Banks have not had it easy for a long time thanks to the fantastic rate at which financial technology is evolving. New threats to such financial institutions are appearing all the time because technology is creating all manner of new competitors for banks.
What most people think of as “traditional banking” is already dead, or on the way out, but there is still a lot of life and money in banks. The vast amount of cash and assets that some banks have accumulated should sustain them for years or even decades to come.
For example, JPMorgan Chase (NYSE: JPM) reported having $2.563 trillion in assets; and holding $449.16 billion in cash and short-term investments on June 30, 2017. Bank of America (NYSE: BAC) reported $168.86 billion in cash and short-term investments and $2.255 trillion in assets on the same day.
Therefore, the monster banks that Americans love to hate are not going away anytime soon but they face a lot of threats in today’s world.
The Greatest Threats to Banks
Some of the gravest threats to banks in today’s world include:
- Digital wallets such as PayPal (NASDAQ: PYPL), Apple Pay and Alipay. Such wallets are easier to open and use than bank accounts and more popular. There is no credit check, no income requirements and services can be accessed anytime online or through your phone. Wallets are a major threat because they serve as a gateway to other financial services including alternative lending, lines of credit, cryptocurrency, money transfer and Peer to Peer Lending.
- Alternative lending. U.S. alternative lending has grown into a $32.5 billion business over the past decade, Market Realist reported. PayPal is now a major player making installment loans and lines of credit available to Millennials via its digital wallets. Square (NYSE: SQ) is now making loans to small businesses in direct competition with PayPal.
- Peer to Peer (P2P) payments. Peer to peer payment apps which allow people to transfer cash directly to their phones are the fast growing payment solutions. PayPal’s Venmo is the most popular having doubled in volume to $8 billion over the past year, Recode reported. P2P might replace checks and credit cards among Millennials. A major future threat will be lending combined with P2P.
- Big Retail. Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) are becoming major players in U.S. consumer finance. Walmart now offers money transfers, money orders, check cashing, reloadable debit cards and a host of other services in its stores as well as its own digital wallet, Walmart Pay. Amazon has a digital wallet, Amazon Pay, and offers a host of financial services. A future threat would be banking and lending services offered through Amazon Prime or Walmart Pay.
- Cryptocurrencies are a menace because they can form the basis of a wide variety of financial products including loans, bonds, and savings account. A major threat to banks is that fast-growing altcoins such as Bitcoin and Ethereum provide a better hedge against inflation than cash. Particularly dangerous to banks will be cryptocurrency Visa and MasterCard products that allow payment at brick and mortar stores with altcoins. Also on the horizon are cryptocurrency banks such as Change Bank. A major threat is that cryptocurrencies will become the money transfer mechanism of choice, allowing consumers to cut out banks completely.
- Fin-Tech companies. Financial technology companies like PayPal, Ant Financial (sometimes ranked as the world’s most valuable unicorn) and Square are getting more and more like banks. PayPal’s digital wallet; which even pays interest and Ant’s Alipay are versatile alternatives to checking accounts. PayPal and Square are lending money and Ant has a micro loan service that had an estimated value of $8 billion last year. A real danger to banks will come if PayPal or Ant starts selling investments or offering savings accounts.
- Tech companies and mobile wallets. Both Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOG) have quietly entered the financial services business via mobile wallets. Apple Pay and Android Pay threaten banks because they allow users to access a wide variety of accounts and financial products through their phones. One major threat is that consumers will no longer need to carry cash for most transactions, so they will no longer need to go to the bank or the ATM. Another long term threat would be Google or Apple lending.
- Credit unions. The growth rate for these popular alternative financial institutions was three times that of banks, Credit Union Times reported. Around 6.35% in 2016, the TransUnion credit bureau discovered. Reasons for the growth include distrust of big banks and more openness to new technologies. News stories indicate that credit unions are more likely to support Apple Pay and Android Pay than traditional banks.
- Next generation financial services provided directly by retailers. Many U.S. retailers already issue gift cards and offer some banking services. Long-term threats might include cryptocurrencies offered directly by retailers that would function as a combination rewards program and credit or payment solution. The company that operates Burger King in Russia is already experimenting with such a currency called WhopperCoin. Some cryptocurrencies including Ethereum, Waves, and NEO are designed with such capabilities in mind.
Bankers’ ultimate nightmare; a world in which nobody will need to have a bank account is almost here. Big banks will have to figure out to how to adapt to that disturbing reality if they want to survive.