Even without Clarity, crypto is the least of the challenges banks face

• Key insight: Despite all the focus, the crypto industry wasn't a major challenger to the banking industry.
• Supporting data: Bitcoin's trading volume, measured not in dollars but in bitcoin terms, has been falling for nearly a decade.
• Look ahead: The industry still faces plenty of competition from neobanks and fintechs for both customers and deposits.

On a solely bottom-line, industrywide basis, the banking industry looks great right now. Second quarter net income hit $90 billion, the largest number in more than 40 years and almost certainly the highest number ever. The industry in fact has not had an unprofitable quarter since the fourth quarter of 2009. 
By other measures, though, things look less rosy. The industry's return on assets in the second quarter was 1.37%, which is virtually flat with 1.34% in the second quarter of 2006. You wouldn't expect this number to grow to 80% or something crazy, we're not talking about the tech sector here, but a little growth in 20 years would be nice. Net interest margin of 3.32% was actually a little bit worse than 3.46% in the second quarter of 2006, and is down substantially from the all-time high of 4.91% set in the first quarter of 1994.

Meanwhile, there's competition out there from nonbanks, neobanks, Nubank and every crypto Tom, Dick and Harry with a digital whatchamacallit. Chime started out as a gimmick, an online company with an amiable name that offered banking services to people who couldn't afford a full-service account at a bank. Now Chime is publicly traded, profitable, and buying its own bank in order to become a more fully rounded competitor, as our Joey Pizzolato reports in his profile of the company. 

Then there is crypto. It's hard to say crypto is a full-fledged competitor to traditional banking, though it certainly wants to be, if for no other reason than it wants to attract the liquidity that will keep crypto assets trading. The industry has put a lot of money and time behind getting Congress to pass legislation that it hopes would sanctify digital assets in the eyes of the public. They need something.

If you look at the volume of bitcoin trading in terms of bitcoin itself, not in dollar terms, trading volume has steadily dropped since the big boom of 2017-2018. Yes, the price of bitcoin has shot up, but the volume of bitcoin being traded has gone nowhere; even I was surprised by that. 

Which kind of makes sense. The industry has done some new things — NFTs, prediction markets, perpetual futures — but it hasn't really done anything that's expanded its world. The stablecoins that have come out of the crypto world are used almost exclusively for trading cryptos; they have no real-world utility.

There really isn't anything new and compelling in crypto, which illustrates a point I've made before: the crypto lobby needs the affirmation of regulation far more than banks need to use regulation as a way to block crypto. The news on Tuesday that the Clarity Act failed to survive a procedural vote in the Senate will probably be cursed in crypto circles and welcomed in banking circles. 

But while the failure dooms the act's prospects for now, it doesn't really solve any problems for banks. It just doesn't create a new one. 

Banks are still competing for deposits, which is sending them in different directions. Advances at the Federal Home Loan Banks jumped 15% in the second quarter from the first, according to S&P Global Markets Intelligence. At $532 billion, it's the highest level since the fourth quarter of 2024. 

Banks are also using rates on CDs to try and attract deposits. There were 750 banks in the second quarter offering teaser rates on CDs above 3.5%, up from 588 at the end of the first quarter. With the Fed expected to raise rates again after this week's meeting, we'll probably see this number climb even further. 

Other banks are doing it the old-fashioned way. Northeast Bank up in Maine is focusing on expanding and improving its physical footprint, as our John Reosti wrote. The firm has long been known for its commercial real estate and SBA lending, but like everybody it needs to keep growing. American Express is expanding its services targeted at small businesses, continuing its encroachment in that field, as our John Adams reported.  

Read more:

• Bitcoin's Overton window of opportunity is closing
• Maybe Wells Fargo's unions need a blockchain
• Iran built its own financial system, and has created a cyberfront in the war
• Fed meetings are about to get really awkward

One good piece of news for banks is that Enova International abandoned its attempt to buy Grasshopper Bancorp, our Allissa Kline reported, citing the opaque regulatory environment. The deal was boisterously opposed by consumer advocates who objected to a firm with its roots in payday loans buying a regular bank. For now, they don't have to worry.

All of this is to say that while the industry on the whole is extremely profitable, there are a lot of challenges as well. Which makes sense. The mountain always looks serene from a distance, but climbing to the top of it is hard.