It has been an eventful few weeks since March’s mini banking crisis.
Just last Monday (May 1) JPMorgan bought the subsequently failed First Republic Bank — a previously well-regarded and well-managed lender — showing serious aftereffects from Silicon Valley Bank (SVB) and Signature Bank’s collapses are still being felt.
While investors remain concerned about what the market shocks hold for the future of regional banks, questions are swirling around whether the successive failures were due to individual banks’ management teams, or if there is something more structural and systemic at the root.
And if a fundamental phase shift is happening around the business model of traditional, regional banking — what will happen next?
“There’s a potential moment that we’re seeing here around the franchise value” of banks, Amias Gerety, partner at QED Investors, told PYMNTS last week.
SVB and First Republic Bank both faced massive runs on their deposits, and their solvency disappeared when rates went up due to their having loaded up on assets during low-interest rate environments.
See Also: Tough Times Reveal Embedded Finance Benefits
Bank deposits are part of a long-term relationship, but modern communications technology and social media have made business relationships less sticky. So has the rise of digital and embedded banking and the commoditization of many banking products.
“[T]he combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” a review of SVB’s failure by the Federal Reserve’s vice chair for supervision, Michael Barr, stated.
Banks’ suite of integrated offerings, from their physical branch footprint, ATM locations, online banking solutions, and personalized cross-selling, are all designed to keep customer relationships sticky and drive lifetime value. These efforts also help protect lenders by ensuring their costs don’t go up when interest rates do.
In today’s macro environment, where maintaining and expanding every customer relationship is increasingly important, meeting customer preferences is critical to business growth and survival.
But that notion of, “I am going to go into my bank branch and shake the hand of the manager and we will develop a bespoke financing product for me,” doesn’t appear to be working as well anymore, as interactions become digital-first and classical bank runs make a comeback.
As PYMNTS wrote in March, the banking crisis has shown corporate treasurers and CFOs that the argument that midsize banks pose no systemic risk no longer holds up.
While many observers believe the turmoil with the regional banking landscape will, and already has, result in a flight to quality around “too-big-to-fail megabanks,” others believe that the situation could lead to a fundamental shift in the way the U.S. financial system functions.
That shift, referred to by economists as “narrow banking” or the “Chicago Plan,” would see a separation of deposit taking and lending functions between distinct providers rather than as the bundled model they presently exist under.
Another word used to describe financial institutions providing banking services decoupled from depository functions is a “shadow bank,” and they have already drawn the attention of both U.S. Treasury Secretary Janet Yellen and JPMorgan CEO Jamie Dimon, who, after his firm’s First Republic acquisition now oversees a staggering $3.7 trillion in assets.
As reported by PYMNTS, Secretary Yellen believes the U.S. must work to address shadow bank vulnerabilities — mainly that nonbank lenders are unregulated and generally operate free from adhering to the risk, liquidity, and capital restrictions traditional banks are subject to.
See Also: Why Digital-Everywhere Is Moving Banking Forward
Dimon, for his part, wrote in his annual shareholder letter this year that “the new reality is some things are more efficiently done by a nonbank.”
The JPMorgan chief noted that regional banks “simply cannot” manage the scale and complexity of certain transactions. At the same time, even the largest lenders, like his own firm, will soon play a smaller role going forward due to the “increasing role and size of shadow banks.”
While shadow banks encompass a variety of institutions, up to and including other financial sector giants like private equity companies, PYMNTS has long been tracking how the payment landscape’s ongoing digital transformation is eating away at the market share of traditional institutions.
Eighty-three percent of financial services executives believe embedded finance will majorly or moderately impact their business operations within a year. Eighty-four percent of nonfinancial services executives believe the same.
Consumers and businesses increasingly seek seamless, digital-first experiences, and banking as a service (BaaS) has emerged as a powerful tool to meet this demand.
For historically underbanked segments and businesses struggling to find access to capital amid a tougher economic environment and tightening credit restrictions, this new normal could prove to be a lifeline to future growth.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
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