Financial-services companies provide a wide range of vital services to millions of people—including credit cards, wealth and asset management, and products and research to make investing easier.
Banks, asset managers, credit-services providers, and financial data providers can gain a competitive edge—resulting in a wide Morningstar Economic Moat Rating—for a variety of reasons.
One is switching costs: Once established with a bank or asset manager, for example, customers are unlikely to leave. Another edge is the network effect: The more people who use a credit card or index, the more valuable it becomes. Cost advantages come with size and scope. Then there are intangible assets, such as brand names that inspire customer confidence.
Here, we highlight the 17 financial-services companies that made our Best Companies to Own list in 2023. These companies earned their spot on the list by having carved out wide moats and having made smart decisions with their capital.
This is one major sector from that list that we’re deconstructing; other articles will dig into the consumer defensive, healthcare, industrials, and technology companies that we recommend.
Because this list is built for the long term, rather than to identify presently undervalued companies, it may not be the right time to buy all these names. Still, we believe they are strong choices for an investor’s watchlist.
Moat Source — Cost Advantage
Moat Source — Efficient Scale
Moat Source — Intangible Assets
Moat Source — Network Effect
Moat Source — Switch Cost
|Bank of New York Mellon Corp||BK||Asset Management||Yes||No||No||No||Yes|
|Northern Trust Corp||NTRS||Asset Management||Yes||No||Yes||No||Yes|
|Bank of America Corp||BAC||Banks - Diversified||Yes||No||No||No||Yes|
|JPMorgan Chase & Co||JPM||Banks - Diversified||Yes||No||No||No||Yes|
|Royal Bank of Canada||RY||Banks - Diversified||Yes||No||No||No||Yes|
|The Toronto-Dominion Bank||TD||Banks - Diversified||Yes||No||No||No||Yes|
|Wells Fargo & Co||WFC||Banks - Diversified||Yes||No||No||No||Yes|
|U.S. Bancorp||USB||Banks - Regional||Yes||No||No||No||Yes|
|Tradeweb Markets Inc||TW||Capital Markets||No||No||No||Yes||No|
|American Express Co||AXP||Credit Services||No||No||No||Yes||Yes|
|Mastercard Inc||MA||Credit Services||Yes||No||No||Yes||No|
|Visa Inc||V||Credit Services||Yes||No||No||Yes||No|
|CME Group Inc||CME||Financial Data and Stock Exchanges||No||No||Yes||Yes||No|
|Intercontinental Exchange Inc||ICE||Financial Data and Stock Exchanges||Yes||No||Yes||Yes||No|
|Moody’s Corporation||MCO||Financial Data and Stock Exchanges||No||No||Yes||Yes||Yes|
|S&P Global Inc||SPGI||Financial Data and Stock Exchanges||No||No||Yes||Yes||Yes|
|Berkshire Hathaway Inc||BRK.B||Insurance - Diversified||Yes||No||Yes||No||No|
Cost Advantages Give Banks Their Edge
The largest banks benefit from cost advantages as well as high switching costs for customers and clients. Preeminent among them is JPMorgan Chase JPM.
“With leading investment bank, commercial bank, credit card, retail bank, and asset and wealth management franchises, J.P. Morgan is truly a force to be reckoned with,” writes Morningstar strategist Eric Compton. “The bank’s combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy.”
J.P. Morgan also boasts a Morningstar Capital Allocation Rating of Exemplary. Management has made smart investment decisions. For example, the firm avoided the mortgage-backed securities that afflicted many other banks during the global financial crisis, while investing wisely elsewhere. “Over the last decade-plus,” notes Compton, “JPMorgan’s acquisitions, organic growth investments, and internal technology investments have built the most dominant U.S. banking franchise.”
Bank of America BAC, the second-largest U.S. money-center bank, is one of the top deposit-gatherers and a leader in retail mortgages, home equity lines of credit, and small-business lending. It also has one of the largest online retail brokerages and largest advisor forces through Merrill Lynch Wealth Management.
“Overall, we believe the bank’s key advantage comes from its scale in certain fixed-cost, fixed-platform businesses and the breadth of products it can offer to clients,” writes Compton. This leads to sustainable cost advantages and creates switching costs for customers.
The Best Credit-Services Companies Enjoy a Network Effect
“Payment networks such as Visa V benefit, unsurprisingly, from a network effect,” writes Morningstar senior analyst Brett Horn. “The more consumers that are plugged into a payment network, the more attractive that payment network becomes for merchants, which in turn makes the network more convenient for consumers, and so on.”
The same can be said for Mastercard MA. These companies have developed two of the largest payment networks, insulating them from competition. These large networks also create cost advantages.
American Express AXP is much smaller, but it has the advantage of a differentiated operating model. “American Express issues the credit card to the consumer, operates the payment network, and establishes a direct relationship with the merchant,” writes Morningstar analyst Michael Miller. “By operating as a closed-loop network, American Express can capture the full economic profit from a single credit card payment.”
Top Financial Data Providers Offer a Strong Brand Identity
Similar to credit card companies, financial data providers benefit from network effects. Those with established reputations, track records, and relationships also have intangible assets that make it difficult for newcomers to compete and create switching costs for customers.
S&P Global SPGI benefits from such advantages on several fronts, writes equity analyst Rajiv Bhatia: “Whether through credit ratings, financial indexes, or commodity price reporting, S&P Global has established a wide moat from its data-driven benchmarks. Given the embedded nature of these benchmarks, S&P enjoys a strong competitive position and strong operating margins.”
Moody’s MCO is a market leader, alongside S&P Global, in providing credit ratings on fixed-income securities. Bank of New York Mellon BK owes its wide moat to its custody business, built on cost advantages and switching costs.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.