In many previous pieces, I’ve shed light on the disruptive potential of up-and-coming firms that are leveraging cutting-edge technology to create innovative new solutions in order to attract the the customers of industries that were once viewed as safe from such tech advances.
As we enter the AI revolution, many traditional business models may need to be shaken up. The most remarkable change I believe will happen over the next few decades is the advancement of the financial industry. Banks are old businesses. They’ve got huge moats and until recently, their business models haven’t really changed over the course of the last century.
With the rise of mobile banking, small up-and-coming banks are popping up with promises of marginally higher interest rates than that of the behemoths that have dominated for many decades.
These interest rates likely come at a cost, however, whether it’s through the lack of retail banking locations and additional financial services or a higher degree of risk should the probability of insolvency be more likely in the event of another financial crisis. The latter possibility is probably enough to scare away most consumers, but the fact remains that with the rise of mobile banking solutions and AI-based financial services, the banking industry may stand to face one of the most challenging environments in its history.
This isn’t to say that the Big Banks are in trouble, however. In fact, the old-fashioned banks have shown that they’re aware of the technological changes the industry is poised to experience. As a result, many firms, including Toronto-Dominion Bank (TSX:TD)(NYSE:TD) have loosened their purse string when it comes to investments in innovation. As such, these investments, although likely not accretive over the short- to medium- term, will pay huge dividends over the next few decades. If you’re a young buy-and-hold investor, that should be music to your ears.
It’s hardly a mystery that TD Bank’s management team has been proactively pursuing initiatives in order to separate itself from the pack. With several patents ranging from AI to block chain, it’s clear that TD Bank knows that tech is going to play a major role in the future of the entire financial industry. As a result, I expect TD Bank to eventually become what you’d consider a “tech play,” as engineers begin to account for a larger portion of total employees.
Other banks, including Royal Bank of Canada (TSX:RY)(NYSE:RY) have caught on with the trend as well. And over the years, it’s expected that significant investment in tech will be a top priority in order to retain and attract customers. With TD Bank’s remarkable number of promising patent filings over the last few years, however, I think the bank has the ability to get a leg up over its peers by being aggressive with tech investments early in the game despite a lower ROE over the near-term.
Currently, I think TD Bank is your best bet if you’re looking for a future-proof bank with the capacity to hike its dividend at an above-average rate through for many years to come.
As the financial industry evolves into the financial technology industry, many investors may be worried about their Big Five bank holdings. I think these worries should be put to rest, however, as these banks have stood the test of time and know how to adapt. I believe this time will be no different.
Stay hungry. Stay Foolish.
