82 - Why Banking is an Attractive Industry

Mental Models discussed in this podcast: Retention Rates Lindy Effect (Durability) Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode82 Key Characteristics of the banking industry which make it attractive for investors Fewer Banks over time in the United States Over 23k commercial banks in the United States in 1966.  By 2002, that number dropped to 7.8k.  In 2018, there were only 4.7k FDIC-insured commercial banks in the United States. Number of New Banks being created has fallen to near zero Before the 2008 financial crisis, about 146 new banks were created each year. Since then, only 1 bank per year has been created. High Retention Rates Relationship-Based If you're a local business you may work with a dedicated banker that helps you out, offering you a loan. You'll probably also hold your personal household accounts with them, your mortgage, college savings fund, checking accounts, etc... Each type of account or loan you have with a bank increases the stickiness of the customer. A bank that is only a checking account is easy to switch. A bank where you have a checking account, multiple savings accounts, a debit card, credit card, mortgage, and car loan is much harder to change away from. Low Competition (Hard to steal a customer) Switching banks is time consuming, difficult, and there is often only a small benefit for doing so.  As an industry, bank efficiency is improving over time. Fewer commercial banks in the US = less competition.  The weaker banks are the ones failing or being acquired. Fewer bank branches = higher concentration of deposits per branch High retention rates = Large amount of recurring revenue, the stability of deposits, and reduced risk of bank liquidity problems.  Financial service companies and the internet = lower costs to service customers, which means more profit per dollar of deposits. Banking is a durable industry It has existed for thousands of years and will continue to exist for thousands more.  Lindy Effect Banking as a business is very simple. You collect deposits and make loans. Specifically, we're focused on commercial banking. There is no R&D. Product innovation is unnecessary. There is no inventory that can expire and become worthless.  Summary: Banking is an industry with characteristics that are quite attractive to long-term investors. Properly evaluated, a bank can make a great investment. High retention rates, lower competition over time, and the durability of the industry are what attract me to bank investing. References: https://ilsr.org/number-banks-u-s-1966-2014/ https://www.statista.com/statistics/184536/number-of-fdic-insured-us-commercial-bank-institutions/ https://ilsr.org/number-of-new-banks-created-by-year-1993-to-2013/ https://ilsr.org/vanishing-community-banks-national-crisis/