Bank of America Corp (NYSE:BAC) has realized that, today, the cost of gathering deposits and handling routine transactions isn’t primarily salaries and benefits, but technology.
Even during the past decade, banks gathered deposits by having a lot of branches or “stores” staffed by people.
As I helped a friend gather emergency cash yesterday, I saw how this has changed. No one went in the “branch” bank I visited. Instead they walked up, or drove up, to four ATM machines. There were some drive-up windows at the suburban Atlanta location we visited, but they went unused.
Bank of America’s understanding of tech’s role would seem to be its chief advantage, alongside JPMorgan Chase & Co. (NYSE:JPM), in dominating consumer banking. The bank’s latest branches don’t have any employees at all.
I have written that this helps make BAC stock a safety play. But is it, really? I bank with Charles Schwab Corp (NYSE:SCHW). I could use all the Bank of America ATM machines, free, the charge being refunded to me every month. The credit union we had used started charging for accounts that allowed you to use a teller. When we ran out of paper checks recently, I realized we didn’t need them.
The process of consumer banking has changed in this decade. And while Bank of America has worked hard to stay on top of it, with 100,000 people now working on or operating its technology platforms, the extent to which its investments play to its advantage — and to the advantage of its investors — remains unclear.
Banking vs. Moore’s Law
A bank ATM machine costs about $10,000 for a merchant to set up, plus the cost of real estate, with operating costs of just a few hundred dollars per month. This is dirt-cheap compared to the cost of hiring tellers and staffing bank branches.
New machines can take Apple Inc. (NASDAQ:AAPL) Apple Pay and other phone-based payment systems using near-field communications. Checks are read directly by the machine, and no longer go into envelopes. The latest machines can take loan payments, cash checks and split deposits among accounts.
While there are risks to running ATMs — from skimmers that read cards to thieves who will cut into the machine for the cash or just take the whole thing — these costs are manageable.
Now, even ATMs are quickly being replaced. Once a bank’s full functions are on your phone, you don’t even go to the ATM. I began depositing my checks through my phone last year, and no longer even visit my Schwab branch.
The problem with investing heavily in technology, as Bank of America is doing, is the speed with which technology changes and renders investments obsolete. A cardless ATM serves not only Bank of America customers, but others’ customers as well, and recouping the cost through fees changes the nature of the bank’s balance sheet.
The Bottom Line on BAC Stock
The bottom is that Bank of America is becoming a technology company.
When something like blockchain or Bitcoin comes along, they look to patent its use cases and partner with Microsoft Corporation (NASDAQ:MSFT). When the technology landscape changes, Bank of America lays off the people working on the old stuff. When hot startups move to disrupt the business, BofA buys them and uses that technology against other innovators.
Technology has reshaped banking and, in turn, has reshaped how you invest in banks. Right now, Bank of America’s technology platform makes BAC stock a buy, but technology platforms are made to be disrupted.
You can’t just stick a bank stock in your portfolio — any bank stock — and ignore it. As banks stay on top of change, you must stay on top of banks.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AAPL, MSFT and SCHW.
