Most of us probably never dreamed we would end up being a Goldman Sachs or JP Morgan customer. You needed ten digits on your net worth, and possibly 11, just to get through the door. But now, they are throwing themselves into the mass market. Last week, Morgan Stanley unveiled a $13bn takeover of E-Trade, one of the leading internet-based share-trading platforms. It will now be offering a range of services to small investors.
JP Morgan is planning a British retail bank offering a range of saving and loan products in a digital package. When the bank is launched it will be competing with its long-standing rival Goldman Sachs, which already has its Marcus unit up and running in the UK and elsewhere. At this rate Credit Suisse, Deutsche Bank and Rothschild & Co will be offering mortgages, credit cards and saving accounts by the end of the year.
It is not hard to understand why they are moving into the retail market. Investment banking is in trouble. Across the 12 main investment banks revenues last year fell to their lowest level since the financial crash of 2008, according to figures from the industry monitor Coalition.
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The problem? Equity markets are shrinking, with fewer and fewer companies listing and more and more leaving the public markets altogether. Mergers and acquisitions work has dried up, with hardly any hostile bids launched. And proprietary trading, which provided much of the growth over the last 20 years, has been curbed by regulators who are worried that it is too risky. Add it all up and it is hard for them to make money anymore.
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At the same time, technology has opened a space in retail finance. No one needs a branch network anymore and the cost of processing payments has fallen dramatically. The retail banking market, which for decades was a cosy oligopoly controlled by a few familiar companies, has been shaken up by the arrival of app-based rivals. The industry is suddenly wide open and the opportunity is there to steal a huge slice of it – investment banks are nothing if not opportunistic. There is a problem, however. It isn’t going to work.
Four hurdles the investment banks will stumble at
1. The skills are different
Investment banks and retail banks have always been completely different beasts. Investment bankers, in the main, are traders and advisers, with a lot of their own skin in the game. There is nothing about their culture, tradition or skills to suggest they have any great talent for the retail market. They have nothing special to bring to the table.
2. Investment banks know nothing about branding
True, JP Morgan and Goldman Sachs have some cachet in business circles. But it is unlikely that ordinary customers have much idea who they are or what they do. Even worse, insofar as they have heard of them, they probably think of them as overpaid swindlers, which is not exactly a great look. The challenger banks, and especially the apps, have shown that retail finance is mostly about building a great brand.
3. Costs are high
Even when the money was pouring in, investment banking was never especially profitable. Costs were astronomical – the massive salaries, the lavish expenses, the ritzy offices in the smartest parts of town. Retail banking operates on very thin margins – which are likely to become thinner as the market becomes more competitive. Extravagance is part of the investment-banking culture and that is unlikely to change.
4. Competition from the tech giants will be intense
The investment banks are not the only new players in the industry. Amazon has already launched a current account, Apple and Google have invested heavily in payment systems and Facebook is even trying to launch its own currency. Not only do they have unlimited amounts of cash to spend, but they also have vast quantities of customer data they can mine (Google and Amazon know far more about what we spend and where than JP Morgan ever will). They are going to be fearsome competitors. It looks like all the investment banks will end up doing is squandering a lot of their shareholders’ money.
