A few weeks ago Morningstar’s Jim Callahan asked whether banks have moats. He felt that banks have high relative switching costs and cost advantages.
Gannon On Investing presented a different take on bank moats. Geoff Gannon did not really see high switching costs establishing moats around banks. He instead thought that bank transactions had similar characteristics to Gillette razor blades. Disposable razor blades are sold over and over again at a very low price per transaction, and because the buyer will form a habit and not make much of an effort to compare prices, profits will be higher. In summary, he sees banks as “sticky” businesses. I have a different take on what gives some banks moats.
First, I do not agree with Jim Callahan’s opinion that high relative switch costs give most banks moats. My personal experience is that it is fairly easy to switch retail bank accounts. Business accounts that provide lots of services might be a different story, but personal checking accounts are easy to move to another checking accounts . The only challenge is finding your pin number to change your direct deposits from your employeer.
Second, I agree in part with Geoff Gannon that the small and frequent “costs” (lower interest rates and fees) associated with retail banking keep many consumers from shopping around. The cost of researching alternatives and the uncertainty of switching to an unfamiliar bank can seem to outweigh the benefits in many people’s minds in the short-term. However, I don’t believe that this “stickiness” alone gives a bank a moat, especial in today’s information age. One can easily go online and discover tables detailing the best banks with the highest savings rates and lowest fees.