Finance Stocks

Two ways to make money from money

The two themes in this family sit on opposite sides of the same business. A bank earns the difference between what it pays for deposits and what it charges for loans, and carries the risk that the loans are not repaid. A payments company earns a fee on a transaction and carries no credit risk at all. The first is a balance sheet; the second is a toll.

Regional banks are read through three numbers. The cost of deposits, which rises when savers have alternatives and compresses the margin. The shape of the rate curve, since borrowing short and lending long only works when long rates are higher. And the loan book, particularly commercial real estate, where a concentration built over a decade can become visible in a quarter.

Fintech divides by what is actually earned. Card networks take a fraction of every transaction and carry no risk, which is the best position in the industry. Processors do the technical work at thin margins on high volume. Lenders that happen to use an application instead of a branch are banks with a different distribution, and carry the same credit risk. The distinction matters most when the economy turns: the fee businesses slow, the lending businesses take losses.

What both themes share is that the regulator is a participant rather than an observer, and a rule change can alter the economics of an entire model without any customer noticing.