Think about it: Do you go into a bank branch unless it's
absolutely necessary? Given that visits to a bank rarely qualify as “fun,” the
answer to the question is probably “no.”
What Happened: That speaks to the disruption being caused by
the fintech industry and plenty of components in the high-flying ARK Fintech
Innovation ETF (nysearca:ARKF).
Bolstered by the likes of Square SQ, -1.06% and PayPal PYPL,
-4.29% — companies that remove the need for customers to have traditional bank
accounts, let alone spend time going to a physical branch — ARKF is up more
than 76% year-to-date.
Why It's Important: Physical banking is ripe for disruption
like so many other industries, and that disruption is being accelerated by the
coronavirus pandemic.
Common sense dictates if going into a bank — where there are
likely other people — can be avoided, why not avoid it?
Much like e-commerce, cloud computing and other disruptive
technologies, fintech was, well, disrupting before the pandemic . The data on
bank branches confirms as much.
“After tracking the usage of financial services across
demographic factors such as income, occupation, and age between 2013 and 2017,
the Federal Deposit Insurance Corporation (FDIC) reported a drop in the use of
bank branches and an increase in digital and mobile banking,” according to ARK
Invest research.
Banks are up against it when comes to competing against
digital wallets like PayPal and Square on cost.
ARKF's issuer estimates those companies spend just $20 to
acquire each of their customers, while a brick-and-mortar bank spends $1,000 a
head.
What's Next: While some ARKF components and other fintech
companies are trying to get traditional bank charters, that doesn't mean
they'll be opening vast networks of branches.
The data shows they probably should eschew that idea.
As of 2018, it costs $550,000 to run a single bank branch,
according to ARK Invest.
To put that staggering sum into context, it's a nice house
in most of ex-California, ex-New York America. Or: $550,000 would buy 2,941
shares of Square, ARKF's top holding.
“In our view, the 77,000+ bank branches in the US represent
an untenable commitment to acquire customers for roughly $1,000 on average and
monetize them,” said ARK.
What is tangible is that fixed and sunk costs are meaningful
for investors. ARKF is up more than 76% year-to-date, but the S&P Banks
Select Industry Index is lower by 32%.
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