The intense competition for physical branches in high-growth markets is having a direct financial impact. It is forcing banks to offer higher interest rates on deposits to attract customers, which in turn increases their funding costs and is expected to pressure profit margins through 2027.

Despite managing a financials fund, Derek Pilecki is bearish on the average bank. He argues that intensifying competition from online banks and giants like JP Morgan will continuously compress margins and lower returns over the long run, making passive bank investing a poor strategy.

Traditional banks incur massive branch real estate and staffing expenses, whereas digital neobanks serve millions with small teams. This allows digital banks to operate at roughly 3% of incumbent costs, creating surplus margin that can be returned to consumers through zero fees and superior rates.

Nubank's digital-first, branchless model allows it to service 13,000 customers per employee, a stark contrast to the 1,300 at incumbent banks. This structural cost advantage is a key driver of its high ROE and ability to underprice competitors.

IBKR's low-cost, tech-first model is strategically counter-positioned against high-touch incumbents like Charles Schwab. Adopting IBKR's model would require competitors to cannibalize their profitable existing business models, creating a powerful competitive moat based on the innovator's dilemma.

Legacy credit card companies can't simply match Robinhood's 3% offer due to their massive headcounts and marketing spend. Adopting a tech-first, low-cost model would require painful restructuring that cannibalizes their existing, profitable business—a classic innovator's dilemma.

Legacy retail banking consumes tens of billions annually in physical leases and human overhead, while 95% of global transactions still run on traditional systems. By pairing high mobile phone penetration with branchless software models, neobanks can capture market share while permanently structurally undercutting traditional cost structures.

Companies enjoying high profit margins are often under-investing in their product. This creates an opening for well-funded, product-focused competitors to capture market share by delivering more value, eventually stalling the incumbent's growth.

While typical banks earn a 1-1.2% return on assets (ROA), credit card-focused banks achieve ROAs of 3.5-4%. This exceptional profitability, driven by high interest rates, explains why the sector is so attractive to new entrants, as it is one of the most profitable areas in all of finance.