As Fintech Springs To Life, Bank Branches Die Slow Deaths

Think about it: Do you go into a bank branch unless it's absolutely necessary? Given that visits to a bank rarely qualify as “fun,” the answer to the question is probably “no.”

What Happened: That speaks to the disruption being caused by the fintech industry and plenty of components in the high-flying ARK Fintech Innovation ETF ARKF.

Bolstered by the likes of Square SQ and PayPal PYPL — companies that remove the need for customers to have traditional bank accounts, let alone spend time going to a physical branch — ARKF is up more than 76% year-to-date.

Why It's Important: Physical banking is ripe for disruption like so many other industries, and that disruption is being accelerated by the coronavirus pandemic.

Common sense dictates if going into a bank — where there are likely other people — can be avoided, why not avoid it?

Much like e-commerce, cloud computing and other disruptive technologies, fintech was, well, disrupting before the pandemic . The data on bank branches confirms as much.

“After tracking the usage of financial services across demographic factors such as income, occupation, and age between 2013 and 2017, the Federal Deposit Insurance Corporation (FDIC) reported a drop in the use of bank branches and an increase in digital and mobile banking,” according to ARK Invest research.

Banks are up against it when comes to competing against digital wallets like PayPal and Square on cost.

ARKF's issuer estimates those companies spend just $20 to acquire each of their customers, while a brick-and-mortar bank spends $1,000 a head.

What's Next: While some ARKF components and other fintech companies are trying to get traditional bank charters, that doesn't mean they'll be opening vast networks of branches.

The data shows they probably should eschew that idea.

As of 2018, it costs $550,000 to run a single bank branch, according to ARK Invest. 

To put that staggering sum into context, it's a nice house in most of ex-California, ex-New York America. Or: $550,000 would buy 2,941 shares of Square, ARKF's top holding.

“In our view, the 77,000+ bank branches in the US represent an untenable commitment to acquire customers for roughly $1,000 on average and monetize them,” said ARK.

What is tangible is that fixed and sunk costs are meaningful for investors. ARKF is up more than 76% year-to-date, but the S&P Banks Select Industry Index is lower by 32%.

Disclosure: Todd Shriber owns shares of Square.

Courtesy photo.