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I may not have said this to you for a while.
But I’d like to say thank you to those of you who take the time to write into me and the PSE team with your thoughts, your constructive criticism, and the things that you see and read related to the turning of the cycle.
It’s always good to hear from you.
Some of the correspondence revolved around a recent Property Cycle Investor newsletter I wrote about the ever-increasing market share of fractionalized lending.
You can find that edition of the newsletter here.
Specifically, some of you posed very well thought out and articulated questions about them and the future of digital banking.
And so today, we shall examine this issue further.
Your questions related to precisely what kind of effect these types of fintech companies, which exist outside the realm of the traditional banking system, are having on traditional banks?
How much will they contribute to the all-in speculative mania we expect will occur later this decade?
And what’s the latest in terms of how banks will fight back for market share?
These are important questions. I am pleased to receive them because they nailed the key issues on the head, at a very important time given that we are on the cusp of things going hopelessly over the top.
To answer them I have called on the help of a cycles expert to guide us. A bestselling author no less.
By the end of this newsletter, you should be some of the most well-prepared participants in this new lending revolution.
But know this. You are the target audience for these new developments. So, are you across just how much trouble customers have already experienced with these new fintech developments?
We will help you be ready. It’s going to be an interesting ride.
Marriage of inconvenience
There’s a lot of hype surrounding the new fintech companies specializing in fractionalized lending.
Built on the blockchain, it means a piece of collateral, like fine art or a property, can be split into pieces (not literally but in terms of their ownership) – in other words, ‘fractionalized’, and sold in smaller individual pieces to a much greater range of investors.
It may be one cycle too early to see the full extent of these developments. After all, most investors are not aware of them.
Once they are, the number of new business models that appear will be truly staggering.
But that may be a ‘new norm’ for the next cycle.
What I think will happen now is that this type of technology will further fuel the flames of credit-led speculation for the remainder of the current cycle.
New technology is now muscling in on the territory of the traditional banks. And, as you might imagine, they’re going to fight back. Consider the following headline:
Source – FT
America’s largest banks are preparing to fire the latest salvo in their efforts to defend their turf from Big Tech groups. JPMorgan Chase, Bank of America, Wells Fargo, and others, next year plan to launch Paze: a mobile wallet that will connect directly to the credit and debit card accounts of 150mn customers.
The app will be operated by Early Warning Services, a bank consortium group that already runs payments app Zelle.
This is interesting.
They seem to be taking the approach that if you can’t beat them, join them.
This is particularly ironic, when you consider just how hard traditional banks tried to ignore the tech giants’ pivot into digital wallets some years ago (think, Apple Wallet and Google Pay).
Banks weren’t interested in improving your client experience; you had no choice but to use their payments services. It was them or nothing. Until, that is, Apple and co became better banks than they were.
And so now, they have no choice. They must partner up with their former competitors in fintech or face being overwhelmed.
Enter Paze.
This is the digital wallet of choice for many of America’s biggest banks. It’s arguably their only way to challenge and fight off the likes of Amazon, Apple and even X (formerly Twitter).
So, banks are now in the digital game. This is critical because it now brings these new developments into the purview of the real estate cycle. The question is: what does this all mean?
I think it’s time to bring in our bestselling author to help explain it.
New lenders and Mania.
To help us understand what’s really happening, I turned to PSE co-founder Akhil Patel’s brilliant new book “The Secret Wealth Advantage – how you can profit from the economy’s hidden cycle”.
This is a book you absolutely need to have on your bookshelves. You can buy your own copy here.
If you have your own copy, go straight to Chapter 12 – The Mania.
In it, Akhil uses a case study of 1980s Japan to examine and explain the type of mania that erupts in an economy during the second, more speculative, half of the real estate cycle.
Which is where we are heading ourselves currently.
Akhil then analyzes the different developments that take place during the mania stage so that readers can follow it through. It’s in this specific part of the chapter where you’ll be forewarned of the key development: “the mania is driven by new lenders”.
I believe you will find this part most instructive.
Here’s an excerpt from that part of the book below. Bold emphasis is my own.
Banks become fully loaned up within permitted regulations, or they bypass them altogether (in Japan this happened by inflating the appraised value of land).
Further, regulations are designed to address the conditions that led to the last crisis. In a new era, there will be new practices or technology that regulators are unfamiliar with.
So, even though the case study Akhil was analyzing didn’t have anything to do with fintech, doesn’t the above sound a lot like what we are seeing here with this Paze wallet?
New lenders, new technology, new practices.
The effects are going to be profound. Because everyone, including you, is highly likely to own a digital wallet, either one like Apple Pay or in time what these big US banks are proposing. And you will likely use it for everything.
So, I ask you to pay attention and closely read what I’m about to write next.
Because the lines are about to get seriously blurred here, and it’s not to your benefit.
Forewarned is forearmed.
Back to the excerpts from Akhil’s books quoted above. Look at the highlighted words “permitted regulations”.
Are regulators currently concerned about this liaison between fintech and the banks?
From the quoted FT article:
“Regulators want banks to know who their customers are, and that becomes a lot harder when you are working through a fintech,” says Michele Alt, a bank consultant, and a former top official at the Office of the Comptroller of the Currency. “Anecdotally, we have heard increased examination scrutiny by regulators of these partnerships.”
So, that’s a resounding ‘yes’. Regulators are already worried about these fintech partnerships and how such tie-ups could open the banks and the US banking system to bad actors.
Innovation like this also creates an equal and unwanted consequence, at least to regulators. A way to bypass the rules.
Here’s your takeaway. I’m willing to bet that the stated concern by regulators that banks may not know their own customers due to partnerships with third party fintech’s is the wrong way to look at this problem.
The banks do want to know you. Very well, in fact. Here’s why.
What they have now realised is the true asset is your personal information!
Think now what Apple or Google or Amazon know about you? Your financials, your shopping habits, how and where you drive to and from work. This data is a goldmine. And the tech giants have now mastered how to monetise that data.
To make Paze the killer app that banks hope it will be, they will have to commit to allowing it to connect directly to customers’ bank accounts. Imagine now you use your phone to search for your very first home purchase.
Suddenly you find via the Paze wallet filled with offers from JP Morgan and co with their very best first homebuyer mortgage offers.
See the synergies here? No advertising needed by banks, they own your data and can now maximise it.
This is what creates the mania. Because it makes their ability to lend money quick and easy. And because it’s profitable it will happen.
The new developments are important to follow. Here are some key points you’ll need to know:
- how far will this go.
- how easy will it be to access credit.
- if you agree to take on this credit, what happens if it later transpires it was lent to you outside regulations?
- is it your fault if the banks broke the rules?
Like Akhil’s book states, it’s knowledge of the history of the real estate cycle that will ultimately guide you and provide you forewarning of what to expect.
And that’s what the Boom Bust Bulletin (BBB) is designed to help teach you.
You are going to give me the opportunity to take you in depth into the cycle.
You are going to learn about the history of both the 18.6-year Real Estate Cycle and the real reasons why interest rate rises, house prices, and stock markets are so indelibly linked.
Once you know this you will be able to decipher the news that we get bombarded with every day to focus solely on what truly matters.
No more negativity and noise, just the science of the economic rent and the timing inherent in the real estate cycle.
Forewarned is forearmed. Don’t think it’s going to be easy to stay safe. You need to be vigilant.
Take the example of Zelle, a peer-to-peer real-time payment system. This is a precursor to Paze: made by the banks in collaboration with, you guessed it, fintech.
Today, there is a congressional hearing into the rampant scams abounding on the network that have caused millions in losses.
This is the time when lending standards become extremely lax. Have you asked yourself in cases of fraud who you turn to for help? Recall the Paze wallet is a partnership, like Zelle. Is it on the banks to reimburse you, or the fintech company who built the wallet?
It’s not an obvious issue.
Banks have not reimbursed those scammed using the Zelle platform because they claim it’s not their fault but that of the provider, a third party. Yet these third parties blame the banks!
Who is to blame hardly matters to those who have fallen victim to scammers: they just want their money back.
But you don’t even have to be a victim of a scam to fall foul of these developments.
What if you start getting SMS messages from the banks who lent you money demanding some, or all, of it back? Simply because they can tell – via your digital wallet – that you’re struggling to make ends meet.
Then imagine this scenario during the incredibly violent and emotional period you and everyone else will go through during the inevitable bust that marks the end of the current cycle.
We know why it happens. Again, from Akhil’s book:
Since banks seek to maximize profits, this invariably results in over-lending towards real estate. As the cycle progresses, and land prices get higher, this applies increasingly to marginal projects.
Over-lending to real estate, particularly for “marginal” projects; those projects which are based on weak business cases.
And this is where the crash and crisis begin, and the banking system breaks down. What happens to you if the bank is collapsing and needs money back to shore up its balance sheet?
It could very well happen.
Soon you will never find it easier in your life to secure credit.
And in doing so you’ll never be so exposed in your life, either to the whims and want of those same banks. What they give digitally they can – and will – take away from you.
You must be emotionally and financially prepared for what’s coming.
That’s how my Boom Bust Bulletin can help.
As a Boom Bust Bulletin member you will receive a long-form newsletter every month detailing all the key turning points of the cycle, a deep dive into the most important markets across the globe and ways that you can personally benefit from this knowledge.
This derived from our unique and proprietary research – which you’ll not find anywhere else.
Plus, you’ll receive exclusive invites to BBB member-only webinars when we run them.
All this for just US$4 a month, less than a takeaway coffee.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team
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This content is not personal or general advice. If you are in doubt as to how to apply or even should be applying the content in this document to your own personal situation, we recommend you seek professional financial advice. Feel free to forward this email to any other person whom you think should read it.