With the major banks reporting results this week (you can read the low down on the just released Commonwealth Bank of Australia (ASX: CBA) March quarter here) shareholders will be weighing up how their companies have been performing and what the future holds.
Top of the list for many investors in the banking sector is dividends thanks to all four of the majors offering fully franked dividend yields of over 5%. While the income stream is of course important to many investors, it is important to consider the risks as well.
For example, a high yield does not mean that bank stocks can't also be overpriced at the same time. Nor does the fact that 'everybody' owns shares in them make them safe; nor does their current dominant market position negate the potential for their businesses and their earnings to decline in the future.
While taking a good, hard look at the balance sheet of any banks that you own would be advisable to try and decipher the potential risks from these highly leveraged entities, it is also important for investors to think outside the square for a moment.
A recent article which appeared on financial website Cuffelinks highlighted some of the disruptive technologies which the banking sector is facing.
As the article pointed out: "Technology companies without the same legacies who have world-leading brands, are customer savvy and have sizeable balance sheets are now adding banking products and financial services to their broad array of customer services."
Among some of the ASX-listed companies which are endeavouring to entice business away from the majors include Emerchants Ltd (ASX: EML), which offers a range of reloadable and non-reloadable prepaid debit cards both in Australia and Europe.
Another business is Mint Payments Ltd (ASX: MNW) which is rolling-out its technology offering for mobile payments and transaction processing. eServGlobal Limited (ASX: ESV) is also a threat to traditional banking models with the company having developed the technology to provide mobile money solutions which have become popular in numerous developing regions.
The business world is full of historical examples of firms that were leading giants for years, but that eventually succumbed to the forces of competition and change which rendered their businesses obsolete, you don't see many horse buggy manufacturers these days!
Even the 'Big Four' banks are not immune from competitive forces and investors need to keep their guard up and alert to threats to these established business models.
