Why Bank Stocks Tanked in 2020

If there were ever an indication that the digital age is taking over in finance, it is the state of bank stocks. This year has been an extraordinary one in many respects, and the effects of the pandemic have thrown the banking sector into a quandary as fintech companies have outperformed the traditional players in he banking sector.

BNN Bloomberg’s senior anchor, Jon Erlichman, came to this conclusion after studying stock performance reports for banks, fintechs and the two largest cryptocurrencies, ETH and BTC.

A graph created by CryptoPotato, shows a YTD gain of 217% for ETH, while Wells Fargo bank shows a -58% loss. This is a massive change over a decade: “The stocks of some of the world’s largest banks were on a roll since the previous financial crisis over a decade ago. Bank of America shares had increased approximately ten-fold since 2009 to their highs in February 2020 of about $35,” writes Jordan Lyanchev. He also notes that in the same period, “Citigroup stocks went from $15 to $80, JP Morgan Chase & Co (JPM) from $20 to $140, and Wells Fargo (WFC) surged from $11 to above $50.”

What changed for banks in 2020?

The simplest answer is the Covid-19 pandemic. Even in March banks were seeing a significant slump with some losing 50% of their valuation in a matter of days. Some have regained a little of their former value, but they will still end this year in the red. And it is not just banks; Western Union and American Express have also suffered. Lyanchev notes that Warren Buffett, a major investor, sold all his bank stocks this year.

Visa and Mastercard both took a bit of a hit, but have managed to pull back into the green by small percentages. However, they must be looking at companies like PayPal and Square with a feeling of envy.

PayPal’s stocks (PYPL) started 2020 at $110 and have increased by 94% since then. It did see a collapse to $85 in March, but as we can see, it has completely turned that around. Square’s yearly gains have even seen triple-digit percentages, and it has seen a 178% growth since January 2020. Both of them are now connected with cryptocurrency: Square bought Bitcoin valued at $50 million this year, and PayPal is allowing its US-based customers to buy, sell, and store several digital assets.

The crypto markets

It is undeniable that the cryptocurrency markets also took a hit around March. Today BTC is at $13,000, but it dipped to $3,700 back then. Ethereum, now at $400 dropped to $100. Both have overcome the slump, with Bitcoin in particular being increasingly seen as a safe haven asset in the same way as gold.

Analysts are unsure exactly why Bitcoin has seen a YTD surge of 80%, and whether it can be attributed to more interest from institutional investors, the May halving or large companies investing in it. Ethereum has been riding the wave of the growing trend supporting decentralised finance, as its blockchain operates as the underlying technology behind most DeFi projects. Even though this utility has highlighted some of Etherieum’s weak points, such as high transaction fees and slow transaction rates, “none of that matters as ETH has been on a roll during most of the year, especially since the summer.” Now the second-largest cryptocurrency has become the best-performing asset, with an increase of over 200%.

What we can take away from this is that Covid-19 has driven dramatic changes that have made people become more focused on the digital world. They are looking more to online ventures and digitally transferred funds. What we may be witnessing now is the real beginning of a mass movement to an online world that will leave traditional banking behind.

Are banking APIs the real revolution?

Application programming interfaces (APIs) have been around for 20 years, but, as Ron Shevlin points out, just one in five community banks in the USA had deployed APIs before 2020, and they aren’t even on the radar of at least 20% of the banks.

Contrast this with Europe, where 97% of UK banks are already using them, and even the lowest uptake country, the Netherlands, has 83% of its banks deploying APIs. The reason for this huge gap between the USA and Europe is the latter’s Open Banking initiative, however Shevlin says that American banks cannot simply use this as an excuse for their low adoption of the technology.

As a result of the lack of API deployment, US banks are missing out on a number of opportunities, including the reduction of time and costs in several business processes, particularly product application-related processes.

The best known API providers include Stripe, Plaid and Yodlee. These three have furthered the connections between financial institutions and fintech companies. However, Shevlin says there are three fintech startups that are “poised to have a significant impact on the banking industry: Pinwheel, Sila, and Codat.”

Pinwheel

Pinwheel, which has just announced a $7 million funding raise, offers an API for payroll data, “that handles everything from income and employee verification to easily switching and managing direct deposit.”

How would this revolutionise banking? According to a Techcrunch article, “For consumers, the main draw is automated direct deposit control, which will allow consumers to control where their paychecks go. For instance, if they want to split a direct deposit into multiple accounts, or regularly move part of their paycheck into a savings app like Digit or Acorns, Pinwheel can help them do that easily.”

Sila

According to Coindesk, Sila, “is an API platform that issues an ERC-20 stablecoin called SilaToken (SILA). Every transaction on the platform is done using the token, which is pegged 100:1 to the U.S. dollar. Sila plans to install card payments, international payments, business ID verification and begin issuing tokens within one business day. Its partner bank, Evolve Bank & Trust, plans to connect to the Clearing House system, a network started by big banks that provides access to instant payments.”

Techcrunch comments that Sila’s API would: “Supplant ACH as the payments choice for companies who need to move money. Sila’s API for identity verification, which empowers developers to identify users and use that info in the company’s banking API, allows users to debit their accounts and move funds from one account to another. On top of that infrastructure, Sila allows for the creation of smart contracts, which should allow for more rapid deployment of financial apps.”

Codat

Codat, which is based in London, has an API focused on small businesses, and is signing up 10,000 new customers per month. According to TechCrunch:

“Codat is building an API that connects with all the systems that hold all the relevant financial data. That type of information is usually spread across multiple systems, and small businesses often use different systems. On the other side, banks, insurance companies and more can speed up their internal processes and give you an educated answer for your next loan or insurance product.”

Codat is especially on point right now as small businesses are struggling and need funds. However, the current lending processes are time-consuming and confusing. Its API simplifies and streamlines the flow of data between small businesses and financial institutions, and could potentially disrupt the way SME loans are handled today.

Blockchain

On the other hand, perhaps APIs aren’t the ultimate answer for a banking revolution. Brian Platz, co-CEO of Fluree, says, “The answer isn’t to build a better API; rather, it is to turn the database inside out and let data escape from the walls that confine it. Blockchain is how data frees itself. It’s time to end the era of data APIs and begin to look into the blockchain.”

Blockchain solutions to surge by 2023

According to a new study by CB Insights blockchain tech has gone far beyond its beginnings in banking and cryptocurrency, with annual global spending on blockchain applications having almost tripled since 2017. Furthermore, CB Insights’ Market Sizing Tool predicts this annual spend could shoot up to $16 billion by 2023.

As the report says, everything from insurance and gaming to cannabis and industries are seeing the potential power of blockchain. The big companies, such as Facebook, Amazon, Samsung and LG have already dipped their toes in the water, and LG has introduced it using a “Facial recognition service that combines AI and blockchain to make payments in digital currencies,” according to Luke Fitzpatrick in Forbes.

What does blockhain give to industries? According to Ilker Koksal it provides:

Greater transparency

Increased efficiency

Better security

Improved traceability

And which industries will benefit the most and see the biggest changes by using blockchain applications? Here are the four most likely to make the most of blockchain.

Digital banking

Digital banking has made great progress over the last decade and decentralized finance (DeFi) could be a catalyst for taking banking fully digital. Atul Khekade, cofounder of XinFin said, “The FinTech industry is growing at the rate of 23% year-on-year and blockchain is about to make finance more efficient.” He expects to see traditional finance firms and governments understanding the advantages in the near future, and it is almost certainly the case that countries with large numbers of unbanked people will take advantage of blockchain solutions. If they aren’t already, they should be.

Supply chains and logistics

While banking has been the most prominent user of blockchain, industries that rely on the supply chain sector are also embracing blockchain with good reason. As Fitzpatrick says, “The technology by its very design offers an unprecedented level of efficiency in the recording and tracking of goods,” and this didn’t go unnoticed by IBM for tracking goods. Carrefour, a French supermarket, has also used the technology for the tracking of food products from farms to stores.

Fitness and wearables

Wearable technology had already made big consumer inroads, and the Covid-19 pandemic has increased interest in wearables that monitor steps, heartbeat and calories consumed amongst other things. Herbert Sim, an advisor to BeFaster said, “The fitness is gaining momentum over the past 10 years. According to forecasts, in the US alone, the income of the fitness industry by 2023 will exceed 20 million.” The need for social distancing has also led to new app creations for tracking. Allan Zhang, the founder of DxChain said, “Post-lockdown, the technology could be fully embedded into the wearables industry and this will provide immense value to customers in the long run.”

Asset management

Fitzpatrick says, “According to a recent study, artificial intelligence, distributed ledger technology (DLT) and the blockchain technology will have the biggest impact on asset investments in the upcoming years.” The industry is already valued at $74 trillion. Ernst and Young (EY) said, “Asset managers need to proactively consider valuation challenges arising from the COVID-19 pandemic’s effect on financial markets.” Yubo Ruan, a 23-year-old venture capitalist, said, “Pragmatically, this means financial products like ETFs and mortgage-backed securities can be synthesized on blockchain platforms at significantly lower costs,” adding, “ blockchain-based asset management platforms tend to require lower minimum balances to invest, which is a major positive for adoption.”

AI and the Disruption of Big Pharma

Right now there is a lot of focus on Big Pharma for obvious reasons, so it was with interest that I read an article in Forbes by Alex Zhavoronkov about the pharmaceutical industry’s rather slow approach to using artificial intelligence (AI) when it is already very much a facet of less life-and-death services, such as Netflix movie suggestions.

Significantly, Zhavoronkov says, “Experts suggest that the pharmaceutical industry remains one of the most inefficient industries, a last holdout against technological disruption.” It’s curious is it not, that a sector that is all about scientific advancement should be so behind the times?

According to the article, “the efficiency of the industry has been on the decline since the 1950s. Just as an example, it now costs over $2.6 Billion to bring a drug — or a New Molecular Entity (NME) — to the market.” It’s a high cost, and then there are the costs related to the failed drug trials to factor in as well. Eventually, you and I pay for it all.

But AI has potential to perform a role in small molecule drug discovery, and we need to understand its potential and its limitations, especially in relation to the way that the pharma giants have traditionally gone about finding new drugs.

Zhavoronkov comments: “The process of small molecule drug discovery includes several steps: the scientists form a disease hypothesis, identify a target, design a molecule and then conduct pre-clinical studies takes on average five years and may cost hundreds of millions of dollars.” Then it takes another five years of clinical development and testing phases, which mean more expenditure.

AI might look like the perfect solution to reduce costs, and with all the Big Data available, surely it can help pinpoint marketable drugs. But, Zhavoronkov says:“Despite the many advances in technology that have led to major disruptions including mobile and personal computing, the Internet, and genome sequencing, the cost to develop a drug is steadily increasing.”

The pharma sector apparently remains sceptical about its uses: “they prefer to incrementally develop internal capabilities across the entire spectrum of the drug discovery process instead of making big bets on specific enabling technologies.”

Zhavoronkov remains optimistic about the future of AI in pharmaceuticals, and identifies the key to its success as “a massive integration of the systems used to identify biological targets, systems that help design novel molecules, and systems that personalize the treatments, and predict the clinical trials outcomes.” As he concluded that “The recent COVID-19 pandemic demonstrated the impotence of today’s traditional and AI-powered approaches, as seen when attempts to repurpose other drugs to treat Covid-19 did not really produce any promising candidates, and a “lot more work needs to be done in AI and laboratory automation to significantly accelerate drug discovery.”