Five or six years ago, I thought it could be curtains for Lloyds Bank (LSE: LLOY), figuring the opportunity was with new challenger banks and fintechs. Today, things are quite different.
Consider many reasons why the future of Lloyds Bank looked grim back then.
Firstly, there was their public image following the the 2008 crash and the remuneration of the bank’s bosses.
Secondly, was the threat posed by the ‘saintly’ giant techs, the fear that the likes of “community creating” Facebook, “don’t be evil” Google, Apple, and Amazon would move in on banks’ turf.
Thirdly, there was legacy IT. The technology that establish banks’ operations relied on needed a comprehensive overhaul, but how do you transform key technology while still trading? Challenger banks and fintechs appeared to be at an advantage because they were starting with a clean slate.
Fourthly, there were low barriers to entry — as the traditional branch-based banking model was replaced by online banking, the costs of setting up a bank fell.
Then there were regulatory changes designed to remove the “too big to fail’ nature of banks, such as open banking regulations, forcing banks to provide data on individual customers to rivals, if requested by the customer.
Number six, there was the threat posed by cryptocurrencies such as Bitcoin, designed to cut out the middle man in the money transaction business.
Finally, there was the emergence of new funding models — peer-to-peer lending, and crowd-sourced funding.
How Lloyds respondedÂ
Today, things look quite different. While the public image of banks has improved, the techs seem to have lost the moral high ground in the eyes of the public.
Turning to IT legacy, and low barriers to entry, Lloyds Bank has surprised most analysts with the way it has embraced digital, (via its partnership with Microsoft), transformed its IT, and responded to the threat posed by challenger banks and fintechs by adopting an agile approach to product development while looking to partner some startups.
As for new funding models, contrast the performance of Lloyds over the last few years with peer-to-peer lending company Funding Circle (LSE: FCH), which has seen shares collapse by 80% since the 2019 IPO, while losses have increased.
Turning to digital currencies, for many people, Bitcoin has been more about hype than hope. Facebook’s dream for Libra, its digital currency, has felt more like a nightmare for the company. China’s plan for a digital currency may be more tenable, but so far Lloyds seems unscathed by the cryptocurrency threat.
As for challenger banks benefiting from open banking regulation, the more interesting digital-based challenger banks are not yet listed on the stock market, but both Metro Bank and Zopa had a difficult 2019.
It’s not that Lloyds can point to 2019 as a triumphant year, what with profits falling precipitously after higher than expected PPI payouts. However, the PPI disaster has done is worst and the bank looks much stronger now. With its tempting dividends yielding in excess of 5.5%, I would say Lloyds is looking more appealing today that at any time for many years.