Are Banks on the Verge of Collapsing?
No, but banking industry analysts and advisors agree that the industry has been significantly impacted by a growing global, mobile, digital consumer world. In addition, increased regulatory activity, especially regarding lending practices and decreasing assets has further depressed traditional banking performance.
The changing reality of how consumers conduct their financial transactions, along with frustration and disillusionment with the banking interface has created fertile ground for non-traditional financial institutions to nudge banks out of the picture. Banks will have to re-invent themselves if they are to remain viable, but the train has left the station, so to speak, and the non-traditional financial market will be a fierce competitor.
Non-Traditional Financial Institutions
Investment analysts predict that banks could potentially lose as much as $11B in profits to non-traditional financial institutions, defined by Goldman Sachs as “lending activities conducted by non-banks that are similar to traditional banks.” Examples include: hedge funds, real estate investment trusts, marketplace or peer-to-peer lending, crowdfunding, insurance companies, and storefront lenders. The Financial Stability Board estimated that the nonbank lending industry is holding roughly $75 trillion in assets, and set to grow exponentially in 2015. The report highlights six areas where banks’ profits will be eaten away by the nonbanking industry: (1) consumer lending (2) small business lending (3) leveraged lending, (4) mortgage lending, (5) commercial real estate loans and (6) student loans.
Smartphones Spawned Huge Growth in E-commerce
It is estimated that there are 1.4 billion smartphones in the world and ownership is expected to grow by 44% annually. This means that an ever increasing number of consumers, in virtually every country, are ready to conduct financial transactions via their smartphone: shopping, paying, borrowing and even investing. A new research study released by mobile money company Azimo says that between January 2014 and January 2015, the percentage of mobile payments doubled. More and more consumers, especially millennials and the cash-only crowd, prefer mobile payments systems, such as eWallet for transferring money and making payments. They have little interest in owning a bank account.
eWallet transactions are predicted to reach 41% of the online commercial market by 2017. Leading the pack are PayPal and Alipay, both with significant transactions throughout the world, but they are not alone. Others in the eWallet game include: Amazon Payments, Western Union, GoCardless and Venom, to name just a few. In some countries, such as China, eWallet is the preferred method for making payments and transferring money, with a 44% share of the ecommerce market.
The marketplace lending platform has quickly covered the globe, bringing millions of consumers into the consumer marketplace in ways previously denied to them. The market’s proven track record has brought it fully into the mainstream, making serious encroachments on the traditional consumer and business lending turf of traditional banks. Financial analysts and studies examining marketplace lending all agree that the growth has been stunning. Marketplace lending, such as peer-to-peer and crowdsourcing provide an opportunity to consumers to use an online platform that will get them to the money they need in the quickest amount of time.
Simplicity, consumer-friendly approval criteria, speed and accessibility are driving the success of marketplace lending. The growth in the market is not lost on investors either, who are eager to find alternatives to low-return investments from the past. This combination of more investor capital means there is more cash available in the alternative lending market, leading to more consumers successfully obtaining financing all of which leads to good press, customer satisfaction, growth in the industry and less business for banks.