The banking industry’s overall profitability remains strong, but it faces mounting competition from nonbank players. While crypto often dominates headlines, its actual threat to traditional banking is limited. The real challenges come from neobanks, fintechs, and the ongoing battle for deposits.
Banking’s Strong Bottom Line, But Stagnant Metrics
On a purely bottom-line basis, the banking industry looks excellent. Second-quarter net income reached $90 billion, the highest in over 40 years and likely the highest ever. The industry has not had an unprofitable quarter since the fourth quarter of 2009. However, other measures paint a less rosy picture.
The industry’s return on assets in the second quarter was 1.37%, virtually flat with 1.34% in the second quarter of 2006. While no one expects explosive growth like the tech sector, modest improvement over 20 years would be welcome. Net interest margin was 3.32%, slightly worse than 3.46% in the second quarter of 2006 and significantly down from the all-time high of 4.91% in the first quarter of 1994.
Competition from Neobanks and Fintechs
Nonbank competitors are intensifying pressure on traditional banks. Chime, once dismissed as a gimmick, is now publicly traded, profitable, and acquiring its own bank to become a more complete competitor. Other neobanks and fintechs continue to attract customers and deposits.
Meanwhile, crypto’s role as a full-fledged competitor is questionable. The industry has spent significant resources lobbying Congress to pass legislation that would legitimize digital assets. But when looking at bitcoin trading volume in bitcoin terms—not dollar terms—volume has steadily declined since the 2017-2018 boom. Despite bitcoin’s price surge, the volume of bitcoin traded has gone nowhere.
The crypto industry has introduced NFTs, prediction markets, and perpetual futures, but nothing that has truly expanded its reach. Stablecoins are used almost exclusively for trading cryptos and have no real-world utility. There is little new and compelling in crypto, which suggests the crypto lobby needs regulatory affirmation far more than banks need regulation to block crypto.
The Clarity Act and Its Limited Impact
The recent failure of the Clarity Act to survive a procedural vote in the Senate will likely be cursed in crypto circles and welcomed in banking circles. However, while the failure dooms the act’s prospects for now, it does not solve any problems for banks—it simply avoids creating a new one.
Banks Compete for Deposits in Various Ways
Banks are still competing for deposits, which is pushing them in different directions. Advances at the Federal Home Loan Banks jumped 15% in the second quarter from the first, reaching $532 billion, the highest level since the fourth quarter of 2024, according to S&P Global Markets Intelligence.
Banks are also using CD rates to attract deposits. In the second quarter, 750 banks offered teaser rates on CDs above 3.5%, up from 588 at the end of the first quarter. With the Fed expected to raise rates again, this number will likely climb further.
Other banks are taking a traditional approach. Northeast Bank in Maine is focusing on expanding and improving its physical footprint. The firm has long been known for commercial real estate and SBA lending, but like everyone, it needs to keep growing. American Express is expanding its services targeted at small businesses, continuing its encroachment in that field.
In one piece of good news for banks, Enova International abandoned its attempt to buy Grasshopper Bancorp, citing the opaque regulatory environment. The deal was opposed by consumer advocates who objected to a firm with roots in payday loans buying a regular bank.
The Real Challenges Ahead
While the industry on the whole is extremely profitable, it faces many challenges. The mountain always looks serene from a distance, but climbing to the top is hard. Banks must navigate deposit competition, evolving nonbank rivals, and regulatory uncertainties—crypto is just one small part of the landscape.