According to the latest global liquidity indicators by Bank for International Settlements published on July 31, the non-bank sector is turning out to be the preferred choice for corporate treasuries for both financing and borrowing – with non-banks attracting more global liquidity than banks for first time.
As a percent of the GDP, the first quarter of 2019 saw international credit received by the non-banking sector reach 20%, whereas that for banks was at 19.8%. The annual change has been 1.2% and 7.3% respectively. While the bank sector saw a decline in recipients of international credit of -1.1% and -1.6% in the last two quarters of 2018, the non-bank sector has kept growing.
The rapid shift of economic activity comes at a time when many CFOs are asking treasurers to improve their performance. The pace of growth and banking regulation has left too many of them lagging on even core activities in their home markets such as cash management, banking, debt and funding, investments, and risk management for currencies and interest rates.
Tougher regulations troubling banks
The UK’s alternative finance industry remains bullish despite the spectre of Brexit and the continuing focus on regulation. According to a report from KPMG ‘The future shape of UK FS regulation: Rule taker or rule maker?’, UK financial services regulation may alter but it won’t ease in a post-Brexit.
Julie Patterson, Regulatory Insight Centre, KPMG UK, commented: “The regulators on both sides have been clear they don’t want regulatory arbitrage, but the UK has in the past taken a different path, such as being the only country in the EU27 to ring fence its banks, and that trend will become more common when we are no longer in the EU. I see no sign that the UK regulators’ tendency to lead the debate on risk and conduct issues will abate so regulation may become more demanding, not less.”
With tighter banking regulations, banks becoming more and more selective and the various non-banking investment options available to corporate treasuries, deposits with banks are gradually reducing.
Stricter banking regulations are creating new opportunities for non-bank providers of asset-based lending services to treasurers. The tighter regulatory environment has resulted in less willingness on the part of traditional banks to lend. Treasurers are increasingly turning to the non-bank sector to supply short- to medium-term, structured, asset-based loans and an injection of working capital.
Non-bank sector: a welcome alternative
The void left by traditional banking providers presents a lucrative opportunity for fintech startups.
The new alternative banking sector is dominated by online lenders, who can provide cheaper loans because of lower operating costs and reduce risk by gathering richer data on potential borrowers to predict loan defaults. According to the Cambridge Centre of Alternative Finance (CCAF) estimates, lending in non-traditional markets jumped from US$11bn to US$242bn in just three years. Almost 30,000 companies use non-traditional.
The non-bank lenders, by offering personalized and innovative financing services, are a welcome alternative to traditional banking methods for the treasurers.
The alternative lending products have made it easier for treasurers to access money at lower interest rates, often with no collateral requirements.
Non-bank and bank collaboration
The rise of alternative lending is predicted to make a difference for traditional banking and drive change. The rapid growth of the alternative financing sector will perhaps put pressure on traditional banks to innovate and find new solutions to remain competitive in the digital world.
Faced with this kind of competition, banks will have no option but to improvise and innovate or risk losing to new arrivals. Non-bank financiers, peer-to-peer (P2P) lenders and new supplier networks in the market is leading banks to re-evaluate their operating models and embrace partnership, new technology and more agile approaches to lending and trade finance.
Traditional banks must follow suit but will faced the challenge of larger legacy systems and processes. a strategic partnership between bank and non-bank sector can also be a solution helping corporate treasuries.