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.

Covid has created more fintech billionaires

Fintechs have done extremely well out of the Covid crisis. The lockdowns have forced more people to turn to online for financial products, as well as day trading as a way of creating an income at a time when jobs are disappearing.

Afterpay is one example. It is an online service that allows shoppers from the USA, the UK, Canada, Australia and New Zealand to pay for small items, such as clothing in instalments over a six-week period. It’s an online version of the catalogue shopping that was so popular in the 1970s and 80s that allowed mostly women to clothe their families by paying for the items over a period of time. Now it’s in a digital format and not connected solely to a small selection of businesses.

Afterpay is only five years old, but the pandemic has made its founders billionaires, even though at the start of the crisis its shares tanked. Now its shares have increased in value tenfold thanks to a surge in online retail sales. For example, in the second quarter of 2020 it handled transactions worth $3.8 billion, an increase of 127% over the same quarter in 2019.

Who else has benefited? Chime, a digital bank, Robinhood, the stock trading app and Swedish fintech Klarna. And then there are those platforms such as Zoom and Slack which have enjoyed a boom due to the increase in working from home.

Others have not been so fortunate. The Lending Club, which offers personal loans to high-risk customers has laid off 30% of its staff, and On Deck, a lender specialising in small business loans has been sold off in a fire sale.

Victoria Treyger, a general partner who leads fintech investing at Felicis Ventures, commented to Forbes: “Consumer fintech adoption was already strong pre-pandemic, especially among the 20s to early-40s age group,” adding, “The pandemic has become a growth rocket, fuelling the rapid acceleration of adoption across all age groups, including 40- to 60-year-olds.”

Fintech payment providers are amongst those benefiting most thanks to the rise in online spending and home delivery services. Marqueta is one of those. It is a specialised payments processor providing a service to Instacart and others. It is discussing an IPO valued at $8 billion, which is four times its valuation in March 2019.

Credit card spending is down, as large-ticket items such as holidays were effectively cancelled for 2020. Instead, debit card payments are up. This is good for fintechs, as they primarily offer debit cards. For example, Chime, based in San Francisco, used the US government stimulus package to its advantage. In advance of he $1,200 government-stimulus checks started hitting Americans’ accounts, it loaned customers that money to the tune of $1.5 billion. Its CEO said, “Following the stimulus advance, we had the largest day for new enrolments in the history of the company.” It also has a new valuation of $14.5 billion, and “venture capitalists are valuing the company at 24 times its revenue.”

While this year has proved to be a great one for fintechs and other online platforms, there is one thing to consider: will consumers keep up the habit their online shopping habits in 2021, because a lot is riding on that for the fortunate fintechs.

The digital banking surge predates the pandemic

It may be supposed by some that the global pandemic was the kick-starter of the rise in the number of digital bank accounts. However, that isn’t quite true as Ron Shevlin usefully points out in Forbes. 

In 2019, half of all community banks and credit unions opened less than 5% of their new checking account applications in digital channels. But then these banks only account for 15% of the total current account applications last year.

More significantly, it is what the Americans call ‘megabanks’ (Bank of America, JPMorgan Chase, and Wells Fargo) alongside the digital banks that “accounted for roughly 55% of all checking account applications in 2019, 63% in Q1 2020, and 69% in Q2 2020.”

However, one thing is clear; digital account openings are overtaking in-branch applications. For example, “Nearly two-thirds (64%) of the checking account applications taken during the height of the Coronavirus crisis in Q2 2020 for what consumers considered their primary account were submitted either online or on a mobile device,” Cornerstone Advisors report. That’s a 59% increase over the same period in 2019.

The turning point came earlier though; in the second half of 2019 to be precise. This is the moment when digital applications for primary accounts exceeded branch applications.

It would also appear from Cornerstone’s research that the 35% of Americans with more than one current/checking account, are more likely to turn to digital solutions when applying for a second or third account. Shevlin writes, “In Q2 2020, roughly three-quarters of the applications consumers submitted for their secondary checking was done through digital channels, up from 65% in the first quarter of the year.”

And there is more good news for digital platforms: “a larger percentage of consumers who opened an account in the past three years rated their experience on the mobile channel as “excellent” compared with those who used online or in-branch services.

Banks have for some time clung to the idea that consumers want the ‘human touch’, but Cornerstone’s research indicates that while this is somewhat true, “The rest of the experience isn’t as good as it is in a digital channel.” Furthermore, consumer ratings of the in-branch experience haven’t increased in recent years, and in some cases have fallen.

The megabanks have captured much of the millennial market, largely due to a better digital and mobile experience. This leaves the smaller banks at a disadvantage, although there are opportunities for them to become second account providers. They just need to provide a digital account opening process.

PayPal targets fintech

PayPal is getting into point-of-sale financing. This is a tool that allows you to pay for an item in instalments rather than putting it on your credit card. It has been growing in popularity, and the pandemic has driven its use to rise even more steeply.

Two companies, namely Afterpay (Australia) and Affirm (USA) have been thriving in this sector. For example, Afterpay, whose entire business is staked on the scheme, has sailed from a market valuation of $1 billion in 2018 to $18 billion today, and Affirm is planning an IPO that could fetch $10 billion.

Now PayPal is squeezing itself into the space with its new ‘Pay in 4’ product. This will allow you to pay for any items that cost between $30 and $600 in four instalments over six weeks.

It promises to be slightly less expensive to use than the other two companies mentioned. It won’t charge interest to the consumer or an additional fee to the retailer, but if you’re late on a payment, you’ll pay a fee of up to $10. 

It’s OK for PayPal to do this, because it already has a highly profitable payments network it can leverage. As Jeff Kauflin says, “Eighty percent of the top 100 retailers in the U.S. let customers pay with PayPal, and nearly 70% of U.S. online buyers have PayPal accounts.” Not to mention the fact that as Covid-19 made online purchases skyrocket, it saw record revenues of $5.3 billion and profits of $1.5 billion. Its stock has rocketed in value, adding $95 billion of market value over the past six months, and Lisa Ellis, an analyst at MoffettNathanson, told Kauflin, “PayPal can grow 18-19% before it gets out of bed in the morning.” 

Why move into point of sale financing?

Data from both Afterpay and PayPal shows that consumers spend more money—sometimes 20% more—when they’re offered point of sale financing options. Therefore, when PayPal launches Pay in 4 this autumn it can expect to see transactions rise. It earns 2.9% on each transaction, so its fee revenues will receive a boost as well.

Kauflin makes a good observation: “With Pay in 4, PayPal’s renewed push into lending is an indication the company is getting more aggressive in a volatile economy where many consumers have fared better than expected so far.” Furthermore, PayPal will house these new loans on its own balance sheet. As its senior vice president Doug Bland says, “We’re incredibly comfortable in managing the credit risk of this.” That is indubitably true.