A Storm on the Horizon for Banks

During all the junk, we have watched about Matt Lauer, John Conyers, Al Franken, and others, a warning has come from Wall Street.  Ironically, this warning is coming from a man about to depart as the head of one of America’s largest companies.  But he is leaving on his own will, with no scandals in tow. 

Ken Chenault took the helm of American Express in 2001.  He is the third black CEO of a Fortune 500 company.  He navigated the company through the market crash in 2008.  As he is leaving, he is issuing a warning for his industry at his last investor conference. 

This all started a decade ago when some of the largest banks decided to cash out of their ownership of Visa, Inc. and Mastercard, Inc. through initial public offerings.  Before the sale, banks controlled the piping system of payments across the country. 

 But now with those entities outside the banking industry, they will have a hard time fending off new entrants that offer consumers innovative ways to move and spend their money.  This will blend finance with commerce. 

Chenault said that breaking off the card networks “was one of the biggest strategic blunders of the last 20 years.  They didn’t understand what they were giving up, and they lost sight of where the puck was going.  Along with yielding pricing poser to the network, the banks also limited their access to data and merchant relationships at a critical time.”

Take China, where payments are rapidly shifting from cash to apps and mobile devices, vaulting over the traditional banking industry.  Jack Ma’s Alipay and Tencent Holdings Ltd.’s WeChat Pay now handle 90 percent of these transactions, creating a vast system of e-commerce and finance.  Whoever controls the point of payments, commerce, and other services is at a “major advantage,” according to Chenault. 

A decade ago, lenders like JP Morgan Chase, Citigroup, Bank of America, Wells Fargo, and HSBC Holdings broke off their jointly owned credit card networks.  Mastercard had an IPO in 2006 and Visa in 2008.  Both stocks have soared since their introduction into the market. 

“They gave it up on the cheap, and now the roles are totally reversed,” Chenault stated that it is one of the most amazing business stories of the past 20 years.  “An industry literally transferred wealth over to two associations.  They were nonprofits.  That’s unbelievable.” 

Chenault thinks China’s payment model is coming to the U.S.  When it does banks may be the ones holding the bag to traditional non-bank companies who will take market share from the finance industry.  It creates a different model to be concerned about.  No longer is the small community institution focused on what bank or credit union will pop up down the street from them.  Now they will be concerned if Amazon becomes the financial house of choice for their customers.

The payment transfer industry will become even more important over time as there is a move to eliminate cash from our society.  If all transactions can be handled with an app or software, the place banks once held in society may not be there.  We need to realize these trends and prepare to meet them head on if we are to thrive in the future.