Nonbanks muscling into commercial areas

Banks believe that new digitally enabled supplier finance networks and alternative lenders now pose a significant threat to every part of the commercial lending business, according to a new survey conducted by Misys.

Key findings from the survey include:

• 68% cited small business lending as being under high threat.

• 61% see competitive pressure in supply chain finance product lines, such as receivables finance and factoring.

• 84% see pressure on pricing of loan products as a challenge.

• 75% fear loss of market share to alternative lenders.

The rise of alternative financiers, peer-to-peer 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. According to a report by Grant Thornton, in 2014, 60% of businesses in the mid-market were already using nonbank lending as a source of finance, showing that it is no longer a fringe activity, but one that is widely considered normal by corporates.

Can partnerships improve picture?

Despite these challenges, the Misys survey results show that banks also believe that a strategic partnership with nonbank players can be a strong driver in growing their trade finance business, with 68% citing that they see this as a big opportunity.

“Our survey respondents believe they can leverage emerging supplier networks and the financial technology vendors that can provide digital enablement and connectivity across trade and lending to grow and retain clients,” says David Hennah, head of Trade Finance at Misys. “We have seen an increasing focus on strategic technology partnership.”

“The threat from nonbanks on traditional banking models is clear and present and this has grown largely from the technological innovation in this space,” says David Gustin, editor of Trade Financing Matters, a trade finance and working capital online site. "The challenge is that lenders don't know what they don't know, meaning many clients will access alternative forms of finance without their knowledge. In order to compete, banks need to replace outdated delivery models and put customer interests at the core of their business strategy.”

“Innovation is outpacing the limitations of legacy bank frameworks. By thinking differently and embracing change banks, in partnership with their vendors, can define new value propositions along clients’ financial supply chains,” says Hennah.