Andrew Sheng

Opinion | Do banks stand a chance against tech giants?

Technology companies are steadily moving into territory once dominated by banks, and they won’t stop at payments and lending platforms

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People look at their mobile phones to check the mobile financial app Toss as they gather at Seoul Museum of Art in Seoul on April 13, 2023. Online financial service providers such as Toss have made significant inroads into payments, lending and other areas once dominated by banks. Photo: Reuters

Andrew Sheng

Published: 8:30pm, 25 Oct 2024Updated: 11:35am, 27 Oct 2024

How are banks responding to an era of massive tech disruption and the prospects of lower interest rate margins as global interest rates fall?

The banking industry used to be a highly profitable business because interest rate margins – the difference between the lending rate and deposit costs – were high. In the 1960s, when bankers were considered trusted custodians of other people’s money, the “3-6-3” dictum referred to bankers offering depositors 3 per cent on their accounts, lending that money out at 6 per cent and heading to the golf course at 3 o’clock.

The average net interest margin of banks got squeezed when the US Federal Reserve and European Central Bank started cutting interest rates after the 2008 financial crisis. The stock market valuation of the banking industry took a beating with prospects of a slower economy, threats of more non-performing loans and heavy overhead costs.

When fintech platforms arrived at the turn of the century, banks and financial regulators downplayed the threat of technology to the role of banks. Fintech firms began to take the payments business from banks, then started to eat the banks’ lending lunch. Tech platforms can deliver financial services with less overhead and provide more reach to online customers at faster speed.

According to McKinsey, cumulative market capitalisation of the 200 largest banks at the end of 2019 had a price-to-book valuation of between 0.8 to 1.2. Meanwhile, the seven largest Big Tech companies had price-to-book valuations above 5, with both groups valued at roughly US$6 trillion in market cap.

Today, the bank with the largest market cap is JPMorgan, ranked 14th in the world at around US$630 billion. Of the top eight companies – valued at more than US$1 trillion each – seven are tech companies. The other is Saudi oil giant Aramco. The largest Chinese bank ICBC has a price-to-earnings ratio of 4.5 compared with 12.5 for JPMorgan, while Alphabet and Nvidia have ratios of 23.6 and 65.8, respectively.