What is The Travillian Group’s Tech-Forward Bank Index? We have compiled a list of banks that we deem to be “tech-forward” and at the forefront of the convergence of traditional banking and fintech. The business models and strategic priorities of these companies are differentiated from their traditional bank peers, and each is a pioneer and leader in their respective area of expertise. Each company has benefitted from “first-mover advantage” in their early embrace of technological change, and results to-date have evidenced strategic ingenuity, financial outperformance in certain key metrics, and, for many, top quartile profitability and a premium stock valuation.
Moreover, with trading patterns increasingly correlated in banks widely considered to be “tech-forward”, we think it makes sense to track and monitor these companies as a select group. As strategic priorities, financial metrics, share performance, and stock valuations potentially diverge further from traditional bank peers in the coming years, we would also expect these companies to increasingly brand themselves more as tech-forward providers of financial services. Again, this is all the more reason to track progress of this group as a select subset of the bank sector.
We will debut the list of companies over the next few weeks, profile its constituents over time, and continue to augment the list as new candidates are considered for inclusion.
The convergence of banking and technology is undeniable and is likely to accelerate further in the coming years. There are those that believe strongly that the interplay between traditional banking and financial technology is destined to be less of a convergence than it is a complete obliteration of the former over time. The perception of the “dinosaur-like” business model of traditional banking lends favor to the continued rise of financial technology, with its emphasis on service quality, convenience, efficiency, and its embrace by younger generations. Proponents of this line of thinking were no doubt heartened by commentary from Jamie Dimon, CEO of JPMorgan Chase, who opined on his company’s fourth quarter 2020 earnings conference call that banks should be “scared shitless” of their fintech rivals. Another perspective we read recently from a well-regarded industry voice suggested that within 5 years, virtually all major brands in the United States will have some sort of banking presence.
But at this point, it’s probably fair to say no one really knows with any degree of certainty how it’s all likely to shake out. On one hand, fintech’s encroachment on the traditional bank sector will undoubtedly continue, with the experience during the pandemic likely to serve as an accelerant to the pace of change. That said, we firmly believe that the inherent value of the regulated banking system has been overly discounted in this equation. If this is true, it will likely result in more of a middle ground convergence between traditional banking and fintech, whereby the “best of breed” from both categories are likely to emerge as the long-term winners. If middle ground convergence is the ultimate result, then in our view it makes sense to closely monitor the banks that seem to be at the very forefront of change.
How do banks qualify for the list? In attempting to simply explain his definition of pornography, the Supreme Court jurist Potter Stewart famously concluded that “you know it when you see it”. In our view, market observers have similarly struggled to define fintech and to subsequently track and measure success as it relates to tech-forward banks. As an example, perusing our list of tech-forward banks, one will notice companies that are pioneers in the concept and implementation of “banking as a service (BaaS)”, with notable success in establishing fintech partnerships and driving fee-based income; others have been innovators in the payments space, which has translated to impressive low cost deposit growth, margin expansion, and impressive fee income diversification; still others have thrived due to their advanced utilization of data analytics and digital strategies; some are noteworthy as tech incubators and/or for their successful track record of direct investments in fintech companies.
The bottom line is that there simply is no quantitatively-based “common denominator” that can be used to standardize and measure success for tech-forward banks. So unfortunately, for those, like us, that prefer simple analytically-driven conclusions, we’re left with the admittedly squishy definition of “you know it when you see it”. Of course, the ultimate arbiter of success is the extent to which these companies can drive superior profitability metrics and risk-adjusted returns to shareholders, and some are clearly doing so already. But again, given that this evolution and eventual convergence is still at a relatively early stage, it seems premature to base admittance to this select group and track subsequent progress solely on the basis of company-wide profitability, share price performance, and valuation. While this will undoubtedly be a component of our overall evaluation, readers can be assured that the analyst in us will remain on the lookout for ways to standardize and measure progress as the situation evolves!
Stay tuned…Travillian’s Tech-Forward Bank Index will be published soon!
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