Will clearXchange Be a P2P Game Changer?

mobile-payments.jpgIt looks like there’s going to be a big rumble in the person-to-person payments jungle.

An announcement last week that three of the nation’s largest banks—Bank of America, J.P. Morgan Chase and Wells Fargo—had teamed up to offer their customers a new person-to-person (or P2P for short) service called clearXchangesignals that these institutions are serious about taking on the industry leader, PayPal

Although details about the new clearXchange offering are somewhat scarce at this point, the three banks’ customers will be able to send money directly from their existing checking accounts to another party using just an email address or mobile phone number. This is pretty much what consumers have already been able to do through PayPal, which has used its Ebay Inc. connection to build a customer base of some 85 million users.

Not to be outdone, Google Inc. also announced last week plans to create a digital wallet that will permit consumers with Android smartphones to pay for their purchases with their credit or debit cards by waiving their phones in front of a special reader at the cash register. The card information would be linked to a special chip in the phone.

Both initiatives will most certainly accelerate the growth of mobile payments, which my colleague—Executive Vice President Al Dominick—has written about in several recent posts. But from the banking industry’s perspective, clearXchange offers the best hope to date that the fast-growing P2P market won’t end up being dominated by e-commerce heavyweights like PayPal and Google.

Hank Israel, a partner at the New York-based consulting firm Novantas, explains that the value of any payments network “is defined by the number of endpoints that it has.” Those endpoints are in fact customers, and Israel estimates that the three banks combined have about 25 million customers (minus some overlap for, say, BofA checking account customers who have a home mortgage with Wells or Chase credit card). With 85 million endpoints (i.e. customers), PayPal is still the “big bad gorilla” in the P2P market, says Israel.

But by all indications, clearXchange intends to open itself up to other banks in an effort to create as large a network as possible—which will be critical to its success. “It wouldn’t be in [clearXchange’s] advantage to say there’s a group of banks that it doesn’t want to be in the network,” says Steve Ledford, also a partner at Novantas. “The value of a network to everyone becomes greater—exponentially greater—the more participants you have.” A BofA spokesperson confirms that clearXchange is in discussions with other banks about joining the network.

Indeed, there are approximately 280 million individuals with checking accounts in the United States, according to Israel. And the average checking account has 360 transactions a year, compared to just 13 for PayPal—which means that a large bank owned network could eventually generate a sizeable customer base and very significant volume.

According to Israel, clearXchange would do well to embrace the digital wallet concept and incorporate additional payments options including credit cards since this would greatly increase the service’s utility. PayPal already allows its users to send P2P payments using a variety of mechanisms including multiple credit cards and transaction accounts.

While PayPal and Google would be formidable competitors for any fledgling e-commerce venture, clearXchange has other important advantages. PayPal requires its customers to set up a separate PayPal account in order to use its P2P service, while clearXchange’s bank customers will simply be able to use their existing credit and debit card accounts, which would appeal to those P2P users who prefer to deal with a single entity. And initially at least, Google’s new offering will be restricted to smartphones that use its Android operating software, and will also require merchants to install new point-of-sale technology. These factors may limit how quickly Google can build a customer base for its digital wallet.

Despite PayPal’s clear lead in the P2P market, Israel believes that clearXchange has a good opportunity to catch up. “To the extent they can work collaboratively, I think they’ll be very successful.”

Four Degrees of Separation

In my 30-plus years as a financial journalist, the best banker I’ve ever known was Carl Reichardt, who was CEO at Wells Fargo & Co. from 1983 to 1994. By “best” I mean someone who knew how to make money. Reichardt did it by focusing on a few core businesses, controlling costs and getting his employees to perform through financial incentives and the blunt force of his own personality. I’m sure Carl had an affable side, but he was a tough old cuss when it came to running his bank.

fishes.jpgTwo other bankers who are pretty much in the same category were Jack Grundhofer and his younger brother Jerry. Jack and Jerry once worked for Carl and Jerry once worked for Jack, and they all practiced what became known as the “Wells Way.”

And a guy who might end up being just as good as all three of them is U.S. Bancorp CEO Richard Davis, the subject of our cover story in the current issue of Bank Director magazine. Richard never worked for Carl, but he did work for Jerry and is an apple off of the same Wells tree, even though he never spent any time there.

These tangled connections are fascinating, and here’s how they all fit together.

Jack was a vice chairman and head of corporate banking at Wells when he was recruited to run First Bank System in 1990 after the Minneapolis-based company experienced severe lending problems. Jack turned the bank around nicely using pretty much the same strategy that Reichardt used at Wells. He was a demanding manager who preferred to focus on a few core businesses, but he also believed in the importance of incentive compensation. In 1997, Jack celebrated First Bank’s revival by acquiring Portland, Oregon-based U.S. Bancorp and taking that company’s name.

Jerry Grundhofer, who is six years younger than Jack, began his banking career at Union Bank in Los Angeles (where Reichardt had once worked many years before), was later recruited by Jack to join Wells,  where he stayed for a few years before leaving to join Security Pacific Corp., eventually becoming president and COO. The nomadic Jerry eventually left Security Pacific to become CEO of Star Banc Corp., a struggling Cincinnati-based bank that he quickly turned into a Midwestern powerhouse through a string of well-conceived and skillfully executed acquisitions.

Jerry’s best deal was probably his last one. In 2001, his bank (which had assumed the Firstar Corp. name after one of his early deals) acquired Jack’s bank – U.S. Bancorp – and assumed the latter’s name. For the next few years Jerry worked for Jack and then succeeded his older brother as U.S. Bancorp’s CEO.

Honestly, you can’t make this stuff up.

Richard Davis, who succeeded Jerry as U.S. Bancorp’s CEO in 2006, began his banking career as a teller at Security Pacific, while getting his college degree at night. Richard’s career took off when Jerry arrived at Security Pacific to run its retail banking operation and gave him his big opportunity. Richard followed Jerry to Star Banc and eventually built his own reputation as an outstanding retail banker. Since taking over at U.S. Bancorp, Richard has put the company on a solid growth path and turned it into one of the top performing big banks in the country.

I’ve had the pleasure of meeting all four men, and wrote separate profiles of Reichardt and each of the Grundhofers. They’re all a little different. Carl and Jack seemed tougher, Jerry and Richard more motivational. (Richard was a keynote speaker at our Acquire or Be Acquired conference a few years ago and had 500 community bank CEOs and directors so fired up, I thought I was at a Mary Kay convention.)

But they also have similar backgrounds. Carl grew up in Houston where his father managed a motel. The Grundhofers grew up in Los Angeles where their father was a bartender and their mother a housekeeper. Richard also hails from LA, where his dad drove a truck and his mom was a secretary. They are self-made men who attained their professional success through hard work and ambition.

And while they are different men, I think they share two traits that have defined them as bankers: A strong preference for strategic simplicity, and a passion for execution. They keep things simple, and make things happen. These were central tenants of the Wells Way. Richard never worked for Carl, but I bet Carl would have loved him.

Will 2011 be the year for bank stocks?

The bad news seems endless. Unemployment remains high. Bad real estate loans continue to hurt banks. Increased government regulation and caps on fees will hurt bank income in the future. And yet, so many bank analysts are so bullish on bank stocks in 2011.


Profitability is returning or will return this year to many mid-sized or small banks, several analysts say.

Stronger banks will be able to buy weaker rivals and grow market share. Even the investors of struggling banks stand to gain after years of misery. Their banks will get bought out at premiums compared to the disappointing prices of the last two years. 

Here is a review of what bank analysts are saying about the outlook for bank stocks in 2011 and their favorite picks:

mmosby.jpgMarty Mosby, a bank analyst at Guggenheim Partners in Memphis,
 says he thinks all of the 15 large-cap banks he covers will be profitable by the middle of this year and he projects a 30 percent stock market gain on average for his group, which includes Winston-Salem, North Carolina-based BB&T Corp., Atlanta-based SunTrust Banks, and San Francisco-based Wells Fargo & Co. 

“We believe 2011 will be the year of the recovery,’’ he says. “We will finally see banks return to the norm.”

Some banks will be better off than others in the new normal, of course.  Banks such as Wells Fargo & Co., Pittsburgh-based PNC Financial Services Group and New York-based BNY Mellon have revenue potential and strong capital, he says, which means they could buy other banks or increase dividends, always a plus for the many dividend-starved investors out there. PNC Financial Services Group reported today record profits of $3.4 billion for 2010.

Jim Sinegal, associate director of equity research at Chicago-based
Morningstar, Incexpects his top picks such as New York-based JPMorgan Chase & Co. and Wells Fargo to return 25 to 30 percent gains for investors. He hedges that a bit by saying it may happen in the next year—or two.

“We don’t see any surprises ahead that could derail something,’’ he says. “We’ll see a slow and steady improvement. Credit is slowly and steadily improving. A lot of banks already are benefiting from that. The worst loans on their balance sheets have already been charged off.” 

He even likes Charlotte, North Carolina-based Bank of America, even though other analysts are just too worried about an ongoing investigation into the bank’s foreclosure processes to recommend the stock. 

“We think the best values can be found in recovering banks,’’ he explains. “We think the stock is cheap.”

Bank of America was trading at $14.37 per share Thursday midday on the New York Stock Exchange.

jharralson.jpgJefferson Harralson, managing director in Atlanta for Keefe, Bruyette & Woods, says smaller banks might have a more difficult time seeing stock market gains this year than big banks. They could be hit hard by new regulations that limit fee income. New restrictions on debit card fees charged to merchants could limit that source of income by as much as 75 to 80 percent, he says. 

Plus, many small and even regional banks have not paid back the government for the Troubled Asset Relief Program money, which could weigh on stock prices this year as well. Investors worried the bank will be forced to raise more capital to pay back TARP won’t be eager to buy those banks.

kitzsimmons.jpgKevin Fitzsimmons, managing director at Sandler O’Neill & Partners in New York, says 36 percent of the group’s bank stocks have a buy rating, compared to 26 percent in January of last year. 

He also thinks there will be more risk in small bank stocks this year, because the heavy weight of regulation will move to smaller banks, as in rolling downhill, as regulators begin forcing those banks to recognize their problem loans.

“This is not going to be smooth going (for all banks),’’ he says. “(The market) will be selective.”

The good news is all that new regulatory pressure on small banks could lead more banks to sell out—for a premium this time.

Sinegal said recent acquisitions have netted prices at two times tangible book value for the acquiring bank, as opposed to no premium or 1.5 times book value during the last year.

“There is more optimism that the worst is behind us,’’ Fitzsimmons says. “There has been optimism that some banks will be able to go out and acquire more banks and the acquired banks can be bought at some sort of premium.”