Banks are between a rock and a hard place. Those that are heavily weighted towards capital markets are flogging a dead horse in terms of generating profits near to pre-crisis levels. Goldman Sachs, for example, just had its worst quarter for four years, with much of its downside coming from its trading and principal risk-taking business. Meanwhile JPMorgan, Morgan Stanley and Citi – all have seen their stock performing well below the S&P500 year-to-date.
What are they to do? Analysts suggest financial firms need to focus more on lending and deposits as the revenue driver of the medium term. That means committing hundreds of millions of dollars of investments into developing payments systems that can rival services from new non-bank entrants. But as the numbers show, translating that investment into revenues is no small feat.
Citi research says investments in financial technology rose from $1.8 billion in 2010 to $19 billion in 2015. Most of that investment has focused on the consumer space around payments – yet only 1% of consumer banking revenues were generated from digital channels last year. Banks cannot seem to make it work.
More worryingly – is it even worth it? Non-banks don’t seem to be able to make it work either. Peer-to-peer lenders are beginning to feel the squeeze. Without the legacy issues to deal with, they more easily have the technology in place, but they are struggling to find investors to match the borrowers. Both Prosper and Avant have scaled back the number of loans they are marketing, according to direct marketing research firm Mintel Comperemedia. LoanDepot says it has slowed the number of loans it is making to consumers. On Deck Capital has reportedly said its revenue growth will be slower this year than analysts expected.
As the US teeters on the edge of another recession, the lending business may not be the safest place to be in any event. Indeed, finance as a whole seems to be a sector better avoided, even with all of the gusto around non-banks and fintech. It’s a long-term cyclical business but unfortunately these days investors have little patience.