Citi's New Line of Business May Be Hazardous to Its Health
As evidenced by the financial crash, banking as we've come to know it today is extraordinarily complicated. Most would say it's complicated enough already. So do we really need banks pursuing lines of business beyond their already far-reaching bailiwicks to find new and potentially hazardous revenue streams, as Citigroup (NYS: C) is now doing?
When tens of billions of dollars is just the beginning
The Wall Street Journal is reporting that Citigroup is moving big into the field of "identity proofing" -- the business of providing identity badges that employees use to get into and out of their office buildings. But more than just the physical items themselves, Citigroup will also be performing the background checks that go along with them.
Citigroup first got into identity-proofing in the late '90s, as part of a consortium called "IdenTrust" that included Wells Fargo (NYS: WFC) and Bank of America (NYS: BAC) . Though IdenTrust is providing the software for this job, the consortium as a whole hasn't had much success yet, and Citigroup appears to be going it alone here. Citi's new gig is for the Department of Defense: specifically, for civilian contractors.
Right now, Citi is the only bank that has the clearance to provide this service, and the DOD spends only $33 million per year on it. At that level of spending, there's not much in it for a bank Citi's size, but at a projected future level of spending of "tens of billions of dollars" -- as one estimate suggests -- there almost certainly is.
Smile and say "transaction fees"
But even that significantly higher dollar amount isn't Citigroup's prime motivator for getting into the business of identity proofing. What the superbank is really counting on is its belief that, in time, badge recipients will use their identity cards to process financial transactions, which Citigroup will then collect a transaction fee on.
The bank is already big into the transaction-services field for both the public and private sector. Last year it made $3.4 billion on gross transactions of $10.6 billion. People are already paying for goods and services using their mobile phones, which would certainly have seemed odd even a few years ago, so why not identity badges? One industry group estimates there at least 260 billion electronic payments already processed every year.
As the move from cash as a physical thing to cash as a burst of electronic data becomes more and more common, transaction services is an undeniably good line of business for a bank to be in. It's also a normal line of business for a bank to be in -- but can one say the same for identity proofing?
Tiptoeing through the minefield
Gary Schneider, Citigroup's lead for transaction services, thinks so: "We see a huge opportunity between the convergence of digital identity and payments." There's an argument to be made for vertical integration in many industries, and Citigroup clearly believes there's a benefit to be had from doing that here, but there are reasons Citi is the only bank trying its hand at this particular kind right now.
It's expensive, for starters. You have to have offices, for example, where people will come to get their photos taken. Then you have to have people to take the photos, and answer the phones, and so on. And database access, for the background checks, doesn't come cheap. There's also the question of liability. What if the person you clear as A-OK to walk into the Pentagon turns out to be a terrorist or a spy?
You don't see Morgan Stanley, Goldman Sachs (NYS: GS) , or JPMorgan Chase (NYS: JPM) getting in on the action yet. If they're smart, they'll let Citigroup make the first steps across the identity-proofing minefield.
What would Jamie do?
A raft of financial engineering and "innovation" by the country's biggest banks, going as far back as the '80s, brought the world to the brink of economic ruin in 2008 and 2009. But at least derivatives and collateralized debt obligations were, in various senses, the province of banking.
Identity proofing isn't. If Citigroup's ultimate goal is to profit off the hoped-for transaction fees, is it worth the time, money, and risk to also take over the thankless and liability-ridden work of background checks, sitting people down for photos, and asking them to say "cheese?" Modern banking is complicated enough as it is. Just ask Jamie Dimon.
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At the time this article was published Fool contributor John Grgurich thinks an all-expenses paid junket to New York City to straighten all this out is justifiably in order, but he owns no shares of any of the companies mentioned in this column. Follow John's dispatches from the bloody front lines of capitalism on Twitter, @TMFGrgurich. The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs and Wells Fargo. The Motley Fool has a positively gripping disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.