The most recent economic crisis is fading in the rearview mirror. Republicans control the levers of power and are rolling back regulations imposed during previous U.S. administrations. New technologies and competitors are shaking the financial services industry from complacency.
That sums up the status quo — of the 1980s.
The sense of excitement that today surrounds deregulation, fintech innovation, and technology giants — like Apple and Alibaba Group Holding, whose digital-payment offerings challenge a traditional banking stronghold — is hardly new. Similar waves of change have disrupted convention in the past. The history is instructive and, to incumbent institutions that may have faced questions about their survivability, even reassuring.
Between 1981 and 1985, the years of President Ronald Reagan’s first term, the U.S. came through a recession and a real estate crash, and Reagan appointees pushed an aggressive deregulatory agenda. The disruptive technologies of that era included automated teller machine (ATM) networks, which contributed to the demise of laws that prevented bank branching across state lines, and personal computers, through which financial services began to be delivered directly to homes and businesses.
The Reagan-era deregulators found ways around the Glass-Steagall Act of 1933, which erected walls between commercial and investment banking and between banks and other industrial enterprises. The law was not repealed until 1999. One of the deregulatory levers was savings and loan charters, which were not restricted by Glass-Steagall.
In 1985, for example, Ford Motor Co. was able to diversify by acquiring First Nationwide Financial Corp., the parent of a savings and loan operating in multiple states. At about the same time, Sears Holdings Corp., then called Sears, Roebuck & Co., was implementing its “stocks and socks” strategy, using retail stores as distribution points for its then-owned businesses: Allstate Insurance Co., securities brokerage unit Dean Witter Reynolds, and Coldwell Banker Real Estate. American Can Co. also made its way into financial services during the Reagan era, a diversification move that resulted in its rebranding as Primerica.
Powerful companies like Ford and Sears struck fear in many consumer bankers’ hearts, but in the end, it was incumbents that were still standing. Ford sold First Nationwide in 1994 to an investment firm controlled by financier Ronald Perelman, according to The New York Times. First Nationwide merged with Golden State Bancorp in the late 1990s, and Citigroup bought Golden State, whose largest shareholder was Perelman, in 2002.
Sears lost its once-dominant retailing position to Wal-Mart Stores, and its Dean Witter and Discover Card assets went to Morgan Stanley in 1997. Sears’ store credit cards were acquired in 2003 by Citigroup, which in the late 1990s had bought another nonbank-initiated product, AT&T Universal Card.
The 1990s rattled banking in a different way: The Internet forced a fundamental rethinking of information technology and communications architectures. When banks were not so quick on the uptake, then–Microsoft chairman Bill Gates compared them to dinosaurs. A 1994 Bloomberg headline read “Bill Gates Is Rattling the Teller’s Window,” but in reality, Microsoft had no plans to enter banking. After adjusting to its own challenges in Internet-driven commerce, Microsoft remains dominant in PC operating systems and is a leader in cloud computing — perhaps the most transformative technology today. Microsoft Azure, Amazon.com’s Amazon Web Services, and Alphabet’s Google Cloud Platform are among the businesses that are making virtually unlimited quantities of computing power available at attractive, pay-as-you-go prices. But are “big tech” companies like these a threat to banks?
An August 2017 World Economic Forum report on fintech observed that large technology firms are in the driver’s seat, possessing the kind of IT talent that banks would have a hard time attracting. Big tech businesses are to be feared for their “digital prowess, established brands, and customer access, which provide an almost unassailable advantage in extending their corporate brands into banking,” Gerard du Toit, Bain & Co.’s head of banking, said in a statement when the consulting firm released its annual retail banking study in November.
Maybe this time is different for Wall Street. Then again, the financial services industry spends hundreds of billions of dollars annually on IT, including $127 billion within capital markets, according to research firm Opimas. JPMorgan Chase & Co. alone had an IT budget of $9.5 billion for 2016, including $3 billion spent on new initiatives, CEO Jamie Dimon said in an April 2017 letter to shareholders. The bank spent $600 million on “emerging fintech solutions,” he said, which includes improving digital and mobile services. Meanwhile, U.S. banks’ aggregate quarterly net income was higher than ever in second-quarter 2017, at about $48.1 billion, a level that was nearly the same for the following three months, according to Federal Deposit Insurance Corp. data. These are not indicators of incumbents withering away.