Earnings are a reflection of customers as well as banks

Earnings season starts
In some ways banking is a perfect business. The basic model is a banker takes money from a depositor, agreeing to pay a certain amount of interest on what is essentially an open-ended loan. The banker turns around and lends out that money, collecting a higher level of interest from the borrower. In theory, a bank should never lose money.

Processing Content

But banks don’t exist in theory, they exist in reality, and reality is different. In reality, there are myriad pressures that can come down on a bank’s P&L statement. Did you make good or bad loans? Are your debtors paying their loans back? Is the economy growing and creating demand for credit? Are other banks muscling in on your business? And of course the big one: is the central bank making the cost of money higher or lower by raising or lowering interest rates?

That last one is the question tying all the other questions together, our Allissa Kline writes in her preview of third-quarter earnings season. Today we get reports from JPMorganChase, Goldman Sachs, Wells Fargo, and Citi. Tomorrow we get Bank of America and Morgan Stanley. All of these banks are so big that the question of whether or not they reported a profit isn’t an issue at all. All of them did, of course, with numbers in the billions.

The questions really are what their businesses reflect about the environment for the industry and the country.

Gambling isn’t good for banking
I was joking (well, half-joking) last month that banks looking for new revenue streams might turn to gambling, or rather the so-called “prediction markets” that are gambling but in another name. 

Six years ago banks didn’t have any interest. But that might change if companies such as Kalshi and Polymarket and their preferred regulator, the Commodities Futures Trading Commission, get their way. If prediction markets fall under the same broad regulatory umbrella as derivatives markets, rather than the state-by-state gambling laws, then it stands to reason that a financial-services firm might decide to start making markets in, say, a Giants-Commanders game (I would not recommend it, for a variety of reasons). 

I know, it really is kind of outlandish to think about. But the reality is, gambling is growing sharply in the country and already making inroads into banks’ customers. Younger people, the kinds with which banks need to form long-term relationships, are the main customers for Draftkings and Kalshi and all the others, and that creates a problem for the banking industry, Mitch Rutledge, the CEO of banking-software firm Vertice AI, wrote in a BankThink essay.

He noted that more than 9% of checking-account holders are involved in gambling. “Bettors are not saving like non-betters,” he wrote. Non-betters are putting their money into savings or money markets or CDs. Bettors are putting it into, well, a Giants-Commanders game (again, can’t stress enough what a bad idea that was). “Heavy bettors also had a 56% lower median deposit account balance compared to casual bettors,” he said. And he said the analysis his firm did almost certainly didn’t catch everything. In other words, the problem is worse than he could quantify.

This dovetails with a story our Kevin Wack wrote this summer, reporting on the findings of a New York Fed research effort. Staffers there found that in counties where sports betting was legal, consumer credit delinquencies were noticeably higher in the months and years after gambling was legalized. Even in further off counties, where people would have to drive to the counties where betting was legal, there was a noticeable uptick in delinquencies.

No, banks may decide that gambling, or prediction markets, or whatever you want to call it, isn’t good for their business. But at least some of your customers have already gotten involved, and it is affecting their finances. And that will have some effect on your bottom line.