Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Bank of America a Technology Company?

The line between financial technology (Fintech) and banks keeps blurring. For example, Bank of America (NYSE: BAC); or BOA, is bragging about its apps.

Astonishingly, corporate clients can move up to $1.6 billion through BOA’s CashPro app, Bloomberg claims. Bank of America claims an unidentified electronics company used CashPro to move $1.6 billion in summer 2019.

“You can do a payment on an Apple Watch through our CashPro system for 500 million bucks,” BOA Chief Executive Officer Brian Moynihan brags. Bloomberg reports Moynihan made the claim at a 5 November 2019 investor conference in New York City.

Money Laundering and Tax Evasion at the Touch of an App

If Moynihan is right, money laundering and tax evasion just got a lot easier. To explain, Moynihan admits you can use the modern banking system to quickly transfer billions of dollars between countries.

Hence, American billionaires could move all their cash outside the United States in a few seconds if Congress passes U.S. Senator Liz Warren (D-New York) wealth tax proposal. Thus, Moynihan shows why average people hate and fear giant banks so much.

I predict CashPro will become a political issue because it reportedly exists and works. Bloomberg claims 500,000 users sent $144 billion in payments with CashPro between September 2018 and September 2019.

Interestingly, CashPro could be one of the largest mobile payment apps, if Moynihan; and Bloomberg’s, claims are true. Venmo, PayPal’s (NASDAQ: PYPL), popular peer-to-peer (P2P) app had a $24 billion net payment volume in 2nd Quarter 2019, Statista estimates.

Will Bank of America Make Money with CashPro?

Moreover, Statista estimates PayPal added nine million accounts to its ecosystem in 1st Quarter 2019. Thus, I think CashPro could drive dramatic growth at Bank of America.

BOA; however, could make little money from CashPro. Statista estimates the 2019 total revenues from the global mobile payment market at $1.08 billion. Hence, the revenues from CashPro could be tiny even though it moves billions of dollars.

Tellingly, Bank of America’s quarterly revenues and gross profit fell from $23.04 billion on 30 June 2019 to $22.807 billion on 30 September 2019. Additionally, Stockrow estimates BOA’s revenue growth rate for last quarter at 0.37%.

The Fintech Paradox: More Efficiency Less Revenue

I think BOA’s revenues point to an interesting paradox in Fintech; the faster and more efficient Fintech gets, the less money it makes. Digital financial technology makes banks faster and more efficient but they make less money.

I believe one explanation for the paradox is the nature of banking. Banks traditionally make money by adding steps to processes that gives them a chance to charge fees and make money.

For instance, you need cash so you go to the ATM and pay a fee for that. Meanwhile, you need to pay your mortgage, so you write a check for that. The bank charges you for the check and the checking account. If the mortgage check bounces, the bank charges you a higher fee.

However, with digital technology you can pay with a debit card or your phone so you need not go to the ATM and pay a fee to get your own cash. In addition, you need not write a check because you can use online bill pay or bill pay through your banking app.

Since bill pay is digital and usually instantaneous, there’s little chance of a bounced check the bank can charge you a fee for. Moreover, the bank cannot charge you for checks or the “service” of processing checks.

Can Bank of America make from Digital Payments?

You benefit from the digital payments process but Bank of America makes less money. However, BOA will have lower expenses because it can do more with a smaller infrastructure.

Accordingly, Bank of America is closing branches across the country. For example, BOA closed all of its branches in Topeka, Kansas, WIBW TV reports. In addition, Bank of America closed 16 branches in Charlotte, North Carolina, in July 2019, Crain’s Chicago Business reports.

BOA’s actions show a disturbing aspect of the Fintech paradox. Technology makes banks more useful to the rich and big corporations, but less useful for ordinary people.

Jeff Bezos can transfer $1 billion to Switzerland with his app, but you will have a hard time cashing a check in your neighborhood. That sounds like a sure-fire recipe for discount and populist anger at big banks to me.

Why Frustration with Big Fintech is Growing

Predictably, some polls name bank critic U.S. Senator Liz Warren (D-Massachusetts) the leader in the Democratic presidential primary. Furthermore, the probable Republican presidential nominee for 2020 is U.S. President Donald J. Trump (R-New York) another bank critic.

Frustration with Big Fintech in America is growing, and it is easy to see why. Basic financial services for ordinary people vanish while services for the rich grow.

Bank shrinkage and Fintech growth will make the growing generation gap in America worse. To explain, younger people; Millennials (under 35) and Generation X (age 35-54) don’t notice bank closures because they make all their financial transactions digitally.

Older people, mostly Baby Boomers (age 54-74) who rely on checkbooks and cash get left high and dry. For example, the working Millennial does not care when his neighborhood BOA branch closes. However, a retired secretary could face a long bus ride to cash checks.

What’s good and bad about Big Fintech

Conversely, there are some benefits from Big Fintech and digital payments. Unfortunately, it is not clear if the gains from banking digitalization outweigh the losses.

On the positive side, Bank of America workers could make more money. B of A claims it plans to minimum wage to $20 an hour, National Public Radio reports. If BOA’s wage claims are true, its workers will earn an entry-level salary of $38,400 a year.

Interestingly, Bank of America’s pay will still be below the average hourly wage in the United States. Trading Economics estimates the average hourly wage in the United States was $23.70 an hour in October 2019.

On the negative side, Bank of America pays higher wages because it employees fewer workers. Moynihan even bragged about cutting 84,000 people from its workforce in nine years at an investor conference last year, Market Mad House claims. I estimate Bank of America’s workforce fell from 288,000 people in 2010 to 204,000 people in October 2018.

Job Killing Fintech at BOA

BOA employees few people because digital platforms and automatic teller machines (ATMs) do the work. For instance, no tellers to cash checks or take deposits are necessary when you use an ATM.

Moreover, Bank of America needs no employees to open envelopes, or process checks, when you use its app to pay your phone bill. Instead, you send a digital payment from BOA’s digital platform to Verizon’s (NYSE: VZ) platform.

Unfortunately, Moynihan did not say what all the former BOA employees; mostly lower middle-class women, will do for work. Personally, I do not think retraining is an option. For instance, I cannot see a 54-year-old ex-bank teller with diabetes and a high-school diploma going back to school to learn website design.

The disappearance of banking jobs will put a strain on communities. In particular, there will be more competition for service jobs like a waitress, retail sales associate, and cashier. That will mean a trip down the social ladder for many women, a situation which will lead to social and political unrest.

Expect, the role of job killing Fintech to become a big issue as Presidential candidates like Andrew Yang (D-New York) attract attention. The danger from job-killing tech and a basic income are Yang’s signature campaign issues.

How much Money is Bank of America Making?

Bank of America (NYSE: BAC) is taking some big risks by betting on Fintech but how much money does the monster bank make?

The answer is a lot. For instance, BOA reported a quarterly operating income of $7.638 billion and a quarterly net income of $5.777 billion on 30 September 2019. However, those numbers were down from $9.816 billion and $7.109 billion on 30 June 2019.

Dramatically, BoA reported a negative “operating cash flow” of -$5.702 billion and a “free cash flow” of -$5.702 billion on 30 September 2019. Impressively, Bank of America reported a financing cash flow of $22.828 billion on 30 September 2019.

Hence, Bank of America makes a lot of money from its core business but loses vast amounts of money on its infrastructure. Therefore, I think Moynihan’s strategy of pruning the infrastructure while investing on technology is a wise one for BOA.

Can BOA make money with Platform-as a-Service?

The core businesses Moynihan concentrates on are digital payments, lending, investing, and business banking. I think those operations are primarily Fintech. Hence, B of A is turning into a Fintech company.

For example, Bank of America and IBM (NYSE: IBM) are collaborating on a financial services cloud, American Banker reports. In detail, the financial services cloud could include over 190 API (Application programming interface) driven cloud-native platform-as-a-service products to create new and enhanced cloud-native apps.

BOA claims it cut its information technology budget by 29%; or $2.1 billion a year, by going to the cloud. American Banker estimates Bank of America it cut its IT infrastructure from 60 data centers and 200,000 servers to 70,000 servers.

If those claims are true, I think BOA could be a leader in banking Fintech, cloud, and platform-as-a service products. That could add a lot of value to BOA. For instance, you can use digital wallets like Apple Pay and Google Pay to get cash from Bank of America ATMs.  

Digital wallets like Google Pay, PayPal, Venmo, and CashPro are platform-as-a-service products. Thus platform-as-a-service could drive business and customers to BOA.

How Much Cash Does Bank of America Have?

 I like Bank of America because it has an incredible amount of cash. BOA reported $436.246 billion in cash and equivalents on 30 September 2019. Impressively that number grew from $428.123 billion on 30 June 2019.

Thus, platform-as-a-service is bringing more cash to BOA. That is good news for BOA shareholders because it means the dividend will continue.

For the record, Bank of America (NYSE: BAC) will pay an 18₵ quarterly dividend on 5 December 2019. That dividend grew by 3₵ in 2019; rising from 15₵ in June to 18₵ in September. In contrast, PayPal pays no dividend. credits BOA with five years of dividend growth. BOA shareholders received a 2.18% dividend yield, an annualized payout of 72₵, and a payout ratio of 26.55% on 13 November 2019.

In the final analysis, I like Bank of America because it is cheap, cash-rich, pays a good dividend, and has a lot of growth potential because of Fintech and platform-as-a-service. I think Bank of America was a bargain at the $32.77 share price reported on 13 November 2019.

If you want a cheap investment in Fintech; and the cloud, you need to investigate Bank of America (NYSE: BOA).