Tech makes life on the coasts tough for banks

Why is the nation’s financial industry concentrated in just a few very costly cities?
The latest actions by the Charles Schwab Corp. suggest there’s less reason than there once was amid the squeeze the industry has been feeling since the Great Recession ended.
In Schwab’s case, the discount brokerage firm slashed its fees, said it would buy a main rival and move its headquarters from high-cost San Francisco to more-affordable Dallas. It may not be the last to make such a move.
No matter what part of the financial services or banking ecosystems you look at, revenues are harder to come by today than they were 10 or 20 years ago. Trading commissions have fallen, with online brokerages ushering in zero commissions. Bid-ask spreads for market makers have narrowed. Management fees for mutual funds and hedge funds continue to shrink. Mutual funds are losing market share to low-cost exchange-traded funds. Net interest margins for banks have been compressed by both low interest rates and a flatter yield curve. The Volcker rule restricted some of the more lucrative activities banks can do. Higher capital requirements have reduced the profitability of the banks. Loan growth has been anaemic since the financial crisis. And increasingly, private companies are looking to do direct listings on stock markets rather than initial public offerings, threatening bank underwriting fees.
And at the same time that revenues have been pressured, the costs of operating in coastal urban hubs where the finance industry has traditionally been clustered continue to rise. Although conservatives might snicker and chalk it up to the higher taxes in coastal finance centers, the bigger story has been the concentration of the technology industry and the young, highly paid knowledge workers they hire. In the first decade of the 2000s, when the credit and housing booms were roaring, the tech industry played second fiddle to finance when it came to urban employment. Even San Francisco was relatively tech-free until Twitter set up shop in the latter half of the decade. Rents, although high, were manageable for many workers with good financial industry jobs.
That’s no longer the case. With tech on a tear, young college-educated workers have, in turn, clustered in a handful of cities to gain access to more job opportunities. This dynamic has driven up rents in New York and San Francisco, posing stiff competition for financial companies looking to hire workers with the same types of skills prized by tech firms.
For the financial industry, that means if you can’t beat ’em, retreat to cheaper pastures. That helps explain why Goldman Sachs has expanded in Salt Lake City; AllianceBernstein is planning to move its headquarters from New York to Nashville, Tennessee; and BlackRock is opening an “innovation center” in Atlanta.
As with the shifts in the manufacturing industry, these changes take place over years and decades, but it’s likely that the trend of decentralisation will continue.

—Bloomberg

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider