The Future Of Everything In Banking Is Digital

The future is really coming into sight.

Capital One Chief Executive Richard Fairbank told analysts on a call in April:

"The future of everything in banking is digital."

Readers of my posts know that this is a narrative that I have supported for a very long time.

It was even a part of my story when I was running banks in the 1980s.

The reason?

Money is just information. Money is just ones and zeros.

And, information grows and spreads.

This is history.

And, more and more people are coming to realize it.

The latest data to support this conclusion?

Gina Heeb writes in The Wall Street Journal that:

"Online banks have managed to pull off what has become a tall order in 2023: They brought in more deposits than they lost."

This news, I believe, is a tremendous advancement in the spread of digital banking.

As we review the data, two major points seem to stand out.

First, bank customers are relying more and more on "tech" for routine transactions. This movement has speeded up since the Covid-19 pandemic.

And, about 6,100 branches were closed by banks in the 2019 and 2022 period.

This is the largest number of branch closings in a three-year period in history.

Second, some of the greatest losers in this movement into the "digital world" appear to be among the regional banks.

Of course, we know of the bank failures earlier this year were from this sector of the banking industry, but many of the banks that the regulatory community is keeping their eyes on these days are also from this segment.

These banks seem to be caught in the middle between the largest banks and the smallest banks.

The episode with Silicon Valley Bank is perhaps the clearest picture of what is going on in this part of the world.

And, just one side note here. Silicon Valley Bank was caught in a "bank run" that was associated with how easy and how fast it now is for some depositors to move money electronically.

As Ms. Heeb writes:

"tech also turbocharged the deposit runs at Silicon Valley Bank, Signature Bank, and First Republic, as online banking made it relatively easy for people to yank out their money."

This problem is one that is going to plague the banking industry more and more in the future.

The problem is, commercial banking practices are not up to the ability to respond to movements of money that occur this quickly. But, this is a growing part of the digital world.

The Biggest Banks

The biggest banks seem to be in the best shape so far.

For one, they are, and have been, the leaders in the movement into the digital world. Depositors can get many of the newest services from them, and they also provide networks that extend far beyond what most of the smaller organizations can do.

Second, depositors appear to feel "more secure" in dealing with the larger banks, and so lots and lots of money over the last few years have flowed from the larger regional banks into the largest banks in the country.

But, the biggest banks are not totally immune to the problem.

In the first quarter of 2023, Goldman Sachs Group achieved quarter-over-quarter growth in its online bank Marcus.

Deposits were down just slightly at Bank of America and Wells Fargo. Ms. Heeb does notice, however, that these banks did pick up deposits from customers that left smaller banks.

But, at the bank that seems to be moving ahead of all the others, JPMorgan Chase & Co., experienced a 2 percent increase. JPMorgan has really started to show how well it is positioned for the "digital" future of banking.

Note further, that JPMorgan opened branches in 25 new states and the District of Columbia, since 2018. But, JPMorgan is very, very disciplined in its branching efforts. At the same time it has opened all of these branches, it has "reduced its overall network size by hundreds of branches since then."

But, the biggest banks with branches cannot, cost-wise, offer as high an interest return as some organizations with fewer branches or as some financial institutions that are not banks.

According to Ms. Heeb:

"Online-focused banks can often offer higher rates, as they don't have to pay for the real estate, employees, or equipment required to run a traditional network of branches."

The driving force is that depositors seem to be much more sensitive to interest rate differentials. Depositors have more information. Depositors can move faster, and depositors don't have anything that specifically ties them to any one particular financial institution.

As Roger Hochschild, CEO of Discover Financial, stated in the article:

"I think a lot of traditional banks have to adjust their models because people are focused on getting a good return for their money."

People with more information and more capability of moving money are not just going to sit still. We are in a new era.

The Future

The data reported in this post, I believe, are giving us a good view of the future.

The big, technologically advanced banks or financial institutions are going to dominate the industry.

Regulators are going to have to revise regulations so as to protect the industry from all these advancements that are waiting to be unveiled.

And, depositors are going to have to become more technologically informed and more informationally engaged.

There will be fewer banks, there will be more non-bank financial institutions, and there will be advanced networks to tie all these functions together.

And, there will be a lot fewer banks in the world than now exist. To me, this consolidation is not going to stop until we move to a financial world that is fully connected and fully regulated.