Commercial banks stand at a crossroads: on one hand, business indicators in the U.S. are trending more positively than at any point since the financial crisis, and loan volume and values are on the rise. On the other, banks are facing many threats within the commercial lending industry, including compliance burdens and competition from non-bank peer-to-peer lenders, who aren’t bound by the same regulatory requirements.
Whether you refer to them as shadow or sunlight banks, alternative sources for credit funding have existed for decades in the financial services industry. Until the financial crisis, these nontraditional sources for lending experienced a steady increase in growth and revenues. During the financial crisis, like many traditional banks, these lenders recoiled their activity but have recently experienced exponential growth, particularly in the consumer, residential mortgage, leveraged lending and small business arenas. Recent publications have stated the market share for nontraditional lenders has increased by 21 percent within the last three years (2012-2014).
Other studies, such as the one conducted by Grant Thornton in 2014, indicate that as many as 61 percent of consumers say they are already using nontraditional lending services, with an added 8 to 10 percent to transition over the next five years. But this growth phenomenon is not limited to the consumer and their credit needs. Nontraditional lenders are proving to be a preferred funding source to small businesses who have had trouble accessing credit since the financial crisis, according to the New York Federal Reserve Bank and as published by Goldman, Sachs and Co. in a highly publicized article produced earlier this year, “The Future of Finance: The Rise of the new Shadow Bank.”
From the foregoing, it is obvious traditional banks are more cautious post-crisis in their lending activities, but what other industry factors are driving a shift from traditional lenders? One of the main drivers is a traditional lending shift away from low-margin businesses. Historically, low interest rates have contributed to margin compression, and increased regulatory oversight has made compliance expensive for the origination and servicing of loans. This has also contributed to a shift in traditional bank models, making it less than desirable to operate in markets where it’s hard to justify the costs for sales, compliance and marketing.
In short, traditional banks appear willing to forego lending activities where returns are small and market presence cannot be justified.