Blackstone sets up $10 bln test of banks’ AI risk

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The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Stephen Gandel
NEW YORK, Oct 22 (Reuters Breakingviews) - Private equity is about to find out whether bankers should really be worried. Digital assistants like Meta’s META.O Muse threaten to upend lenders' businesses: if artificial intelligence can automatically move deposits to high-interest accounts, cheap balances might disappear. They could also theoretically mimic IntraFi, a company built entirely on cash-shuffling. Buyout shops Blackstone BX.N and Warburg Pincus want to offload the so-called reciprocal deposit network for $10 billion, Reuters reported on Tuesday. Such a big return could somewhat allay technological fears.
IntraFi is not a bank, yet it benefits from the same frictions that protect lenders’ deposit franchises. Thanks to consumer inertia, large banks get away with paying little or no interest on many accounts, which provides cheap funding to issue loans at far higher yields. Executives like JPMorgan CEO Jamie Dimon have brushed off concerns that so-called agents like Muse could automate away this cozy equilibrium. 
The new sale process offers a kind of test on how investors feel. Deposit juggling is IntraFi’s specialty. Depositors enjoy government-provided insurance in case their bank fails, but only up to $250,000 per account. That could make them leery of handing large sums over to any but the safest institutions. IntraFi's reciprocal network automatically splits and swaps deposits above the cap among member banks, creating linked accounts that each qualify for full insurance coverage. Lenders can then offer more protection to customers, paying a fee to IntraFi for the privilege.
Agents could replicate that service on the customer end, sparing humans the labor of opening and tracking balances among multiple accounts. The threat is theoretical at this point. IntraFi's value is, in part, in retaining a single point of contact: a business can act as if they just work with one lender, which they might engage with for a range of services. On their own, a client would also have to do a lot of account-juggling to cover big sums. A number of banks, including JPMorgan JPM.N, have said they would restrict agents' access. As with any technology, though, improvements and rapid adoption would make it harder to keep saying no.
A sale near the $10 billion target would suggest confidence that this won’t happen. Add on $4.8 billion of debt, according to S&P Global Ratings, and the price would equate to about 24 times IntraFi’s $630 million of annual EBITDA, as reported by Reuters. Given Blackstone's initial $2.5 billion investment in 2019 and nearly $3 billion of dividends along the way, it simplistically implies an over-400% increase in value. Regulatory loopholes are not easily closed, even by frontier technology.
     
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CONTEXT NEWS
Reuters reported on October 20 that Blackstone and Warburg Pincus had hired investment banks Morgan Stanley and Guggenheim Securities to find a buyer for IntraFi. The private equity firms are trying to sell their stakes for a combined $10 billion, according to the report.
The company, which Blackstone acquired in 2019 for $2.5 billion, dominates the market for reciprocal deposits, which enable banks to spread their customers' money across multiple institutions in order to access federally backed insurance on balances exceeding $250,000. Warburg Pincus purchased a portion of Blackstone's IntraFi stake in 2022 for an undisclosed amount.

(Editing by Jonathan Guilford; Production by Maya Nandhini)
((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))