Technology is rapidly changing the way that banks interact with their customers and compete in the marketplace. Online and mobile banking options, among others, are growing by leaps and bounds. Community banks have been somewhat slow to adopt the most cutting edge of these technologies, but in most cases, that hasn't been to the detriment of investors. That won't last forever.
In the video below, the Motley Fool's Gaby Lapera and bank stock expert Tim Hanson discuss how the changing technological landscape is both a threat and an opportunity to small banks across the country.
A transcript follows the video.
This podcast was recorded on March 14, 2016.
Gaby Lapera: Technology is a really rapidly evolving sector and we've talked about it a few times on this show that technology is changing the financial sector.
Tim Hanson: Sure, oh yeah. Absolutely.
Lapera: The question is, how is it affecting small banks? I was reading a 10-K earlier in 2015 on a small bank -- in their little announcement section at the beginning, they're like, "We just released a mobile banking app." It was 2015, and I was like, "How...?"
Hanson: It's a fair point, I should have mentioned that earlier. That's another thing driving up fixed operating cost for smaller banks that they would seek to spread that cost across a wider asset base. Because having your own mobile app is expensive. I was laughing not long ago: Carter Bank, (NASDAQ:CARE) I think their big triumph in 2014 or 2015 was introducing telephone banking.
Hanson: Which was years behind the mobile apps phase. Mobile banking, Internet banking, payment processing, Apple (NASDAQ: AAPL) Pay -- those are all things that are interesting and hard for small community banks to adapt to. They're certainly trying; it's table stakes stuff now, in order to compete and hang on. I mean, those deposits are probably loyal only to a point where they want to be able to take a picture of a check and deposit it or use their fingerprint to buy something or so on and so forth. There's an interesting company in Austin, Texas, called Q2 (NYSE:QTWO) and it's a public company. They do outsourced mobile app and Internet banking design for community banks.
Lapera: Mm-hmm (affirmative).
Hanson: It's been very fast-growing for them because they sort of have an out-of-the-box solution, they can customize the design. They're hoping that by gobbling up or getting business from a lot of small banks, as the small banks get acquired, their technology would get adopted by larger and larger banks. And they get paid on a per user basis, so obviously, having more users would be very good for them. No small bank is going to have an IT department of 100, 200 people, so certainly the outsourcing and development of those sorts of things is driving costs up and is another thing pushing consolidation.
Lapera: That's really interesting. This is kind of an ongoing conversation on this show, about how financial tech is changing the sector. We had a pretty long show about Apple Pay the other day as well. It's interesting to think about ... I don't want to call them big players, but people you just don't normally think about and how it is going to affect them. Because J.P. Morgan and Bank of America, obviously, they have huge buy-in on these kinds of things, but ...
Hanson: This is a little bit farther afield from small banks, but it's a fascinating point. Apple Pay -- Apple takes a huge cut if you buy with Apple Pay, but the data that I've seen from their side is if you install Apple Pay in your app, the take rate on whatever you're selling goes to three times to five times or even 10 times which you would get without having Apple Pay.
Lapera: That's insane!
Hanson: You make it up in volume what you lose on commission, but it's almost like a deal with the devil, right? You're like, "Ahh, I've got to give away 30% to Apple? Maybe I don't want to sell a million units. Maybe I do." That's the math problem at the end of the day. Ultimately, one would expect prices to come down in that space.
Hanson: Yeah, in the ecosystem.
Lapera: There are competitors with Apple Pay. There's the ... I can never remember if it's Goggle Wallet, Android Pay or if it's flipped ... It might be the other way.
Hanson: No, yeah. When you look at the commissions Apple Pay is getting, it's certainly incentive to compete.
Lapera: Mm-hmm (affirmative). Of course there's Wal-Mart (NYSE: WMT) with their MCX payment plan, which is eventually going to get rolled out, so we'll see what happens with that since they have so many major retailers in it.