Last week, I was seated on an airplane next to a student in his final year at Vanderbilt. He was on his way to Seattle to interview for a position with Microsoft, after already interviewing at a number of other big-name technology companies.
We got to talking about the technological upheaval that's going on in the bank industry. What I found most interesting was that his perception of the future of banking corresponds closely to something that Hugh McColl, the legendary former CEO of Bank of America (NYSE:BAC), once told me -- namely, that the banks that are best positioned to dominate in the future are those that give current and future generations of consumers more control over their money.
To younger generations, using cash and checks is akin to crossing the country on a train powered by a steam locomotive as opposed to the Boeing 737 we were on. There is nothing wrong with steam locomotives per se, but they are slow, cumbersome, and inefficient. As are cash and checks. Why in the world would anybody use either to pay rent, reimburse a friend, or settle up with a plumber? (I ask that somewhat rhetorically because dinosaurs like me still do.)
And it isn't just inefficient and cumbersome for the consumer. Banks look at cash and checks the same way. "We still spend about $5 billion moving cash, currency, and checks around our company," said Bank of America's current chairman and CEO, Brian Moynihan, in an interview with CNBC earlier this year. "Our ATMs distribute about $200 million a day in cash. Do you know how much work it is to get that cash in those machines?"
Talk to any exceptional banker today, and they will tell you the same thing: that the future of banking is less about the storage of money and more about its secure and unencumbered movement. It's accordingly Bank of America's lead in this regard that seems to position the nation's second-biggest bank by assets to succeed in the future.
On Monday, Bank of America announced that its new person-to-person payments network, Zelle, processed $1.5 billion worth of payments in October. That was up 90% from the same month last year. And this trend should continue to gain momentum. There are now 2.5 million active users of Zelle, with thousands more signing on every day.
"Zelle makes it easy for consumers to send, receive and request money, allowing them to use the existing contacts on their mobile device," explains the bank. "Funds are sent from one bank account to another typically within minutes, when both parties are enrolled, using only a recipient's email address or mobile number."
Bank of America's success in this regard builds on its customers' rapid adoption of its mobile banking application. At the end of the third quarter, there were 23.6 million active users of its mobile app. The volume of mobile check deposits made on the app corresponds to the work of 1,100 branches -- the steam locomotive of the financial services industry.
For investors, these moves are important for two reasons. First, because they keep Bank of America at the forefront of the technological transformation of financial products and services. There could come a day when all banking is done digitally and remotely, so any bank that isn't positioned for that is facing an uncertain future.
Additionally, because digital banking products are much more efficient for Bank of America to provide, they are almost certainly helping it continue to cut expenses. Since Moynihan took the reins at the beginning of 2010, the bank has cut its annual expenses from $70 billion down to $55 billion in 2016. And it isn't done. Last year, the bank vowed to drop its yearly operating costs to $53 billion by 2018, a goal that it is has already achieved on an annualized basis.
An efficient cost base is essential to banking. There is the direct benefit of allowing more revenue to fall to the bottom line, fattening shareholders' wallets. But there's also an important indirect benefit to running a lean operation: Efficient banks don't have to cut corners on underwriting in order to earn the type of return investors expect. It's no coincidence that the most efficient banks also tend to have fewer nonperforming loans when the credit cycle takes a turn for the worse.
And lest there by any doubt about Bank of America's progress on the efficiency front, its results last quarter speak for themselves. It was the second quarter in a row that the Charlotte, North Carolina-based bank turned in a lower efficiency ratio than the notoriously efficient Wells Fargo. This goes a long way toward explaining why Bank of America appears to have supplanted Wells Fargo as Warren Buffett's favorite bank.