The Story of How the Banking Establishment was Taken Down

Literally, ‘Attention, baby!’ — ‘Achtung Baby’ was the title of a best-selling album by U2 in the 1980s.

But in German, it really means ‘warning’ or ‘watch out’.

As in ‘watch out, a British spitfire is about to blow you out of the sky.’

Achtung, spitfeuer!

(Why do all roads seem to lead back to Second World War metaphors when it comes to Germany?)

Well, in the spirit of today’s piece I say to you now: ‘Achtung, Dear Reader!

Because if you’re an investor in any of Australia’s big banks, I’m about to tell you why a certain 150-year old German institution could be a big warning sign for you too…

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The neo-banks are coming…

Germany is the undisputed powerhouse economy of Europe.

And yet, the value of Germany’s biggest bank is in freefall. That should pique your interest. And I’ll explain why in a moment.

First, check out the ‘death spiral’ share price chart of Deutsche Bank below:

Money Morning 2-07-19

Source: Incredible Charts

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Don’t underestimate how huge this is…

It’s like seeing 95% wiped from the value of your Commonwealth Bank shares.

Imagine it: CBA shares at $4 per share in 10 years from now.


So how has this happened to Germany’s largest and once most respected bank?

Well there are the scandals, of course. Or the ‘Skandal’ as the Germans would call them (they capitalise the ‘s’ to stress the importance of it).

Allegations of laundering Russian money, manipulating interest rates, violating US economic sanctions, duping their customers into buying toxic securities and spying on its critics…

It’s not exactly a glowing list.

In fact, in the last couple of decades Deutsche Bank has resembled more of a rogue villain from a James Bond film, than a respectable bank.

Money Morning 2-07-19

‘Deutsche Bank, you say?’

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But beyond the Skandal, the bank is suffering from problems that run deep in all old school banks — even Australia’s Big Four.

Lower revenues, sticky expenses they find hard to get down, tougher credit regulations and rising funding costs.

They’re stuck in a vicious cycle.

To make matters worse, there’s now a new breed of German bank taking huge chunks out of this flailing carcass.

The neo-banks are coming…

The new wave of fintechs are gaining ground

While Deutsche Bank struggles, German challenger bank N26 is growing at a rapid pace.

This ‘smartphone bank’, backed by famous tech investors such as Peter Thiel and Li Ka-shing, is valued at US$2.7 billion (from January 2019). Much smaller than DB, but closing in fast, and with plans to enter the US market soon too.

If I was a Deutsche Bank investor, I’d be worried.

In my opinion, the story of these two banks is a microcosm of a trend we’ll soon see the world over. It won’t be a unique story anymore.

It’ll be the story.

The story of how the banking establishment was taken down…

Technology is, of course, at the heart of it.

Although the banks will try to invest in technology to compete, the fact is they don’t have the tech culture or know-how to win.

Plus, the other fact is the new wave of fintechs are gaining ground simply by using their lower cost base (remember, no branches) to cut fees on things such as bank accounts and transactions.

Old school banks loath to do that because it instantly eats into their profits.

It’s a bit like how Kodak didn’t want to promote digital cameras because it would destroy profits from their film-developing business.

You know how that story ended (Kodak went bust).

But there’s no escaping it.

To compete with these fintech upstarts, banks will soon have to start cutting their own lunch in all manner of ways.

Which will mean falling revenues are on the horizon — and that’s just to stay in business.

They really are stuck in between a rock and a hard place…

Why you need to watch this area carefully

I think this area will be fascinating for you to watch over the next few years.

Not just fascinating, but actually essential. Because it’s not just in Germany that this is happening, it’s here in Australia, too.

The future of banking isn’t coming; it’s already here.

You’ve got success stories such as the innovative Afterpay, newly listed business lender Prospa, wealth manager platforms like Hub24 and neo-banks such as Xinja and Revolut all making in-roads in Australia.

If the trend continues, this squadron of fintech challengers are about to bomb the living heck out of old school bank profit margins.

And that’s not the only threat…

At the other end, you’ve now got large tech companies like Facebook and Apple launching forays into banking, too.

Apple Pay is turning into a serious threat to the traditional world of credit cards.

And you probably know by now that Facebook last week announced the launch of their own cryptocurrency, Libra. It caused quite the stir.

You could almost smell the fear from the old banking elites as they screamed ‘You can’t do that!

But who says they can’t…?

What on Earth’s going to happen next? I doubt I’ve even foreseen the extent…

But it’s not going to be an easy decade ahead for Australia’s big banks, that’s for sure.

Because make no mistake — big, big changes are coming to the world of banking…

Good investing,

Ryan Dinse,
Editor, Money Morning

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Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia