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To bank or non-bank – that is the question

14th June 2017

Kevin Claypoole-McCloskey

Managing Director

Does the post-financial crisis rise of non-bank providers give traditional institutions cause for concern? We examine the emerging trends.

In the Netherlands, non-bank lending accounts for 20% of new lending in the country’s €662bn mortgage market. Just five years ago it accounted for nothing. Has it hurt the banks? In 2016, the share of new mortgage lending held by the Dutch big three – Rabobank, ABN Amro and ING – fell below 50% for the first time. That has to hurt.

Following the financial crisis of 2008, banks the world over felt constrained by tightening regulation, especially the capital adequacy demands of Basel III. Lending was suddenly a more difficult game. From individuals, to small businesses and even some large corporates, money was harder to come by as banks stiffened their loan criteria.

For banks, on both both sides of the Atlantic, providing longer-term loans when they are reliant on short-term funding was a problem. This is why the gap in the global residential mortgage market was plugged by institutional investors who had the opposite problem.

Hungry for some kind of yield, similarly constrained by Solvency II regulations that discourage investment in asset-backed securities, and facing a lifeless bond market, insurer and pension fund money had to go somewhere for the duration. Non-banking, it seems, has answers to these problems.

A broad sweep

But what exactly is a non-bank? How are they defined? In both Europe and the US, non-banks are described as financial institutions that are not considered full-scale banks because they do not offer both lending and depositing services.

These include community and social institutions such as credit unions, micro-lenders, crowd-funders and peer-to-peer lenders. They can also mean businesses such as supermarkets, pay-day loan providers, investors, private equity and venture capital firms, as well as those offering specialist services such as asset managers, money market funds and hedge funds. The list is huge.

Agile community lending

Whilst non-bank lenders, without strict capitalisation requirements, can be more susceptible to economic conditions, being less constrained by regulatory oversight gives them far more room to manoeuvre.

This gives genuine social and community providers the ability to fill a space that banks can’t occupy. And in doing so, they are bringing greater financial inclusion. For mid-sized business borrowers too, the well-developed markets for private placements in the US and Schuldscheine in Germany are filling another banking gap and are fuelling what is effectively the engine of growth for just about every developed economy in the world.

Complementary banking

The good news for banks is that they can continue to play a role in supporting clients – in partnership with non-banks. If bank funding is not available, the bank can, for example, help arrange direct lending from an institutional investor. It still gives them the opportunity to offer all their day-to-day banking services. It’s not bank versus non-bank but a complementary service offering.

Commerzbank in Germany is a strong advocate of Schuldscheine, making deals happen as an arranger. In the US, Bank of America and Goldman Sachs, amongst others, have also brought together their own private placement teams to service this market.

Learning to play and pay together

Perhaps the most competitive area for banks and non-banks is in payment technology. Non-banks – and fintech companies – have shaken up the existing model because their success indicates that they know what their customers’ needs are, and are able and willing to reach further and wider to deliver.

But banks are beginning to show more innovation in this space, as shown by the progress made in the corporate space by SWIFT, the adoption of the pan-European SEPA payments integration initiative, and country-specific Faster Payments-type mechanisms.

New payments technologies need all parties to work together. With different roles to play but a clear need for each other, learning from the competition is perhaps more of an open door now. It needs to be.

What customers want

Accenture’s Banking Customer 2020 study shows that almost 50% of consumers would consider banking with a non-bank company with which they currently do business. In the 18 to 34 age group, this figure rises to above 70%. This is a warning shot across the bows for all banks.

Non-bank financial players such as PayPal and Square, and companies outside the financial sector like Apple, Google and Amazon could erode a third of traditional bank revenues in North America by 2020, estimates Accenture.

Banking Customer 2020 argues that the bank response of simply being “more digital” is not enough. Consumers are looking for value, trust and a fruitful relationship.

Getting involved

This isn’t an alien challenge. Indeed, it’s one that’s faced by many financial institutions. To build trust, successful financial services providers need to create a quality customer experience for their clients. Consumers certainly want value for money but they also want a reliable provider of advice and a trustworthy partner.



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About the author

Kevin Claypoole-McCloskey

Managing Director

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