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Fortune
Fortune
Michael del Castillo

Tech surge means banks are making $98,000 more per employee—even as headcount shrinks

Bankers are generating more revenue for their companies than ever. With the help of a steady stream of technological innovations—from online banking to artificial intelligence—the per capita contribution of bank workers has grown $98,000 since 2009. Put another way, financial firms would require 400,000 additional bankers to generate today’s levels of revenue had productivity remained unchanged from 15 years ago.

While all of this has boosted the banks’ bottom lines, the news is less rosy for those who work in the banking industry. Even as the number of working Americans has increased 7.8%, the number of jobs in banking has stayed roughly constant at 1.37 million—meaning there’s 5.4% fewer banking jobs per American worker than there was 15 years ago.

This may come as glum news for the next generation of bankers but the story is different for shareholders. According to Mike Mayo, managing director and head of U.S. large-cap bank research at Wells Fargo Securities, investors could be on the brink of a golden age for bank stocks. Mayo shared unpublished research with Fortune that he says shows how, after decades of incremental growth, a “sea change” in employee efficiency has taken place in the last two years.

As artificial intelligence takes its first steps towards replacing various banking tasks, then entire positions and offices, Mayo expects revenue per employee to continue growing for the near future. In turn banks will be able to hold record amounts of deposits with a fraction of the headcount leading to an explosion of profit and payouts. But as interest rates are on cusp of dropping, the bank stock gold rush could be coming to an end.

“If you're a stock investor, you were rewarded for ignoring bank stocks for most of this decade, until a few months ago,” says Mayo, who has been a large bank analyst for more than 20 years. “Bank stocks have been horrible performers versus the stock market as a whole. I think that's changing given a multiyear inflection from negative to positive for revenue growth, operating leverage and earnings growth, and we're on the cusp of that inflection.”

Banks laid ground for a technology surge

To understand what’s going on under the hood of American banks we need to go back to the end of World War II. Over the years following the war, inflation adjusted deposits-per-employee slowly fell from a high of $5 million at the height of the war to $2.5 million in the mid-1950s. It stayed there for decades, according to Wells Fargo estimates. The stability of deposits led to almost equally stable revenue and banks were seen “more like annuity investments,” says Mayo, “which had greater reliability, less risk, and relatively more consistent results.”

View this interactive chart on Fortune.com

Then came the 1980s. As banks sought to expand their revenue, Citibank CEO, Walter Wriston declared that “countries never go bankrupt,” triggering a surge in lending to risky markets, followed in the early 1990s by the collapse of over-developed commercial real estate. From 1990 to 1993 Federal interest rates fell from 8.25% to 3%. Over the time, the FDIC estimates, 1,600 insured banks closed or received financial assistance. But deposits per employee remained almost exactly the same.

To pre-empt future bank closures, Congress passed a number of emergency legislative measures, perhaps most importantly—25 years ago this month—the Interstate Banking Act letting banks buy banks across state lines. “The mere threat of acquisitions incentivized banks to streamline their businesses or risk getting acquired,” says Mayo.

Not only did the smaller banks clean house while merged banks enjoyed new economies of scale, but a wave of technological innovations triggered a slow moving creep of “incremental improvement,” as Mayo puts it. Wells Fargo became the first U.S. bank to provide customers with online access in 1995 and in 1999 European banks started conducting transactions via text.

Then, in 2020, that incremental growth exploded into what Mayo describes as a “sea change.” The average deposits held by banks, per employee, surged by 21% to $7.5 million, the fastest growth ever experienced in the banking sector. The next year it surged again to $8 million. By 2022, those increased deposits helped generate a record $567 billion in bank revenue, according to Federal Reserve of St. Louis data. The Dow Jones U.S. Bank Index that tracks the performance of banks has increased 38% over the past year outpacing the S&P 500 by 11% over the same period.

View this interactive chart on Fortune.com

And all that time the median number of banking jobs remained 1,370,600. It’s at 1,365,400 jobs today. That means that from 2009 to 2022 roughly the same number of bank employees, generated 31% more revenue. With all this money floating around, one might expect bankers are reaping the rewards. But according to Bureau of Labor data, commercial bankers' year-over-year earnings growth peaked in 2018 before starting a years-long decline that saw them getting smaller pay raises than other private workers, bottoming out to an average pay cut of 2.4% by 2022.

View this interactive chart on Fortune.com

"Less bankers, more bots”

Though salaries have started to increase once again, this may provide little solace to the next generation of bankers who will find it increasingly difficult to get a job in the first place. As noted above, if productivity had remained flat, banks would have had to hire an additional 440,000 people to generate the revenue we saw in 2022. That’s nearly a half-million banking jobs turned into software. Citi estimates that 54% of banking jobs could be displaced by AI, the most of any industry, followed by insurance, software, capital markets and energy.

Mayo says that improvements from technology will reduce bank branches by 25%, back offices by 40% and double incremental margins on new revenues. “Banks' ability to layer on earning assets without growing headcount should yield significant dividends in a rising rate environment,” Mayo wrote in the unpublished report. While Mayo thinks that opportunity for investors could continue for the next couple quarters, he says changing interest rates could delay the process.

Andrew Crowell, vice chairman of wealth management for investment firm D.A. Davidson believes the goldrush may already be over. He says investors started approaching him at the end of last year, seeking above average dividends payments of as high as 4% with the promise that shares would continue to appreciate.

“As we see the Fed signaling that they're going to begin cutting interest rates, there's going to be that pressure on their net interest income spread,” says Crowell. “That doesn't mean banks won't have strong earnings. It just means that perhaps the widest lending spread has already been seen.”

All things being equal though, if bank sector revenue continues to grow for the next 15 years at the same rate as it did over the past 15 years it would reach $760.4 billion, and if bank jobs remained at the median of 1.37 million, the revenue per employee would increase to $555,000. “The old school practice was to measure importance and power by the number of people reporting to a manager,” says Mayo. “This is no longer the case and, in particular, banks are making greater efforts to rid the middle office. The unofficial industry mantra is ‘less bankers, more bots.’"

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