4 Predictions for the Future of Banking

Will banking branches still be needed in 25 years? Will robo-advisors take over the investing world? While nobody has a crystal ball, here’s what Industry Focus: Financials host Michael Douglass and Fool.com contributor Matt Frankel see for the future of online banking, fees, robo-advising, and lending.

A full transcript follows the video.

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This video was recorded on June 25, 2018.

Michael Douglass: Now, here’s one, actually, that we might disagree on a little bit. I believe that 99% of U.S. bank business will be online in 25 years. To give you some context here, according to a Bank of America study, in 2016, 62% of Americans reported that they primarily banked online. I believe that banks, in the quest to better compete with their low-cost, online-only competitors — like your BofIs — will essentially force everyone to go fully digital or pay ruinous fees on things like checking accounts; and that people, price-sensitive as they are, will increasingly head in that direction.

Now, I do think there will still be some bank branches, not a ton. I think they’ll be designed, basically, to facilitate the high-touch stuff — meetings between a bank-employed wealth advisor and high net-worth clients, that sort of thing. Think of it like the Capital One Café model, except taken to an extreme. If you Google Capital One Café, you’ll get an idea of what they’re starting to do. It’s really cool, really interesting. I think that’s where banks will ultimately go. I do not think that a lot of the daily, teller-based stuff that a lot of people are still using banks for today will be at all in widespread use in 25 years. And Matt, our difference is really one of scale, not necessarily of direction.

Matt Frankel: I definitely agree with the trend, I just think it’s going to happen a little slower than you do. I believe that, as long as the Baby Boomer generation is alive at all, first of all, branch banking won’t go away. This is the same reason that personal check-writing at the grocery store hasn’t gone away. There are some people who just really don’t want to switch to a new technology.

And there are a lot of, as you said, high-touch things that are not just the older Americans. For example, I have a safe deposit box at a bank, so I have to go to that whenever I need to access the box. I think the number’s going to be closer to, let’s say, 75-80% than 99%.

Douglass: Fair enough. And, hey, this is the fun thing about predicting things 25 years out — who knows?

Let’s also talk about these mass-market things. I think it’s very, very clear that fees for mass-market services, things like checking accounts, savings accounts, money transfers, bank wires, index funds, ETFs, etc., will collectively be very close to zero. This is one of those things where they probably won’t actually be at zero, because there’s still some kind of underlying fee. But I believe that banks will be finding other ways to monetize those clients. You hear about the cross-selling, for example, that a Wells Fargo has historically done — with, as we all know, some externalities, let’s just say. But, you could also see freemium models, things that are ad-supported, things like that. There are a lot of different ways that the internet is solving the fee problem, and I do believe that’s going to ultimately come to banking, as well.

Frankel: Absolutely. I think, within 25 years, every bank — big bank, small bank, whatever — will have a free checking and savings product. It will be an absolute necessity to compete with the online banks, especially, as we both agree, more and more banking will switch to online. You just can’t charge people $12 a month for a checking account when they can log onto their computer and get one that’s free. That’s not a long-term sustainable business model. But, other things, like money transfers — will a wire transfer ever be $0? No. But it’s not going to be $30 forever.

Douglass: [laughs] Right!

Frankel: It might be $1. Maybe something like that is the floor. But it’s never going to get to zero. But, banks will offer the free checking and savings products in order to retain their customers to be able to charge them for things like that.

Index funds, ETFs will all gravitate toward zero. Index funds already are. If they want to compete with places like Schwab and Vanguard, ETFs are going to really have to lower their fees over the long run. Vanguard and Schwab’s fees, I think some of them are down to 0.03% on some of their index funds, which is $3 for every $10,000 you have invested. So, it’s going to gravitate in that direction. It won’t actually get to zero, but pretty close.

Douglass: Very close, yeah. Relatedly, I think that robo advisors will have about 90% worldwide market share in securities markets in 25 years, with self-taught active stock pickers — people like you and me — and the handful of incredibly wealthy people working with hedge fund types making up the balance.

The broader world doesn’t think things are heading there quite that quickly. MyPrivateBanking recently released a report in which they say that they think robo advisors will make up 10% of total market share by 2025. My personal viewpoint is that the initial forays into this have basically been slow because people have had to get used to the idea, and because they don’t offer all the services yet. They’re still building it out.

But my belief is that as the robo advisors improve, and as people get increasingly used to and comfortable with the idea of an algorithm handling different parts of their life, including their finances, I think it’s going to explode. Now, 90% is maybe a little bit aggressive. Maybe it’s more like 80%. But I truly do believe that robo advisors are going to basically wipe up the vast, vast majority of market share in the next 25 years.

Frankel: Definitely. 90% may be aggressive, but it’s definitely closer to 90% than 10%, in my opinion.

Douglass: [laughs] Right!

Frankel: That’s definitely a trend that’s going to take place. There will always be people like me who want to own individual stocks. Michael, I believe you’re one of them, as well.

Douglass: Oh, yes.

Frankel: But that’s not for everybody. You really need the time to research stocks, the knowledge to do it correctly, and the desire to do it, if you’re going to buy individual stocks. I’d say about 90% of the American population doesn’t have those three things. Robo advisors, as long as — as you said — fees keep gravitating toward zero, and these products keep getting more and more advanced, there’s really going to be no reason for the average investor not to use them.

Douglass: Yeah. Relatedly, two points that I’m going to put together into one — I believe that peer-to-peer lending will represent at least 25% of total lending spent in 25 years. Now, I only say 25%. You might be thinking, “He’s been throwing out these huge numbers! Why only 25%?” For me, it’s very clear that peer-to-peer lending has become a lot more widespread and a lot more feasible than it was previously. I do expect the peer-to-peer lenders — or a bank, perhaps, who hops in — to help solve for one of the current difficulties, which essentially is poor underwriting by some of the peer-to-peer facilitators right now, meaning that the investors who are putting the money in aren’t making the kind of money that they’d hoped to — I believe those will ultimately be solved. In fact, I could see robo advisors helping you invest in small debt tranches for exposure on the risky side of the yield curve.

But, I only say 25% because banks have legitimately trillions of dollars to lend, and they will absolutely be looking for ways to deploy that capital effectively. So, I would expect that they will be helping facilitate a lot of these peer-to-peer loans. I believe they will be, in some cases, investing alongside. I think they will often invest in alone, and perhaps then sell it to peer-to-peer lenders for an arbitrage so that they can do it all again, sort of like you see with agency-backed mortgages.

In fact, let me double underline that last point. Banks will probably retain a technological advantage over normal folks. They just have a lot more money to throw at problems, and they will keep gobbling up fintech companies. In the short-term, on a lot of things, they will make more money than normal folks, because they will be able to run the trade and then arbitrage it to someone else. But over the long-term, I think they’ll continue to fall prey to the same failings, which usually come down to greed, or what Greenspan would call irrational exuberance, and, basically, human judgment errors. I think they’re going to continue to fall to those, as they have since time immemorial.

Frankel: I think 25% is definitely a good figure there. I think within 25 years, every bank — whether it’s big, small, online, brick-and-mortar, whatever — will have some sort of lending platform that, on its surface, at least, feels like Lending Club to the consumer, or feels like Marcus by Goldman Sachs, or one of those platforms. 25% to just peer-to-peer lenders, because it is an interesting investment product, it’s a way to diversify your holdings, earn better returns than most bonds will pay. It’s definitely appealing to the investor. But as you said, the banking system has trillions and trillions of dollars to lend. Over time, they’re only going to get more and more efficient about how they use it. They’ll acquire fintech companies, as you mentioned.

So, 25% is definitely a good number. I could see banks actually getting much, much more competitive with peer-to-peer lenders and even maybe taking a little market share back from them. But, the disruption has been made. Peer-to-peer lending is — at least from a customer’s point of view, how it simplifies the process — here to stay.

Matthew Frankel owns shares of BAC. Michael Douglass owns shares of BOFI. The Motley Fool owns shares of and recommends BOFI. The Motley Fool has a disclosure policy.

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