Who knows what dangers lurk in the shadows?
Specifically, who knows what dangers — for banks, at least — lurk in shadow banking, as FinTechs emerge to nibble at market share?
Call it a double-barreled threat pointed toward financial institutions (FIs) that have set down roots over decades, indeed, hundreds of years.
Indeed, in an appearance on Capitol Hill last week in front of the House Committee on Financial Services, seven chief executive officers of banks as far-flung as Goldman Sachs, Bank of America, JPMorgan Chase, Morgan Stanley and others pointed to risks that may be tied to the U.S. financial system amid the rise of alternative lenders.
Beyond the fact that those CEOs said systemic risk is not yet in the cards, the septet also said these alternative lenders bear watching, lest the growing nonbank sector eventually give cause for alarm.
The Lengthening Shadows
The rise of alternative financial services players — where money and credit and loans are extended to corporate or individual borrowers by tech-driven upstarts (like FinTechs, as has been noted by the Federal Deposit Insurance Corp.), or more commonly structured investment vehicles, collateralized debt obligations, money market funds and others — has certainly gathered momentum.
Estimates show that shadow banking is now a $52 trillion global industry (per data from the Financial Stability Board), where assets under management have jumped 75 percent in the years since the end of the financial crisis. In the United States, there’s a bit of concentration here, as 29 percent of shadow banking is tied to the country, at $15 trillion in assets.
JPMorgan Chase CEO Jamie Dimon has warned about shadow banking a few times over the past several weeks, perhaps most extensively in his annual shareholder letter. Though the risk may not be systemic, it bears watching, he wrote, and repeated the sentiment at last week’s hearing, telling lawmakers shadow banking has the potential to “cause issues” in the financial system.
In his writings on shadow banking in the annual letter, he noted, too, that “growth in shadow banking has been possible because rules and regulations imposed upon banks are not necessarily imposed on these non-bank lenders, which exemplifies the risk of not having the new rules properly calibrated.”
The Question of Regulation
During the Congressional hearing, Rep. Jim Himes (D-Conn) asked what products, financing or markets generate systemic risk that require attention. Citigroup CEO Michael Corbat responded that leveraged lending is seeing growth outside of the regulated financial system (he pointed to mortgage and auto lending), and so is not yet posing a systemic risk. Dimon said leveraged lending and student lending are “growing rapidly … and deteriorating rapidly.” State Street CEO Ronald O’ Hanley said he would be “concerned about anything that is pushing activity into the shadow banking system.”
Goldman Sachs CEO David Solomon said although shadow banking is not currently a risk, there have been changes in market structures that have yet to be tested. “There is more direct lending being done,” he said, to consumers across separate vehicles that are not regulated. And in response to a question from Himes as to whether the House committee, specifically, should be examining shadow banking more closely, he said, “There should be a hard look and a better understanding of what’s there.”
FinTechs the More Immediate Threat?
In reference to FinTechs specifically, the CEOs weighed in on the future of banking and FinTech and the way the financial services space is changing.
Bank of America CEO Brian Moynihan pointed to his firm’s 27 million mobile banking customers and “the connectivity of the smartphone, and alerts … it already makes us more efficient.” Dimon pointed to small business lending that can be done through digital means, the same day (with speed, and cheaply) and through phones.
We note that the executives’ nods toward mobile banking pointed to a systemic change that may — without proper action — pose a more immediate threat than the shadow banking leverage that bank CEOs downplayed last week.
In our “Where Will We Bank Next?” study that debuted at the dawn of the month, produced in conjunction with Green Dot, we at PYMNTS found that traditional financial services firms, the most entrenched of incumbents, should sit up and take notice of the companies beating a path to their door, asset-light as they are and devoid of the legacy systems that burden traditional providers.
We surveyed more than 2,500 consumers earlier in the year and found palpable interest in at least exploring what non-bank providers can offer.
Yes, relationships with current traditional financial services providers seem harmonious — at least for now, and at least so far as headlines might suggest. As many as 64.3 percent of those surveyed said they’d been with their providers for at least five years, another 11 percent three to five years. A full 90.6 percent said their current providers “fit their banking needs.”
Under the hood might there be a restlessness stirring? The joint PYMNTS and Green Dot effort found that 13.6 percent of respondents would be “very” or “extremely” interested in switching to new providers. That leaves the door open for the upstarts to make headway against the big banks. The population extrapolated from that 13.6 percent is certainly significant — one that translates into 34 million people 18 and older in the United States.
The fact that 57.5 percent of the study’s control group said they would consider getting at least some of their services from non-banks indicates at least some parts of the relationship with traditional players may be tenuous.
You know some of the biggest names vying for a foothold (or continued strides) in the traditional banking space — such as PayPal, Google and Apple. As many as 46.4 percent of those who said they are interested in switching FIs would consider banking with PayPal, for example, compared to 30.5 percent of the sample (i.e. both those interested in switching and those who did not indicate that preference) and 40.5 percent would do the same for Amazon compared to 24.8 percent of all those surveyed.
Digital-only bank customers offer a mirror image of the long-lived relationships seen among traditional FIs. Of those we surveyed, only 17.2 percent had banked with their FIs for more than five years, and 26.6 percent had been with theirs for one to two — which makes sense as these companies are relatively embryonic compared to, say, JPMorgan or even PayPal. Online banking’s ease of use is among the most cited factors leading to consumer satisfaction with those relationships (at more than 62 percent, compared to a bit more than 57 percent for national banks).
Shadow banking in the shadows, FinTechs in the spotlight vying for traditional bank customers’ hearts and minds. For those helming the marquee names in financial services, attention must be paid.