The pace of change is accelerating in the financial services industry
Big gets even bigger
By Jeff Liguori
Financial advice generally addresses the question “where should I put my money?” It’s a simple way of asking ‘what’s the best investment for my hard-earned dollars?’ Perhaps the most important meaning is more literal: with today’s changing landscape, where do I really put my money?
The financial services industry, which employs approximately 6.5 million people and is responsible for more than $123 trillion in assets in the United States, has evolved rapidly over the past two decades. And the pace of that change is accelerating. As in all industries, change may be the only certainty, but when it directly impacts our wallets, it can create anxiety.
At the end of 2020, there were 4,377 FDIC-insured commercial banks in the United States. This number is down from 6,519 in 2010 and more than 8,000 in 2000. Over the same 20-year period, the dollar volume of loans generated by these banks has increased by 127%, from 1 $.05 trillion to $2.38 trillion. Consumers seem to have fewer choices in terms of traditional banking services.
Despite the number of banks halving since 2000, there are more financial opportunities than ever for depositors, borrowers and investors. Finance has become a complex structure and a confusing web of businesses, ranging from purely digital companies with a limited product offering, like PayPal, to massive financial supermarkets like Bank of America. Incidentally, over the past five years, the total number of active user accounts with PayPal has risen sharply from 165 million to 380 million, up 130%, with total annual transaction volume approaching 1 trillion. dollars.
“Finance has become a complex structure and a confusing network of businesses, from purely digital businesses with a limited product offering, like PayPal, to huge financial supermarkets like Bank of America.”
The adoption of technology in the banking sector is largely a function of age. By the end of 2020, almost 50% of consumers aged 24-39 made payments with digital or mobile wallets. This percentage decreases slightly until age 54. But only one-fifth of consumers aged 55-73 conduct digital transactions, and only one in 12 consumers aged 74 or older are comfortable making digital payments. By focusing on young people, “killer app” technology has become an essential part of the growth of financial services companies. The number of financial technology, or fintech, startups in North America has grown 90% since 2018.
Beyond technology, financial companies continue to expand their product line. For example, the five largest life insurance companies measured by annual premium revenue are Northwestern Mutual, MetLife, New York Life, Prudential, and MassMutual, in that order. These firms also have a significant presence in investment management, through mutual funds or wealth management consulting, or both. The same goes for the biggest commercial banks, investment banks and brokers. Financial solutions are ubiquitous in the industry, regardless of the type of business.
Big gets even bigger. This is an evolution in financial services, and not without precedent. Historically, consumers deposited their wages and took out their mortgage at the local bank. They obtained insurance from a local broker and invested with a local advisor. As these independent businesses were purchased by larger corporations, the relationship with the community slowly eroded. Meanwhile, our bank is connected to our PayPal account, pays our mortgage and car payments directly, and charges our monthly Netflix subscription. The thought of changing banks is enough to cause insomnia, even though our account manager works in a call center in Tulsa.
As with all trends, opportunities present themselves. The combination of a complex financial landscape with rapidly changing technology and greater access to products and solutions than ever before is exciting. The local connection is lost in the consolidation of the banking sector. It used to be that a large institution had better access, but that’s no longer the case.
In It’s a Wonderful Life, George Bailey was the frustrated local banker who single-handedly saved the town from financial ruin. He couldn’t compete with the wealthy industrialist Henry Potter, who owned half of Bedford Falls. But George had one thing that Mr. Potter didn’t, the trust of his neighbors. As financial products and services continue to multiply and digitize at a dizzying rate, it will ultimately be the local banker or trusted advisor who helps confused consumers make the right choices.
Jeff Liguori is the co-founder and chief investment officer of Napatree Capital, an investment boutique with offices in Longmeadow as well as Providence and Westerly, RI; (401) 437-4730.