Twitter can be time sink or it can provide valuable insight on what the market is thinking. Some insight came recently when a well-followed newsletter writer (Long Short Value @lsvalue) posted that “Traditional Banks are a terminal short – prove me wrong,” followed by a list of “headwinds,” which included:

• Fintech competition
• Central Bank digital currencies
• Credit card alternatives, like buy-now-pay-later
• Low interest rates

First, let’s cheat over to the answer key. A big subset of the bank sector – large commoditized banks – are unquestionably long-term losers.

To wit, BBVA paid $13 billion to gather together assets in California and Texas over a decade ago, made little effort in marketing, technology, or strategy, and sold it all recently to PNC for $9 billion. HSBC, another bad operator, is planning a similar exit. CIT, which never bothered to compete with much other than price, gave up and sold for less than 50% of net assets. These lenders are still widespread, from Wells Fargo to Regions to KeyBanc. They are typically quick to jump into multi-family construction 5 years into a trend while firing the entire energy department with crude at its lows. Where is the world headed? They have no idea.

Before we look at the winners – the ones investing in technology, seeking out the best customers in the area, and building fee income streams, let’s look at the shortseller’s points in detail:

• Fintechs like Square, Stripe, and Revolut will take small business lending from banks.

Not really, but they would if the fintechs had any interest in banking. Square hasn’t gotten to a 200x multiple on its erratic cash flows by tying itself to a big balance sheet, and CEO Jack Dorsey doesn’t want to be regulated by the capricious FDIC . These fintechs are using bank or capital markets’ balance sheets and introducing customers onto those balance sheets. There is value to this outsourced customer acquisition, and banks or capital markets are paying an implied fee. It remains to be seen how large this fee will ultimately be, given there is no monopoly on using digital ads or platforms to originate loans. You could compare it to the Netflix vs Disney distribution vs content trade-off. In this case smart banks know they want to expand into distribution, but fintech is not sure it wants to expand into banking.

Further, these fintech customers tend to come from borrowers banks pass over for a reason, like restaurants or small shops. It’s great that these customers are getting capital beyond their credit card. Wholesale banks like Regions or Goldman, can do better buying these loans in place of shared national credits or bonds. The rest of the banks will stick to real estate borrowers and complex businesses.

• Central Bank Digital Currencies will take savings from banks.

Digital currencies are coming. Whether they become “money under a mattress” is a separate question. In theory, the Federal Reserve can set up a website, and let everyone track digital dollars just as if they were tracking their Bitcoin on Coinbase. This is an efficient way to get money in the hands of the poor, many of whom don’t qualify for a checking account. It’s also deflationary, because it takes money out of loan circulation, which would be strike one. It’s problematic at scale, because it puts a government bureau or its representatives in charge of running a business. Selling treasuries is one thing, administering another social-security style program is another, a possible strike two. Last, what’s the right deposit rate? Why is the Fed competing with banks again? Why can’t banks simple custody digital currency themselves, so the customer earns something. They likely could and would. Strike three for this argument. People want their bitcoin to earn interest, and they will want digital currencies to do the same. Bank investors will be keen to figure out which management teams are embracing this opportunity.

To that end, banks are already helping to do the Fed’s work. It’s not a surprise then that Citi CEO Corbat just shared that Citi has “been working with governments around the world in terms of the creation and commercialization” of digital currencies.

• Credit cards are being disintermediated from buy-now-pay-later among others.

This is the same situation as fintech above, but generally speaking the 7 major banks involved in cards are used to competition in this segment and if anything would advise caution given the narrow band of profitability in the segment. Further, these banks are not fools and while they appreciate the card business, they can see they receive an 8x multiple for it, vs a 20x+ multiple for fee streams like payments. The point being, don’t hold your breath for silicon valley to flood money into ways to lend money at high rates.

• Low Interest Rates

Guessing rates is a fool’s game but I’d suggest a glance at the yield curve, which is the steepest it has been since 2017. This means the market is not worried about low rates. The difference in yield between 10 year government bonds and 2 year is shown below. A rising line means higher rates are expected in future.

Where does that leave us? It means a business in place since Mesopotamia is not going to disintegrate. Someone is going to be lending at nice spreads; the question is what horse to bet on? Who are the winners? The answer is:

• Efficient, discriminating lenders. Closing 20% of branches is the new trend in banking, and not a minute too soon. Further, maligned, but highly efficient banks like Bank OZK (OZK), and Bank7 (BSVN) have sailed through the pandemic, compounding book value 10-20% vs. last year. Branch-light business lenders from little Victory Bank (VTYB) to Servisfirst (SFBS) also have flexible models. Again, banking is asset management, and bankers willing to thoughtfully underwrite non-commodity loans will do well for years to come.

• Banks with a differentiated strategy. Silvergate Bank (SI) isn’t particularly worried about digital currencies – they are part of the backbone helping customers transition between crypto and dollars. It looks like the market has noticed:

The best bankers understand technology is essential for profitable growth. The ones that don’t, get consolidated. Look for major market share changes, and mergers, around this fact as slower banks are crowded out in payments,

As for banks doing what they’ve always done, and lending at skinny spreads, to quote Alec Baldwin in Glengarry Glen Ross, “a loser is a loser.” Get that multi-family loan from Wells or whoever for 3.25% fixed, or that 2.5% auto loan at Santander while you can – the bank may be downsizing the department in order to grow energy lending within a few years…