Over the course of the last decade, banking has gone from a market leader to a precarious institution, particularly following the economic recession and bailout in 2008. Today, though, bank stocks are performing surprisingly well despite a high level of distrust. For example, Bank of America Corp. (BAC, Financial)Ă‚ has performed better than the S&P 500 average by nearly 14% over the last year, while JPMorgan Chase & Co. (JPM, Financial)Ă‚ had strong first-quarter earnings. This raises the question: are banks primed for a comeback or is this just a final gasp as financial startups stake a claim on greater market share?
Fear indexes
During the Great Depression, many people turned to gold as an alternative to stocks or banks because they didn’t trust traditional modes of investment. Because of this, the rate of investment in gold came to be known as a “fear index.” Greater investment meant greater fear or distrust of traditional financial authorities. Today, some consider monetary alternatives like cryptocurrency to be modern fear index. But cryptocurrency isn’t the only disruptive force.
Fintech’s growth curve
Financial technology, or fintech, is still broadly unregulated, which should inspire anxiety among users. Yet despite limited oversight, many are ready to dive right in, adopting a range of digital financial solutions for business and personal use. This includes making the switch to comprehensive digital banking services like Revolut as well as task-oriented solutions such as ReceiptBank’s 1Tap receipt management app. For users, these apps reflect the same kind of independence they have found in freelance work or entrepreneurship, with fintech and other startups growing in parallel.
As startups continue to grow, however, will they stick with burgeoning fintech tools or make the move to traditional banks? Determining whether these minor tools will grow with startups or fade away will offer key investor insights regarding the larger banking industry.
Watch and wait
It may be too soon to determine whether fintech is a viable competitor to standard banking, but there are several possibilities investors should consider. First, in the near future, we may see partnerships between fintech and traditional banks. These partnerships would likely be good news for investors and those banks that connect with top fintech startups - especially before an initial public offering - are more likely to thrive.
A few major banks have slowly started to acquire fintech startups over the last several years, but the most impressive acquisitions are likely still a few years ahead - including the potential acquisition of cryptocurrency companies. For now, though, investors should watch other acquisitions, such as PayPal's (PYPL, Financial)Ă‚ recent purchase of iZettle.
The deal may provide valuable lessons for investors interested in the evolution of banking, particularly because PayPal itself began as a small fintech innovation and has since grown into a major corporation. Less than 24 hours after announcing the deal on May 18, its stock was up 3%. More remarkably, by the end of the next day, the stock was up nearly $10 over its May 2 low.
The road ahead
So what’s next for bank stocks? Analysts are worried about a major correction for Bank of America, despite its strong performance over the last year. One reason for the fear: the bank has closed 1,700 branches since June, yet is still planning to build 125 new locations over the next four years. Why open more banks at a time when users don’t need physical locations for transactions? If Bank of America fails to keep up with larger trends in fintech and focus its investments on innovative solutions, that correction will become a certainty rather than just a possibility.
Fintech isn’t big enough to challenge banks yet, but it can certainly destabilize them. Banks need to account for the influence of smaller technologies on operations and investors need to monitor this confluence.
Disclosure: I do not own any of the stocks mentioned in this article.
