By most accounts, the banking industry is in great shape. The economy is humming, last year’s tax break provided a boost to profits, and President Trump’s picks for regulators are now in place and aiming to ease back rules.
But scratch beneath the surface and it’s not difficult to find fears for the future. This includes the possibility of Democrats seizing one or both chambers of Congress, concerns about consumer and C&I lending, as well as lingering fears of what Amazon is up to when it comes to the banking business. What other things are haunting the industry and keeping bankers up at night?
Big problems in consumer credit – The economy appears to be trucking along, unemployment has hit a nearly 50-year low and spending among consumers and government agencies remains strong. But credit problems may be lurking.
After paying down debt after the financial crisis, consumers have since leveraged up, pushing household debt to an all-time high. Over the past decade, student loans have more than doubled to just over $1.4 trillion, according to the most recent report on household debt from the Federal Reserve Bank of New York. Credit card debt, meanwhile, has increased 8% in the last year alone, the report said.
Credit card charge-offs are edging upward but still considered manageable and low overall. However other areas of consumer lending are showing more urgent reasons to worry such as personal loans. Unsecured personal loans have been a popular product for customers looking to refinance high-cost credit cards – and charge offs are on the rise. The challenge with these loans is that after customers use them to clear off their credit cards, they start spending heavily on those cards once again.
The next recession starts in 2019 – It’s largely expected that the economy will face another downturn with many economists predicting it to begin by the end of 2020. However, banks that are currently witnessing record profits are likely hoping to push off that inevitability for as long as possible.
But the fate of the broader economy is largely out of their hands. Already, some of the biggest banks are reporting a slowdown in lending and the yield curve is flattening. Rising interest rates and a lagging housing market could further contribute to a slowdown in economic growth, putting an end to the recent large gains. This could spur the Federal Reserve to slow or even pause its interest rate hikes – a problem for banks that have seen their net interest income restrained by the historically low interest rates of the last decade.
Millennial fintechs continue to make inroads against banks – While they don’t look like typical bankers, millennials have a lot to say about the financial services industry. Investors love them for it, skyrocketing the valuation of these millennial fintech apps. Young customers flock to their offerings, the majority of whom are almost exclusively mobile-first: PwC reports 50% of customers now primarily rely on mobile banking, and mobile is the only channel that has seen increased engagement in the last five years. While banks have tried to create their own millennial digital-first units and apps, there are doubts that it’s enough to attract young customers and stay relevant.
The threat is real for industry incumbents. According to a new global fintech report from Accenture, 19% of U.S. financial institutions are now new entrants, and they have captured 3.5% of total banking and payments revenues. “Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what’s been seen before,” said Julian Skan, a senior managing director at Accenture.