When elite investment bank Goldman Sachs starts catering to the masses with $1 online savings accounts, you know the industry has been flipped on its head.
Like many of its peers, Goldman Sachs has found that the four traditional banking pillars of retail banking, investment banking, asset management, and private banking offer disappointing prospects at best in this era of low-growth banking.
The retail banking market faces yet another year of major headwinds, with interest margins on loans continuing to shrink in the “not-quite-ready-to-raise-interest-rates” environment. And with many borrowers from the oil industry struggling to survive with depressed oil prices, banks can expect to take some off the bottom line too with more loan loss provisions as these customers fall behind on payments or default altogether.
The investment banking business is suddenly not all that alluring either. This year’s low oil prices, recession fears, and stalling growth in China and emerging markets have created a soft M&A market with some major investment bankers posting poor first-quarter results. While Barclays outperformed during Q1 with a 27% uptick in the number of $100 million M&A deals it advised, JPMorgan’s deal volumes were flat and Goldman Sachs’ deal volumes plunged by 50%.
As Rafferty Capital analyst Richard Bove added in response to these results, deal making may only flourish when CEOs “feel confident that if they buy another company, it is going to be accretive to earnings at some point if not in one year, in the second or third year. It’s difficult to have confidence at the present time.”
How about asset management and private banking? The stock market’s second-longest bull run since WWII has been good to asset and wealth managers whose fortunes are tied to rising financial markets and new investor cash coming in. Surely these paths are another way for big banks to grow.
But there’s a potential problem here as well. As a Bloomberg piece points out, the stock market’s returns have been negative over the past 12 months while companies in the Standard & Poor’s 500 Index (which makes up the 500 largest US public companies by market capitalization) have been reporting their worst profits in six years. If investors lose confidence in the stock market, they’re more likely to hold onto their hard-earned dollars and less likely to send it to risk-taking advisors, traders, and mutual fund managers.
So how are banks looking to grow in this climate? By using rarely tried — and critics may even call some of them desperate — ideas.
Take Goldman Sachs and its new $1 online savings accounts. After acquiring GE Capital’s online banking platform and $16 billion in customer deposits, Goldman Sachs Group and its lesser known GS Bank subsidiary have decided to try their luck with the mass-retail-banking market by offering savings accounts that can be opened for $1 online and pay an industry-beating 1.05% interest rate.
While GS Bank’s primary goal is to raise cheap borrowing cash for the group’s trading business, the new offering could also give the bank a fresh source of fee income and a potential opening for cross-sell and up-sell opportunities to a much broader market than just high-net-worth clients and corporations. Given that potential, it’s not hard to see how more elite banks such as UBS and State Street could follow behind Goldman Sachs.
Others like Fifth Third Bank are entering the check-cashing business long dominated by Wal-Mart and cash advance shops that cater to less affluent consumers. Fifth Third Bank recently launched its low-fee checking account, Express Banking, which lets customers essentially cash their checks immediately for a fee of 1%-4% of the check amount.
Payments processor Fiserv, looking to begin its “Immediate Funds to banks” service to fuel such a business, says there will be more banks following Fifth Third Bank’s lead. And given the nonbank check-cashing industry generates $106 billion in annual revenue and caters to 30 million customers, according to trade group Financial Service Centers of America, that’s not hard to believe.
Beyond mass-market-friendly deposits and check cashing services, there are still some banks out there trying more nuanced ways to grow their existing business lines.
Banc of California, for example, recently introduced three new commercial banking business lines that specialize in lending to underserved yet fast-growing sectors, including health care, municipals, and nonprofits.
Rather than using a one-size-fits-all approach to lending, Banc of California can establish deeper relationships within these promising industries by deploying bankers with expertise in those respective fields.
These are just three ideas banks are using to seek growth in an otherwise sluggish industry. But with a lack of other options, you can bet there will be many more ideas like them ahead in 2016 and beyond.
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Christian Hudspeth is a company analyst for Dun & Bradstreet who researches and reports on more than 1,000 banks and financial firms for Hoover’s company database subscribers. Before joining Dun & Bradstreet, Christian was a managing editor, senior financial writer and analyst for a financial publishing company. His financial articles have been featured on MSN Money, Business Insider, Nasdaq.com, and several other well-known online publications. Before he was an editor, Christian worked in the commercial banking industry for seven years.