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Investors in Axos Financial (NYSE: AX) (formerly Bank of the Internet) have gotten used to the online bank's huge profitability in recent years. However, in 2018 those margins have gotten squeezed. Deposit rates are rising with interest rates, and the company is also heavily investing in its future at the same time.
Still, Axos posted a very good 15.01% return on equity last quarter, despite maintaining very healthy capital ratios. Another bit of good news -- the company has finally completed a long-term technology investment in a proprietary platform it calls the Universal Digital Bank.
The Universal Digital Bank is Axos's effort to separate itself from newer online-only competitors and legacy banks that are becoming more digitally savvy. The UDB investment, in combination with the name change to Axos and several bolt-on acquisitions, have made 2018 a transformative year for Axos.
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A modern banking experience
On the recent earnings call, CEO Greg Garrabrants said that "banking will distribute itself such as vertical software providers linked to banking services."
In plain English, Garrabrants is talking about providing various banking products from Axos and its partners through a single software system that Axos controls. With that data all under the company's own platform, Garrabrants hopes to create an automated platform that uses data for mass customization. This is not unlike how large internet stocks such as Netflix (NASDAQ: NFLX) or Facebook (NASDAQ: FB) collect personal data, then present you with shows you might like or highly relevant ads.
This may sound like something any company can do, but the UDB appears to have taken a lot of time and effort for Axos. This is for a couple reasons: One, the company developed the entire software stack in-house on its own, instead of outsourcing to another tech company. Two, Axos itself has been built on a patchwork of highly profitable niche businesses over the years, both organically and via acquisitions. Still, many of these companies or divisions had their own siloed systems, which must now be integrated under the new Axos UDB system.
The integration of the company's entire product portfolio will not only increase cross-selling opportunities to consumer and business customers, but should also have a second, perhaps more important effect.
Lowering the cost of funds
The Universal Digital Bank will be instrumental in Axos's attempt to gain a competitive advantage against its other online-only competition, such as Ally Financial (NYSE: ALLY) and Marcus by Goldman Sachs Group (NYSE: GS). Online-only banks typically entice customer deposits with higher rates (since they don't have the cost of branches), but as rates go up, competition for low-cost deposits appears to be heating up as well.