Next year is not going to be easy for banks, so many will have to reorganize to keep to their companies afloat. This is what analysts are talking about and what the world industry leaders understand. Nowadays, banks are being pressure tested. The economic situation remains uncertain, the financial market - volatile. In the meantime, regulators are tightening rules, afraid the crisis may come back. Collateral requirements have become stricter, so has risk control. The political atmosphere also does not instill optimism.
Think, for instance, of the recent crisis that hit the major European banks. The European banking organization (EBA) analyzed the state of the 105 largest banks in the 21 member countries of the European Union. The detailed study yielded disappointing results, showing that the European banks’ position is worse than that of their competitors overseas. Overdue debt on the EU banks’ balance sheets accounts for no less than a trillion euros.
Such changes triggered emergence of new players ready to start competing in various areas of the banking sector. Although they are officially considered non-banking organizations, some of these companies now successfully compete with the banks in their respective fields.
Loans
The current unfavorable financial situation in Europe and the US slightly changed the familiar scheme of corporate lending, having made it less attractive. This soil produced an abundance of non-bank lenders. Another cause was that big banks could not provide small businesses with service fast and flexible enough. Overall, cost of revenue is growing, making lending in small amounts unprofitable. Banks are gradually abandoning the small corporate loans market, freeing this niche for non-bank institutions.
Let’s take a look at America’s banks. According to analysts, bank lending to small businesses numbered $44.7 billion in 2014, compared to $72.5 billion in 2006. The overall drop was 38%. Coincidently, lending from direct lending funds hit the global record of $29.9 billion – and looks like there is more to come.
Loans are already granted by particular insurers, hedge funds, direct investment funds and sector associations. It is worth noting that non-banks institutions offer more customer-focused, yet much more expensive services. Kenneth Walsleben of the Whitman School of Management at Syracuse University said, “The days of yesteryear when you could go to your corner bank are over. Small, emerging, growing businesses have few traditional sources to turn to. You have to get a little creative.”
The market thrives. Non-bank lenders make money from those who need money – and then invest in other projects. For example, recently, Seattle’s Lighter Capital, engaged in alternative to venture capital and traditional bank loans, told about a new $100 million fund to make 500 investments in tech startups. Lighter Capital CEO, BJ Lackland, said, “We raised this fund to ensure that we can continue to increase our volume of funding… We have built amazing software to dramatically raise our investment volume, forever changing how entrepreneurs access growth capital.”
Finance Consulting
While banks are going through the hard crisis times, corporate finance consulting is suffering less. The fact is that the consultancy and restructuring services are most in demand during difficult times. Be it financial regulatory and compliance, investment consulting or M&A – non-banks are winning thanks to several factors.
Consulting agencies have a structure that is more flexible. Their goal of developing long-term relationships with client companies allows the latter to expect more trust and more attention. In general, it also means better protection and promotion of the client company’s interests. The ability to provide services specified by a particular industry also plays a role.
We can hardly call the current situation a confrontation between banks and non-bank financial advisors. Yet, there is a non-obvious evidence that the demand for consulting services is growing - just look at the elite business schools’ statistics. The Economist reports: "Almost 30% of students at the elite business schools now typically find work at consulting firms. In 2007, 23% of London Business School's MBAs joined such organizations, last year 29% did. At Chicago, the number has risen from 24% to 31% over the same period." It is obvious that the sector is growing slowly and surely.
Retail Banking
Capgemini and Efma annually conduct a study to assess the state of retail banking services in the world market. This year, they came to a disappointing conclusion: retail is becoming deadlocked. Drawing up the World Retail Banking Report, the experts studied banking markets in 32 countries. Statistics showed that the retail-banking sector is sluggish, being affected by animated competition from non-bank financial institutions and startups.
According to the report, non-banks in retail payment by the Bank for International Settlements, nonbanks can be found in almost all spheres of payments. They planted themselves into credit and debit cards, e-money products and remittances. Banks still hold the monopoly on sectors such as credit transfers, direct debits and cheques. However, presence of non-banking organizations is felt quite clearly there, too.
Stefan Dab, Senior Partner and Managing Director at The Boston Consulting Group, said: "There will be both significant disruption and immense opportunity over the next decade in payments. While banks face intensifying competition, they actually have the assets to play a critical role in how markets evolve. To continue to extract value from their payments businesses, they must take decisive action along multiple dimensions: improving the richness of their digital interfaces, broadening their range of services, raising the effectiveness of their operations, and forming partnerships in the larger payments ecosystem. Banks also need to recognize that the value of payments will increasingly be realized by deepening customer relationships, not just by direct revenue generation."
By and large, the modern world does not consider status of a particular financial service provider essential. It is all about benefits, ease of use and maintenance, as well as other objective qualities (and subjective, too – i.e. client-centered approach). Nowadays, the centuries-old tenet of banks being reliable per se is hardly a competitive advantage.
Apart from famous, centuries-established recipes, success in today's financial services is defined by two specific factors.
First, providers must offer services aligned with the modern lifestyle of advanced users.
Second, management should have competences necessary for building effective long-term relationships with a broad variety of partners. The question, whether these companies should have the banking license or not, is only a matter of specialization in the "uncivilized" market of money.
