The Jig Is Up

The biggest story for the year on the Aussie stock market has to be the fall of the big banks.

From gouging customers, to flouting regulations, the Royal Commission into banking exposed the seedy underbelly of Australia’s finance industry.

But that was just the start of it…

More scandals came to light with each passing week, until finally investors said they’d had enough.

The share prices of the major banks — which had been holding up OK in the turmoil — finally fell sharply in September, and are now roughly where they started the year off at.

Westpac — the worst of the bunch — is close to six-year lows!

Who could have predicted that…?

Well, anyone, if they’d cared to look.

I’ve been banging on about how the banks are going through a mass extinction event since the start of 2019.

It’s become blatantly clear these banking dinosaurs can’t compete in the new world of fintech.

And that’s where the other side of this story plays out…

The new world of fintech

Fintech has come into its own this year.

Now fintech isn’t a new idea, it’s been around for a while.

But I think we can safely say 2019 was the year we finally started to see it emerge from the shadows as a powerful new force in banking.

In direct contrast to the banks’ share price, a bunch of fintech disruptors made huge gains this year.

Poster boy Afterpay Ltd [ASX:APT] started the year at $12.40, and is at $28.90 as I type. Sure, it had its ups and down, but the big picture was very much up.

And it was far from alone.

In my small-cap investing service, Exponential Stock Investor, I tipped a small personal loans fintech stock back in March.

It’s up 153% as I type…

It was one part of a portfolio of stocks in the ‘The Great Bank Unbundling’ theme, as I call it.

This is the idea that the one-stop shop model of banking is dead.


Source: TechCrunch

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Kodak had a virtual monopoly in cameras and the film industry.

Then digital cameras came along…

That rise (red bar) in digital camera sales in 2001 was the start of it. But it took until 2005 for the impact on Kodak sales to really hit.

The important point to note though, is that the early warning came years before the fall in sales.

And then just when Kodak tried to adapt and started selling digital cameras, US camera phones in use started to grow.

That killed the digital camera growth story eventually too.

Talk about a double whammy!

Within a few years Kodak was dead in the water and investors lost a packet.

That is how tech disruption works.

It’s relentless.

Check out the evolution of the music business as another example:


Source: Bain and Company

[Click to open in a new window]

The process of creative destruction is at the heart of what makes our system work.

Like a Mafia racket, the big banks have hidden from this process of competition for decades using regulations and political influence to protect their monopoly position.

But finally, the public are demanding change and the new tech has them cornered. This time, they’ve nowhere to run.

The jig is up.

A recent report showed a 5% drop in bank account openings at big banks from 2018 to 2019. A small drop you might think. Think again.

It’s a huge sign for those that understand what’s really happening.

As big as the small move in digital camera sales was for Kodak.

Even the incumbents know it…

Gregor Dobbie, CEO of Vocalink (a Mastercard company) comments: 

After years of discussion around increasing competition in the banking sector, our latest State of Pay report suggests this is finally coming to fruition. While at present the rise in digital-only banks might be most common in urban areas and among younger generations, we expect to see this trend occurring more widely among other demographics in years to come.

Many are choosing digital-only banks for the improved technology and lack of charges abroad, and it will be interesting to see how the traditional players respond to these new customer expectations.’

What to watch in 2020

2019 wasn’t the end of fintech’s rise.

It was the start.

We hit a tipping point which I fully expect to roll through the entire 2020s.

Takeovers…

I expect to see big banks start to panic. They’ll try to buy their way out of trouble. A few well-placed disruptors might become very valuable takeover targets next year.

Bank closures…

As profits start to get hit and dividends start to fall, the pressure will be on executives to cut costs. Which will mean staff losses and branch closures at big banks.

Big tech…

Every big tech company from Apple, to Facebook, to WeChat and Alibaba is becoming a financial services company in some way.

These are true tech leaders and they have young and loyal customer bases. An existential threat to big banks everywhere.

Cryptocurrencies…

At the highest level, fiat money is fast becoming worthless as it gets printed out willy-nilly.

The world will turn to independent money. Hard-coded money is the natural place for a tech-led world.

Are you prepared for all this?

You should be…

Good investing,

Ryan Dinse,
Editor, Money Morning

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