2009-01-16

good riddance to the financial sector

I had the pleasure of seeing James Grant of Grant's Publication give a talk over the summer, where he stated something to the effect of "banking will still be profitable in the future." His point was, bank stocks have been getting sold like crazy, and at some point they'll probably be oversold and undervalued, so it's a good spot to look for opportunites.

I want to present a bit of a contrarian view, because I'm not so sure.

The NY times has a neat picture of the shrinkage of the financial sector. In about a year it went from 20.4% of the market to 16.9%, meanwhile losing about half of its total value.

The thing I keep wondering about is not when will the industry bottom out and begin to grow again, but why should banking be 20% of the market to begin with? What does that industry actually do, other than push numbers around on pieces of paper? Paper.. not so much anymore! It's digital now, baby, and maybe that's why the end is neigh.

You see, computers (I actually prefer the term "robots," it's more fun to think of it that way) are way better at pushing numbers around than people with pens and paper. Let's break down a few things that banks do:

  • Lend money - just before the meltdown, you saw the emergence of direct person-to-person lending on the internet via sites like Prosper and Zopa. Investors can get better rates, and so can borrowers, if you eliminate (or at least reduce) the big chunky margin that traditional banks like to take.

  • Consumer banking - I use an internet bank. I get awesome perks like interest on my checking account and completely free ATM withdrawals at any ATM in the country (hmm.. ATMs.. robots..). Meanwhile, I cost the bank nearly nothing because I've never been to a branch (they only have three, and they're all in California), and I do all of my banking robotically on the internet. Oh, and pretty much everyone uses ACH to move money around these days, right? That's pure robots too.

  • Trading - Some of the bigger financial firms historically made money trading. Over the past few years, technologically savvy trading firms have stepped in and taken much of the business away from the pen-pushers. Using robots that are designed to pick up pennies, where people used to have to get paid much more to do the same thing.





So if robots can move money around almost instantly and at almost zero marginal cost, why does this need to be 20% of the economy anymore? I say good riddance, financial sector, may you become 5%.. or less!

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