Renowned banking analyst Meredith Whitney spoke with CNBC Wednesday, and she issued a warning about the trajectory of the American banking industry: it’s going to be forced to push out the middle class. Due to new regulations and tightened credit standards, banks are making their business model less attractive to the vast majority of the country.
“The unintended consequence is it’s really squeezing the middle end,” Whitney said. “You’re going to see more and more people living outside the system. When it happens, it becomes so much more difficult to operate…The pendulum swings to too much regulation and it squeezes out the system.”
Those people getting “unbanked,” as Whitney termed it, will turn more towards payday lenders and others at the periphery of the financial system to get access to money.
In her interview, Whitney pointed out that in the past home equity lending had provided an easy source of credit for middle-class Americans. But nowadays with billions in home equity having disappeared and credit tight besides, home-equity loans are simply not as readily available. Easy access to credit masked the stagnant wage growth the middle class has suffered in recent decades. With that credit now gone, the middle class is paying the price in lowered spending power.
So is this a cyclical problem, or a regulatory one? To that end, Whitney also specified that “regulation has been one of the biggest drivers [pushing people out of banking] over the last several years.” She estimated that one in three Americans is un- or underbanked, higher than the prevailing estimate of one in four.
Can she be right?
Whitney is certainly worth paying attention to. After all, she made her name by predicting trouble in the banking industry in 2007, recognizing lurking problems for Citibank long before other analysts or commentators. On the other hand, her other big call — that there would be 50 to 100 large municipal bond defaults in 2011 — has yet to materialize. She might be overly bearish.
How exactly our banking industry could survive without the participation of America’s middle class is something that Whitney failed to discuss. It doesn’t seem terribly likely that the industry would do well by pricing out such a large chunk of Americans.
Besides, with so many company’s using new technologies to disrupt traditional banking models, the future of banking looks pretty good for the middle class. Dwolla is developing new and cheap ways to move money around; Lending Club and Prosper are developing ways for people to lend money to one another; prepaid cards, for better or worse, are giving people access to electronic payment methods, obviating the need for other traditional banking products like checking accounts.
There is plenty of disruption in the industry, both top-down disruption due to federal regulation, and bottom-up disruption from start-ups. Banking will likely be less profitable in the future due to new laws like Dodd-Frank, but it’s hard to believe the industry might actually show the middle class — the backbone of the American economy! — the door.