Who Needs A Bank?

Yesterday, Roger Ehrenberg of IA Ventures sent out some thought provoking tweets. Here’s one.

Yesterday, JP Morgan ($JPM) reported earnings slipping by 7%. Additionally, there was a NY Times article where Jaimie Dimon said, “Banks are under assault”. They are.

Banks are under assault from the federal government in the form of Dodd-Frank and other regulatory regimes.  Dodd-Frank killed community banking.  At the same time, banks are under assault from innovation.  Companies like Lending Club ($LC) are unbundling banking.

Roger publicly wondered what other functions in a bank are there that can be unbundled by innovation?  The days of the one stop shop that Sandy Weil envisioned when he built Citigroup ($C) are gone.

One thing is certain to me.  Dodd-Frank and other regulations increase costs on banking.  Only big banks can afford to assume those costs, and the regulations cause even more consolidation.  There has been momentum in consolidation since the early 1990’s.  Here is a Ycharts link to who is left globally.

Who needs the services of a massive bank?  Governments, and multinational corporations.  Other than that, banking can certainly be unbundled and taken care of by startups.

In his book, The Capital Markets Revolution published in 1999, Patrick Young talked about how investment banking came about.  He said in an online world, peer to peer can totally replace a lot of the functions of investment banks.  Back in the days before investment banks, investment banking was done privately around kitchen or bar room tables.

Already today we are seeing it.  Companies like Estimize do a far better job of crowd sourcing earnings estimates than the gurus in the investment banks.  Riskalyze does a far better job of ascertaining portfolio risk and matching it to customer needs than the big banks.  TradingView and Stocktwits  are places where you can find actionable material, better than the research departments of the big banks.

Bitcoin becomes a big bank killer.  The entire blockchain, the easy low/no fee transfer of money goes at the heart of where big banks not only earn gigantic fees, but also make a lot of money on proprietary trade desks handing order flow and trading against it for profit.

There is a giant hole in the market today.  If you wanted to start a specialized lifestyle business that has decent margins, a physical therapy facility for example. What bank is going to loan you the money?

The SBA loans cannot fill the gap, nor do we want them to fill the gap.  As Roger pointed out in his tweetstorm, government usually misprices risk and it’s better to price risk as far away from the government as possible.

Anecdotally, I was on a panel at a Chicago Urban League event.  The room was filled with potential small businessmen trying to get lifestyle businesses started.  They had no access to capital.  How do you revitalize a city without capital flowing down to the small businesspeople that can fill the cracks and holes?  They can’t turn to community banks, because they are dead.  Don’t blame the big banks-this is not their market.  Blame the government for passing Dodd-Frank.

A government with an agenda can use it’s power to try and wreak havoc on things it doesn’t agree with.  At gun shows, it’s hard to get a payment processor.  Obama and his administration abhor guns.

We are on the cusp of remaking our entire financial system.  Startups can fill in the gaps.  It will just take time.  The executives at JP Morgan and other big banks have a right to show concern.  I, along with Roger, wonder what services a bank provides that are essential and I can’t live without.  I don’t see any that I can’t get somewhere else.