Lloyds Bank (LSE:LLOY) shares almost hit 70p before the pandemic. As I write, they stand at around 42p and certainly look tempting at that level in comparison.
Inflation and steep interest hikes experienced so far this year have certainly improved investor sentiment when it comes to financials. Around 70% of Lloyds’ revenue stems from interest income.
While the outlook seems bright for Lloyds Bank’s shares, there is a storm on the horizon. The banking industry has seen reduced barriers to entry in recent years. Financial technology companies have started to capture a significant share of consumer market finance through the birth of eBanks. The popularity of eBanks is growing, particularly among younger market participants.
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If Lloyds cannot maintain its dominance in the consumer banking segment, its pool of available deposits on which it can earn interest will deplete. This could start to subtly strangle the performance of Lloyds Bank shares in the long term.
What is an eBank?
An eBank is a bank offering its services solely online with no physical premises. The key benefits an eBank offers to its users often include:
- Zero or very low-cost fees even on international transfers.
- Preferential foreign exchange rates.
- The ability to hold multiple currencies.
- Super-fast mobile banking apps with excellent features.
However, eBanks are not without drawbacks. These can include:
- ATM withdrawal caps.
- Lower company financial strength.
- They’re less of a one-stop shop for financial services compared to high-street banks.
Why I’m buying Wise shares
Wise (LSE:WISE) is an eBank specialising in cross-border payments. Personally, I very rarely make any international payments; however, the market for this service is huge. In a press release in 2021, the World Bank stated that “remittance flows to low- and middle-income countries reached $540bn in 2020.”
Wise’s revenue soared by over 50% in the first quarter of this year and boasted £24bn worth of payments transferred.
Its success has allowed Wise to further reduce its transaction costs to its users, making them even more competitive compared to high-street banks.
Elsewhere, Wise is investing heavily in its products and infrastructure, with the goal of expanding further in developing and emerging economies such as Africa and India.
I feel that Wise has some great technology, enough to attract partnerships with both Monzo and Google Pay. I’m confident that Wise will deliver on its financial guidance for 2023 and achieve its projected 35% revenue growth in 2023. As such, I bought a small position last week.
Something to consider
One downside to investing in Wise I considered was the recent investigation into its co-founder and CEO, Kristo Käämann, who was fined for failing to pay a large amount of tax in 2018. The CEO of a company offering financial services having their personal financial integrity questioned is certainly not ideal.
The Financial Conduct Authority ruled that Käämann ought to take remedial action regarding his tax matters or risk failing the “fit and proper” test, which would force him to step down.
With the investigation concluded in 2021, I’m betting that Käämann has learned from his mistakes. I’m confident that the quality of Wise shares will override this controversy and provide a healthy return going forward.
