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PCBB Banc Investment Daily February 25, 2014
Banc Investment Daily
February 25, 2014

Donning The Boxing Gloves

A few months ago Men's Fitness ran a piece entitled "The Greatest Boxing Matches of All-Time." No. 1 on the list was the March 8, 1971 match between Muhammad Ali and Joe Frazier at Madison Square Garden in New York. It was advertised only as "THE FIGHT" and was broadcast around the world in 12 different languages. Frazier won this brutal showdown, but later lost two other fights to Ali and continued until his death to harbor a deep grudge against him.
Looking around at our industry, we see it becoming more and more of a boxing match between banks and other entities that are encroaching on the business. Every which way you turn someone is trying to get into the business of banking. T-Mobile, for example, recently announced a new financial services program aimed at customers who don't have a regular bank account. Wal-Mart, meanwhile, has been going after a similar market for the past few years with its Bluebird checking and debit alternative. Just recently a government agency report suggested that the U.S. Postal Service could alleviate its budget woes by offering financial products such as debit cards and loans to consumers. What is next we wonder?
New entrants often go after the unbanked or under-banked market as a way to get into the business and fly under the radar. After all, who would stand in the way of helping those who are poor or need to open bank accounts? Indeed, a 2011 study from the FDIC found that 20% of U.S. households are under-banked--representing 24mm households with 51mm adults. Meanwhile, 25% of households were found to have used at least one alternative financial services product within the prior year and almost 10% of households had used two or more types of alternative products.
What gives and should banks feel threatened by alternative financial services providers? We think the answer is a resounding yes. After all, how long it will be before these nonbanks set their sights on loftier targets? First it's the unbanked, then it is the small business customer loan or deposit.
We're not saying you have to go out tomorrow and ramp up your offerings to the unbanked and under-banked, but keep an eye on new entrants here because with all the rules the only way to really make money for these players is to expand into other sectors. A strong business case can be made this is their ultimate game given the economics of it all. We also think it's important to be ever-mindful of what the competition is up to and to take whatever opportunities you can to remind customers about your value proposition. It reminds customers why they like to do business with you in the first place and further cements relationships over the longer term.
Banks currently have certain advantages with small businesses and wealthy customers, but there's nothing to stop non-banks from trying to woo this business away. Just because alternative financial service providers aren't yet targeting your bread-and-butter business, doesn't mean they won't go after it in the future.
Along those lines, banks would be remiss to assume that in a fight against non-bank financial services providers they'll come out on top. After all, many spectators of the 1971 fight between Ali and Frazier had placed their bets on Ali winning. They were wrong with respect to this fight, but Frazier later lost two other bouts against his nemesis. The lesson for banks is clear: Never underestimate the competition and in banking as in boxing, it's often a fight to the final bell.