Converging Streams of Competition

Change and competition in banking are coming from every direction as the lines blur between traditional banking, fintech, investment management and defi. BankerAdvisor is trying to unpack the whirlwind of movement by focusing on four prevailing trends.

# Trend #1: Big Looking to Get Bigger

The beginning of 2020 looked like it was going to be a big year for merger activity in banking. The BB&T deal that created Truist was the clearest harbinger for a frothy deal market. The coronavirus pandemic quickly cooled all that off as firms looked inward to focus on overcoming low interest rates and surging loan losses.

Thankfully, worst case market and economy scenarios did not come to fruition as a result of Covid 19. Now, with rates even lower this year, plus, as Barron’s reports, steady pressure from fintech upstarts like PayPal Holdings, Square and even WalMart, it’s more likely that big banks — particularly those with a higher price to tangible book value — will be in a buying mood.

JPMorgan added to that sentiment during recent investor calls. After growing bank assets by an astonishing $699 billion in 2020, CEO Jamie Dimon gave investors a heads up that there will be an increase in expenses for technology, marketing and market expansion, with a particular emphasis on acquisition. According to Bloomberg, CFO Jennifer Piepszak told an investor conference that there is a sense of urgency for the bank to find acquisition targets as competition intensifies.

Trend 2: Regionals Consolidate, Deepen Investment in Digital to Compete

Regional banks are pursuing a dual-track strategy to compete. First, a long expected consolidation in regional banking is well underway. The latest deal is M&T Bank Corp.’s $7.6B purchase of People’s United Financial. The combined banks would have more than $200 billion in assets and a network of more than 1,100 branches. M&T, which is based in Buffalo, N.Y., will combine with Connecticut-based People’s United to expand into Boston specifically and the Northeast generally, according to the Wall Street Journal.

This deal comes on the heels of fourth quarter 2020 deals that included Huntington Bancshares merger with TCF Financial and PNC Financial Service’s acquisition of the U.S. Arem of Spain’s BBVA.

Texas regional bank Cadence Bancorp said it's looking to sell and, the regional bank index is up more than 25% this year, ostensibly in anticipation of more consolidation.

Second, and perhaps more importantly, is the noise, investment and activity signaling big commitments to a deeper digital strategy, particularly mobile apps with features like digital account opening, APIs (Application Programming interfaces), Artificial Intelligence, including chatbots, machine learning and robotic process automation. Other, more retail-oriented features include check deposits, quick looks at transaction history, charity tie-ins, automated savings and automated assistants.

While most customers prefer traditional channels for complex or advisory services, Covid-19 has increased use of mobile banking apps to 72% of customers at the four largest banks in 2020, up 10% over 2019 according to Deloitte’s Center for Financial Services Analysis. More than a third of customers have increased online banking usage in 2020.

Big banks have a head start in their digital transformation agendas over regionals. For example, few institutions other than the top 25 banks are doing much with AI. One in four institutions plan new investments in APIs.

Regional banks who have done a good job pleasing customers with mobile apps, such as Huntington Bank, which has excelled in predictive money tools, are the exception not the rule.

Perhaps the most illustrative statement came from Kelly King, Truist’s CEO who said the following when debuting then BB&T’s digital strategy:

> “For most of my career I never worried about Jamie Dimon or anybody else in New York because they had great technology and great volumes but when they came to Main Street, I can win every time because I had better touch and they knew that. But as the digital transformation has changed, touch has to merge with technology so that you get that seamless integration because the client is not going to accept just having someone nice at the branch.”

While efforts from the big banks like Finn from Chase Bank (now shut down and integrated into Chase mobile banking, and Marcus by Goldman Sachs, which just saw a high-profile defection of consumer head leaving to run WalMart’s FinTech, have hit roadblocks, lessons are being learned and reapplied.

Trend 3: Native Digital Apps and Challenger Banks

Call them neobanks, mobile apps or challenger banks, native digital players who are customer experience obsessed have put traditional banking squarely in their sites.

Many will fail, but some from the ranks of BankMobile, Chime, N26, SoFi and Varo will emerge. Legacy banks, whether large or regional, admit that customers who leave for the challengers are very difficult to bring back.

Mobile bank N26 recently celebrated its 7 millionth customer. Since beginning its service roll-out in Germany, it had added 500,000 US customers and now says it is in 25 marketing. The bank uses a freemium model popular with many software and social platform applications and looks to upsell some customers to premium accounts.

Revolut, based in the UK, bills itself a super app with both personal and business services, which includes sending and receiving international payments in 28-plus currencies and free international and local payments within a plan allowance. Rovolut also says it seamlessly integrates with accounting tools, including Xero, ClearBooks and QuickBooks. To date, the company — which doesn’t like to be called a bank — has more than 500,000 business clients worldwide. This is in addition to 12 million personal customers and a recent Series D funding round that netted $500M in 2020. ….

Trend 4: Crypto, Bitcoin, Blockchain

The crypto world has been dominated by speculation news around bitcoin’s (BTC) precipitous jump in value to more than $50,0000 per coin, institutions like Goldman Sachs warming to holding bitcoin in portfolios, a pending IPO from custodian and platform Coinbase, and bitcoin appearing on the balance sheets of companies including Elon Musk’s Tesla.

However, with less fanfare, an increasing number of crypto businesses have made moves into banking, though its unclear the extent. Several companies filed applications with the Office of the Comptroller of the Currency (OCC) for national bank charters, including Atlanta-based BitPay, a payments processing company and crypto exchange Paxos.

In early 2021, the OCC approved two applications. One approval was with Seattle-based Protego Trust Co’s Washington state trust charter to be converted to a national charter. Protege has to meet the terms of its approval which includes application into the Federal Reserve System and adequate bond converage.

The primary interest for the crypto companies seems to be providing custodial services to institutional investors. However, KPMG pointed out that the cryptos could upsell other services to clients. As a custodian bank, the crypto businesses focus on making money from fees for secure storage of assets. This is an attractive business to these firms who can sidestep strict capital reserve requirements from the FDIC.

Protego plans to provide client-to-client lending and a trading platform in the future. However the company said it won’t make direct loans.

Anchorage Trust Company became Anchorage Digital Bank, National Association from conditional OCC approval. While the OCC laid out capital and liquidity requirements, Anchorage said they were happy to be the first federally chartered digital asset bank. According to BankingExhange, Anchorage co-founders Nathan McCauley and Diogo Monica said the approval was a “major milestone” for the crypto industry and wider financial world.

The American Bankers Association called on comptroller Blake Paulson and the OCC to revoke conditional approvals for the new banks citing concerns about changes to eligibility rules.

Plenty more news is on the horizon for crypto, bitcoin, blockchain and banking including digital currency lenders like Celsius, Fulcrum, Crypto.com and Blockchain.com who tout mega yields on band savings accounts of greater than 8%, 10% or even 15%-plus when you let them hold digital assets in their “savings accounts.” According to the Wall Street Journal, online trading firms will borrow customers’ cryptocurrency and then lend it to hedge funds, traders and investors and you get a portion of whatever those borrowers pay the broker, similar to a fully-paid lending program.