Are Banking Careers for MBAs Obsolete? The Future of Finance
“Banks are so f*cked.”
“SO f*cked! I mean, people say, ‘I’m going to short Tesla.’ But I go, ‘Hey, why don’t you short the banks? Like, I mean, you may take a 20 percent risk, but they’re all going to zero anyway.’”
“I mean, those dummies have lost so much money. How many times do you have to get your face ripped off to realize you’re just an idiot? Just go short a bank! I mean, rates are at zero. Do you need an easier short?”
Why are banks “so f*cked?” It’s because the banking industry is in trouble. The record profits recently posted by some blue-chip players are illusory because they mask grim, extinction-level challenges ahead. While banking faces severe threats from skyrocketing costs, the sector also faces disruptive competition from aggressive Silicon Valley fintech firms that enjoy overwhelming cost and technology advantages. And all those headaches translate to risky long-term career prospects for current and future MBA students.
This viral video depicts banter between two astute industry observers: billionaire former Facebook executive and Social Capital CEO Chamath Palihapitiya, who’s talking with Social Leverage’s Howard Lindzon. They’re chatting about what’s arguably a choice target for predatory stock market short-sellers for the rest of the decade. And this target’s not merely a company—it’s an entire industry.
The Trouble with Banks
The fate of banks mirrors the “most unfortunate situation” that befalls the protagonist in Alfred Hitchcock’s “delightful little romantic comedy,” The Trouble with Harry.
Of course, unlike this film’s audiences, bankers aren’t exactly laughing. Because for them, the trouble with banks isn’t funny.
Banks face an existential threat from a potentially lethal disruptive technological innovation: the mobile phone digital wallet apps such as PayPal’s Venmo and Square’s Cash App. Soon, customers will figure out that developers are fortifying these platforms with new technology offering powerful capabilities that can do far more than split the bills at restaurants. When that happens, customers will experience epiphanies that they’re literally carrying around their own little bank branches within their pockets and handbags.
Covid-19 turbocharged the adoption of these digital wallets. That’s because the pandemic’s social distancing created a widespread demand for contact-free transaction mechanisms. Customers wanted alternatives that would not spread SARS-CoV-2 on surfaces like traditional credit and debit cards and cash. And they wanted those alternatives immediately.
It wasn’t until spring 2020 when the Centers for Disease Control at last revised their earlier guidance, advising Americans that new research showed Covid surface contamination from fomites amounted to much less of a threat than previously thought. But by then, many banking customers had defected to contactless digital wallets during the previous 16 months. And without incentives to return to cash and plastic, those customers are not likely to break their new wallet app habits anytime soon.
Profitability: Modern Banking’s Constant Challenge
Speaking of Covid, David Zaring, a banking expert who teaches at the University of Pennsylvania’s Wharton School, has argued since mid-2020 that some large branch banks might not survive the pandemic if it persists so long that borrowers start to default. What’s more, he warned that no real guarantees exist that American banks could remain strong for the entire duration of a protracted crisis:
It can’t go on forever. If all your borrowers can’t pay back their loans, then any financial institution is going to run into trouble, no matter how many dollars the Fed makes cheaply available to those institutions.
However, as Professor Zaring knows, the profitability problems faced by the largest American branch banks had already been dragging the industry down for many years before the pandemic hit. The reason profitability emerged as such a difficult challenge is because branch business model financial institutions experience tremendous operating costs that are even difficult to control during the best of times.
So now, during a period when their utility is diminishing among the majority of customers who own mobile devices and computers, the costs of bank branches continue to soar. Annual per-branch occupancy expenses hit an all-time high of almost $570,000 in 2019 during an era when consumers have largely abandoned brick-and-mortar branches for online banking.
For example, JPMorgan Chase & Co. operates about 5,000 such branches. Maintaining all those branches costs America’s largest bank $2.85 billion per year. Yet their new branch openings don’t show signs of slowing. Not long ago in 2018, JPMC announced plans to open 50 new branches in metro Philadelphia alone. By 2021, the bank had already opened 40 of those branches and had announced the locations for the next ten.
Then there are the costs of the human resources required to staff all these branches. JPMorgan Chase has 255,000 employees around the world. But Square only employs 5,500 employees—only 2.2 percent of Chase’s headcount—even though Square’s Cash App has roughly the same number of accounts as Chase at 60 million.
Incidentally, note also that it took Square only seven years to reach that milestone, and Venmo ten. But it took JPMorgan Chase 30 years and five acquisitions to attain those 60 million accounts.
On top of all these costs, when compared with digital wallet firms, banks also face staggering costs to attract new customers. In fact, banks spend between $350 and $1,500 to sign up each new customer. On average, a typical big Wall Street bank like JPMorgan Chase or Citibank spends just under $1,000 on each customer acquisition.
Why? In short, they do this for the same reason that “Customer Since 2005” appears on checks. The reason that banks still invest so much money in new customers is that during the postwar era, U.S. banking customers have rewarded banks with tremendous loyalty.
Traditionally, a typical banking customer has stayed with their bank for 16 years on average, which is about triple the five-year interval that economists define as “the long run.” All those years work well for the banks because they need at least eight years on average to break even on those massive customer acquisition costs.
But all that loyalty is about to change. Ever since the mid-2000s, customer confidence in banking has steadily eroded, and it fell steeply immediately following the Great Recession. Gallup reports that the proportion of survey respondents who express “a great deal” or “quite a lot” of confidence in banks has plummeted from half the sample in 2006 to 30 percent in 2018. That works out to a 40 percent drop.
Now consider the amount that the digital wallet firms need to spend to attract new business. For each new customer, digital wallet providers only need to spend about $20.
And no, that’s not a misprint—to attract each new customer, Cash App and Venmo need to spend not $1,000, but only $20! Furthermore, instead of an eight-year breakeven interval, the wallets’ accounts break even on acquisition costs immediately, then turn profitable within the new customer’s first year.
This radically divergent cost landscape means that banks are rapidly losing the ability to serve average American customers. Sixteen years ago, the average checking account had an opening balance of about $10,500, but that’s no longer the case. Today’s typical checking account only contains about $3,500. Even assuming that customer does not defect to a competing bank or digital wallet and the bank hangs on to them for 16 years, it will eventually end up losing about $400 on an average balance that low.
Meanwhile, a digital wallet will turn a $475 profit during that period, just by serving an average customer with a much lower balance. If we held constant the $10,500 account balance and 16-year account life, the lifetime customer value—net of acquisition charges—would be $559 for the bank, but almost triple that for the wallet app, at $1,464.
In other words, no scenarios exist where the bank is more profitable than the wallet vendor.
Moreover, lower costs allow the wallet firms to pursue aggressive marketing strategies. A wallet firm can even afford to chase unbanked customers, a total addressable market concentrated in the Deep South region of the United States that’s equivalent to Chase’s customer base of 20 million. A typical unbanked household earning $18,000 in annual income over 16 years would earn $100 in profit for a digital wallet provider. Not surprisingly, a bank would lose $800 on that account.
These days, banking’s crushing cost burden amounts to the main reason why one almost exclusively observes upscale advertising from banks targeting affluent new customers. These economics seem dismal, indeed. They mean that a typical American branch bank finds itself locked in a perpetual battle since it must fight harder and harder to win greater numbers of wealthy customers merely to survive against cutthroat competitors who are also fighting for those same, wealthy customers. A mass-market strategy to win customers with average balances will put the typical branch bank out of business.
Declining Costs Drive Disruption
Although not the only driver, declining costs are a primary driver of technologically-enabled disruption. That’s also true of consumer banking, where the critical variable that determines checking account profitability is the cost of customer acquisition. These low acquisition costs should enable Cash App and Venmo to capture more lifetime value on a per-wallet basis than retail banks currently do, which will boost the present value of all the future profits each customer generates.
That said, experts expect that each digital wallet’s valuation is poised to skyrocket during the next few years. Currently, each Cash App and Venmo digital wallet’s valuation in the marketplace falls within a span of about $250 to $700, with Cash App on the high side of that range.
But if they capture not only a share of the banking business, and also integrate that business with online e-commerce and related products from sectors like insurance and brokerage services, the average valuation of each wallet should scale way up to almost $20,000 per customer.
What makes experts so certain? They base their estimates on the experience of digital wallet companies in China. These technologies were introduced to the Chinese market long before they debuted in the United States. That’s because China, as a traditional agrarian economy that still faced food shortages as recently as the early 1960s, never built much of a physical retail banking infrastructure that most of their population could access.
In China, mobile payments exploded more than 15-fold in only five years, from about $2 trillion in 2015 to $36 trillion in 2020. That’s almost triple China’s gross domestic product. On the two main digital wallets there—WeChat and Alipay—about half of all the aggregate transaction volume comes from e-commerce, and that amount is roughly proportional to 50 percent of the $20,000 estimate.
Part of the reason for these stratospheric account valuations is that mobile wallets typically process and record a wider variety of financial activities than a bank. Analyzing all that “big data” can give the wallets overwhelming competitive advantages. Square’s database also encompasses records provided by the merchants who use its point-of-sale Visa and MasterCard processing system, enabling it to observe a wider breadth of transactions than it could through only Cash App. Similarly, PayPal’s data set includes online electronic commerce records along with its Venmo wallet.
Competitive Advantages in Lending
To better serve a customer who’s shopping for a loan, let’s compare how Square and PayPal might apply their technology advantages when compared with a branch bank competitor like JPMorgan Chase, Citibank, Bank of America, or Wells Fargo.
On average, a traditional lender might sift through 800 data points while evaluating a potential borrower’s financial history during a loan approval process that typically requires a customer to wait two to three months for a decision. Some aspects of this workflow are rooted in traditions and regulations that date back to the 1950s.
During this protracted process, the bank’s loan officer will rely on data points previously consolidated by third-party vendors, such as credit reporting agencies. Banks also tend to rely on verified line items from a customer’s tax filings, possibly combined with audited small business financial statements from some customers.
In general, most of these data points tend to be static and discontinuous. Quality can be suboptimal because availability tends to skew towards older records with less relevance to a borrower’s current lifestyle. Older data can also be suspect because of questionable accuracy. That’s especially the case with credit reporting agencies, notorious for providing lenders with reports based on inaccurate and incomplete data.
By contrast, it’s easy to see why Square and PayPal as lenders wield overwhelming competitive advantages.
Digital wallet vendors typically have access not to 800, but to some 300,000 data points for an average, middle-aged customer. All that big data tends to originate from sources like point-of-sale and virtual terminal systems on the merchant side, along with the Venmo and Cash App transaction records from the customer side. All this data is available in-house, which obviates much of the need for third-party vendors like credit reporting agencies. Instead of the static and dated records on which bank branches typically rely, the wallet app vendors’ higher-quality data tends to be longitudinal, continuous—and in some cases, almost visible in real time.
What’s more, Square and PayPal don’t rely on human loan officers to crank out lending decisions. These Silicon Valley companies instead apply artificial intelligence routines equipped with deep learning algorithms. Systems like these have no trouble evaluating hundreds of thousands of data points for millions of customers. They can even correlate a potential borrower’s financial profile with the profiles of tens of thousands of similar customers.
What’s the result? A digital wallet can approve a loan application not in three months, but in seven minutes. That’s a competitive advantage that’s going to be extraordinarily challenging for banks to beat anytime soon.
Furthermore, Venmo and Cash App are better than banks at more than just applying artificial intelligence to scanning all those transactions. The wallets are also more effective at combining transaction records with customer metadata like locations and preferences. That synergy means they can more productively monetize all that data through cross-selling and up-selling since they target their customers with advertising for a wider range of products and services than banks.
Think of it this way: Mobile wallets possess all the artificial intelligence and machine learning recommendation power of a Netflix or Spotify app. But instead of hawking movies and music, wallet firms “train” that artificial intelligence to sell lucrative financial products and services. ARK Invest’s rockstar CEO Cathie Wood, one of the world’s most successful thematic investors who’s focused for the past 30 years on extremely lucrative disruptive innovation trends, explains these opportunities in this recent video lecture recorded live at a sports arena in Johannesburg.
Banking: Career Insights for MBAs
All in all, banking could turn into a lousy business within only a couple of years. Because they enjoy commanding competitive advantages, digital wallet firms are poised to gut the banking industry.
This trend might be tough to swallow for some of our BSchools readers, and particularly for university students who’ve planned for years on a secure, prestigious career in the industry. In particular, elite students whose prep schools and private universities groomed them for Wall Street careers might especially feel a sense of alarm.
So how can future and current MBA students best apply these recent trends and insights to their career planning?
Clearly, for the right candidates, short-term jobs in the banking industry can still make sense. I’m not suggesting that a kid who just graduated from college should necessarily turn down a short-term job with one of the many two-year, pre-MBA financial analyst programs merely because the company operates within an industry that’s a crummy choice for a long-term career.
Financial analyst jobs have provided a rite of passage for tens of thousands of pre-MBAs since the early 1980s. Along with real-world business experience that’s transferable to a wide range of industries, better analyst jobs can also provide terrific learning, mentorship, and networking opportunities.
Besides, at the best firms, these jobs still pay exceptionally well, and that’s especially true of the rarefied investment banking sector. For example, Goldman Sachs pays new analysts with only undergraduate degrees and zero business experience a staggering $110,000 a year, and those who make it to their second year, $125,000.
However, keep in mind that even as short-term career options, jobs at the toughest banks can be grueling experiences that probably are not appropriate for the vast majority of pre-MBAs. For the first time in history, a group of junior Wall Street investment banking analysts at Goldman went public in early 2021 in a viral slide deck with claims they were working up to 140 hours each week, which means that they were sleeping at most about four hours each night.
Furthermore, the financial services industry has a horrible reputation for mental health and wellness. Nobody should interview with these firms without first thoroughly familiarizing themselves with this issue’s long history, and with the alarming health and safety hazards these jobs pose.
This record is readily available online. In fact, since the early 2010s, the press has widely reported at least a dozen instances of tragic consequences among finance employees suffering from severe untreated clinical depression.
Instead, what I am arguing is that graduating MBAs who plan on a 35-year career within the banking industry not only labor under an expectation that’s unrealistic, it’s a bad idea. Any MBA who goes to work for a bank after graduation knows or should know that they can almost certainly expect a career change out of this industry in fewer than five years.
What’s more, a job in a stagnating industry makes for a financially risky proposition because of dwindling long-run career prospects. Why in the world should any MBA forego better long-term opportunities merely to develop a career in a dead-end industry that—if it doesn’t change—will end up a dinosaur long before the end of the decade? Bearing that opportunity cost makes little sense, if any.
And let’s state the obvious: Banks fight change. Few other industries resist change as aggressively as the hyper-conservative, tradition-saddled banking industry. Is it any surprise that JPMorgan Chase’s CEO Jamie Dimon announced that his bankers would be among the first U.S. employees called back to physical offices after Covid, even though the pandemic demonstrated that work at an office does not boost innovation and a Stanford study even demonstrated that remote work boosts productivity? Is it also any wonder that about 13 percent of American customers already bypass the banking system—which many consider discriminatory and corrupt—by investing in cryptoassets?
Of course not. The banking industry may possess the ability to change, but lacks any genuine motivation. That resistance to change is what ultimately will doom the industry as a crippled sitting duck under fire from the likes of PayPal and Square.