 

 

3.  As regards to Dimon opening up branches, I could say the same thing about GS opening up Marcus.  The GS management team is arguebly better than the JPM one and they decide to go with the strategy.  I think the real answer is like someone said "someone with a hammer..." GS has no branches and JPM does.  They see different nails and have different hammers. 

 

edit: I'd like to add the assault on deposits is only one dimension of the disruption big banks are facing.  You have more effective competitors on the wealth management side. You have emerging competition on the loan issuance side, credit cards....  Banks are risking distruption not just from branchless banks but basically from the vast majority of the fintech space against virtually every aspect of their business (except maybe IB).

 

It just isn't as simple as math -- that is what everyone is trying to argue . Not having branches is a very easily replicated cost structure advantage. All can add 2+2 and see that branches cost money.

 

If branchless banking is so obvious and the math is so shockingly easy, why isn't even going that way? Why doesn't every bank just close its branches? For a total no-brainer, why isn't every bank copying these internet bank? Might there be a reason?

 

A well run, well located bank branch both makes money and reduces overall costs and risk. The actual "cost" of running a branchless model is the cost of A. Having to often buy loans at wholesale prices, as well as taking on risk of representation by the seller (i.e., you didn't do the underwriting yourself), B. The cost and risk involved with quickly moving deposits (fast money). C. Reputational/trust issues (as shown by many here).

 

The big banks also have mindshare. When I drive around town, I see B of A, Wells Fargo, a few local banks, Chase. When I drive around a town in another state I see... B of A, Wells Fargo, Chase, a few local banks...

 

This drives banking relationships - and the banks know it.

 

There is also the tie between personal and commercial banking. (These discussion about internet banks typically revolve around consumer savings accounts -- that's one piece of a much greater overall pie.)

 

If I run a $10 million manufacturer and I need somewhere to put my business' checking account, and go to for a commercial loan as well as personal loans, do I go to Internet Bank X, or down the street, where my friend from high school is a loan officer and there's a branch I drive by every day? And once they've captured that, don't you think they make it easy and sensible for me to put my personal money there?

 

You had an aside that this "tying" is minimal -- I disagree. It might be a minority by number of people. But there's an 80/20 rule and, I'm sorry, a minority of people have a majority of the money and banking needs.

 

I don't mean to disparage the online-only model, it has a place and value for sure. The idea that everything's headed there is, I think, a mistake. Silicon Valley people really think everyone else is dumb and they're smart and that's that. Well, sometimes true, sometimes not.

 

All good discussion -- dissent makes markets.

 

well said