The Uncertain Future of Local Banks
Revolut (Might!) Apply for a Charter; Parsing Goldman's Earnings
The Uncertain Future of Local Banks
It may seem like a lifetime ago, but as recently as the 1990s, there were approximately 12,000 commercial banks with 50,000 branches in the United States. Long before the rise of the digitalization of banking, fintech challengers, and COVID-19, a more important force was driving consolidation in consumer and commercial banking: regulation (well, de-regulation).
The 1999 repeal of Glass-Steagall, which separated commercial and investment banking, paved the way for further consolidation and the rise of the “Big Four” (JP Morgan Chase, Wells Fargo, Bank of America, Citigroup).
Despite consolidation in the number of banks, the number of branches actually continued rising until 2008, peaking at 82,422 - and has only declined by 5,585 through 2019. It’s hard to remember now, but branches were still a key customer acquisition (deposit gathering) and service channel as recently as 10 years ago.
Today, there remain about 4,500 commercial banks and another ~5,100 credit unions (a bank-like, member-owned financial institution).
The majority of these (~83%) are small, local banks and credit unions holding less than $1 billion in assets. In aggregate, this segment holds ~$1.3 trillion in assets, or 15% of the assets of the Big Four.
What does the future hold for these small local institutions?
Challenges
Declining importance of geographic footprint - branches no longer are primary channel for acquiring and servicing customers.
Increasing compliance burdens and cost.
Increasing customer expectations for polished digital customer experience from onboarding to customer service (website, app) and unified experience across channels (app to site to phone to branch).
Competitive customer/deposit acquisition environment, with digital-only banks attracting deposits with higher APYs and VC-backed fintechs advertising heavily.
Opportunities
Buy and partner instead of building. Small/local banks don’t have the budget or talent to custom-build digital solutions. (This also represents a market opportunity for banking infrastructure players.)
Buy, build, or partner for digital distribution. Local banks are constrained by a small geographic footprint. Buying/building tech or partnering can unlock nation-wide scale.
Invest in technology to automate and reduce manual back office and compliance work.
Leverage their licenses. Early pioneers like WebBank, The Bancorp, Celtic Bank, Green Dot Corporation etc. made smart use of their licenses by partnering with others to distribute their products - allowing them to cheaply gather deposits and generate revenue with an asset-light approach.
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Revolut (…might?) Apply for US Bank Charter
This really shouldn’t be news. CNBC reported that Revolut “is close” to applying for a US bank charter, setting the fintech twittersphere on fire.
In reality, this won’t change anything in the near future for Revolut’s plans in the US — afterall, it took Varo something like 4 years and $100 million to secure its banking license.
The more interesting question for me was, why a state license (vs. national), and why California? (This may be an especially confusing topic for my UK and EU readers, who are used to somewhat simpler regulatory regimes.)
Matt of Privacy.com (@regulatorynerd on Twitter) explains this far better than I could in this tweet thread (and no I’m not just embedding this because he said nice things about this newsletter):
In the US, there are a variety of charters/regulators at state and national levels (though state-chartered banks can still operate nationally -- confusing!)
Quick summary of options
Credit union. Requires a defined geographic area or membership, like university students, company employees, etc. (not applicable to Revolut).
Industrial Loan Company (usually in Utah). Rarely granted and there are some restrictions on the types of accounts and products that can be offered (Square and Nelnet have pursued this, but it doesn't make sense for Revolut).
National bank charter via OCC. This is the type of charter banks like JPMC, WF, BAML have, and it is the route Varo Bank went.
State charter + FDIC or FRB as federal regulator. In the state model, there are various pros/cons by state - familiarity with 'fintech', local talent, cost, permissible interest rates, etc.
Do yourself a favor and read Matt’s tweet thread for a more thorough unpacking of this.
What Do Goldman Earnings Reveal About Marcus?
While Goldman Sachs' huge trading-driven earnings are getting the headlines, there is some interesting Marcus/retail data in the earnings presentation & call.
The way Goldman groups and breaks out (or doesn’t break out) Consumer & Wealth Management makes it difficult to parse exactly what's happening, but here’s what we know:
Top line revenue for "Consumer Banking" (basically, interest income from Marcus personal loans + Apple Card) is continuing to grow
Provision for loan losses (which is for Consumer Banking AND other loans held by Consumer & Wealth Management division) dramatically improved vs prior quarter (but remains +78% YTD vs 2019)
Operating expenses for Consumer & Wealth Management up 14% YTD vs 2019
Net earnings for Consumer & Wealth Management -54% YTD vs 2019 at $93M (would be meaningful revenue for a startup, but for GS, a mere rounding error)
On the loan book side:
Personal loans outstanding ("installment") decreased by $1b Y/Y
While Apple Card has tripled (from $1b to $3b; the pending GM credit card portfolio will add another $2.5b to GS’ card portfolio)
Making Apple Card balances account for 42% of consumer credit portfolio
Any small business lines of credit/loans via Amazon partnership are de minimis
Consumer deposits were up $4b Q/Q — despite regulatory caps in the UK and cutting its rate to 0.60% in the US.
How Can Fintech Help Low Income Consumers?
The economic fallout from COVID-19 and the associated economic dislocations are likely to setback lower income families, which are disproportionately Black and Latinx, by years, if not decades.
Can banks and fintechs help?
Pre-COVID (2016)
Median net worth of white families was $171,000
vs $17,150 for Black families
and $20,765 for Latinx families
Net worth, via housing wealth, retirement accounts, and cash savings provide a critical buffer against loss of income, especially in the US, which has a much weaker social safety net than other advanced economics.
The current economic pain is not shared equally:
White workers are more likely to be able to work remotely. With reduced spending and a booming stock market, many are actually doing BETTER than they were before COVID.
Latinx and Black households are more likely to face unemployment, with 86% and 66% reporting difficulty affording medical care and keeping up with debt payments, respectively.
While these serious societal problems are best addressed through public policy, banking and fintech have a role to play by:
Innovating to develop responsible products tailored to users' needs.
Developing business models where business and user incentives are aligned.
Promoting financial health and wealth building instead of encouraging products/behavior that maximize companies' own revenue.
Help (still!) Wanted
If you’re a marketer, product manager, or data scientist looking for work (full-time, consulting/project-based, or advisory) — let me know. Multiple founders, CEOs, and VCs have asked me for referrals in the past couple weeks.