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When one ponders the inexorable rise in the market value of Apple, Google, Amazon or Facebook, one is left with a simple question: once a company’s market capitalization is worth hundreds of billions of US dollars, how does it grow? Surely selling smart watches won’t move the needle all that much. Neither will delivering by drone. This simple reality may help to explain recent reports that Apple is moving aggressively into the electric car business. After all, why not? Once a company is as big as Apple, it needs to start eating up other industries in order to keep growing. Surely though, there are lower-hanging fruit than the auto industry? Most notably, there is the finance business.
Take Alibaba as an example: the company already operates its own payment system (Alipay), it has seen the money market funds on its platform sell faster than egg tarts from a Macau bakery, and it has lately applied for its own banking license. This is a development that makes perfect sense. Who knows more about the business of mid-size
companies in China’s industrial belt? Alibaba or the local bank? For that matter, we would venture that Google, Amazon and the rest probably also know more about the Gavekal readership than their local banks. All of which brings us to the three ways banks make money, specifically:
1) Playing the yield curve (lending to governments). Quantitative easing, coupled with new bank regulations and diminishing inflation expectations, means the ability of banks in most countries to make money by playing the yield curve has essentially evaporated.
2) Lending money to consumers and providing money brokerage services (i.e. wire transfers, foreign exchange transactions etc.). Historically, these have been highly profitable endeavors, offering high margins for minimal risk. But this part of banks’ business is increasingly coming under pressure from financial technology companies, whether through the growth of peer to peer platforms, or the proliferation of parallel payment systems like Apple Pay (see The Disruption That Could Change Banking).
3) Providing capital to businesses. Although financial tech firms also threaten margins here, providing capital to growing businesses should logically be the one growing profit center left for banks—provided, of course, that companies are interested in borrowing money. This remains the million dollar question for the US, eurozone, UK and Japanese banking systems.
In which countries will banks find all three opportunity sets: India? China? Indonesia? The Philippines? And in which countries will banks struggle to make money from any of their three traditional business lines?
Note from InvestmentOffice.com: this post is only a section of a full report from GaveKal Dragonomics.
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