100 YEARS AGO How are banks responding to an era of massive tech disruption and prospects of lower interest rate margins as global interest rates fall? The banking industry used to be the most profitable business, because interest rate margins (lending rate less deposit costs) were high. In the 1960s, when bankers were considered trusted custodians of other people’s money, the dictum “three three’s” meant interest margin at 3 per cent, 3 hour lunches with clients, and 3 o’clock at the golf course.

The average net interest margin (NIM) of American banks was traditionally 3 per cent for quite a while, but when the Fed and European Central Bank (ECB) started cutting interest rates after the 2008 financial crisis, NIM got squeezed. The stock market valuation of the banking industry took a beating with prospects of slower economy, threats of larger non-performing loans and heavy overhead costs. When tech and fintech platforms arrived at the turn of the 21st century, banks and financial regulators poohpoohed the threat of technology in disintermediating banks. Fintechs began to take the payments business from banks, then started to eat the banks’ lending lunch.

Tech platforms can deliver financial services with less overheads, legacy branch fixed assets and staff with more reach to online customers at faster speed. According to McKinsey, by the end of 2019, cumulative market capitalization of the 200 largest banks had a price-to-book valuation of between 0.8 to 1.2, whereas the seven largest big tech companies had price-book valuations above 5, with both groups valued at roughly $6 trillion in market cap. Today, the largest bank market cap is JPMorgan ranked 14th in the world with $600 billion, whereas the top eight companies valued at more than $1........

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