Challenging The Banks | Global Finance Magazine

Nonbanks have eaten into traditional banks’ marketplace. Can the older banks retake lost ground by simply becoming more agile?

Once upon a time, banking was simple: Take deposits, use depositors’ money to make loans, and transfer payments between clients and earn a commission.

All three pillars are now under assault.

Longer-term savings have migrated to wealth managers who promise much better returns over time. An array of innovative fintechs offer alternatives for payments. Home or car buyers are ever more likely to borrow from nonbank originators. Some 70% of residential mortgages in the US, the world’s largest banking market, are processed by nonbanks, according to Brian Graham, partner at the Klaros Group, which advises and invests in financial firms.

Corporate borrowers have been shifting to nonbank lending since the 2008 global financial crisis, the latest hot alternatives being collateralized loan obligations and private credit. The latter has mushroomed to $2.1 trillion globally and is still growing fast. Nonbank financial institutions, or NBFIs, hold two-thirds of financial assets in the most advanced economies, according to the Financial Stability Board (FSB).

In order for the banking sector to regain market share from nonbanks, banks will need to change how they compete for customers. Long-established banks will need to become less cautious and more agile in navigating regulations. One avenue for the banking sector is to start from scratch, as KakaoBank did in South Korea and Nubank in Brazil.

Higher interest rates have given banks some relief over the past few years, increasing their net interest income while hampering competitors—particularly fintech startups dependent on equity financing. The FSB reported that global NBFI assets shrank 5.5% in 2022, the first notable decrease since 2009, while banks’ balance sheets grew by 6.9%.

Long-term trends remain adverse, though. “Banks are losing market share to nonbanks, and the situation is much worse than what the statistics show,” says Miklós Gábor Dietz, lead of McKinsey’s Global Banking Strategy and Innovation team, the global Ecosystems Hub and is the managing partner of Vancouver Office.

Pros and Cons of Government Oversight

Banks are competing with the equivalent of weights tied to their ankles. These, of course, are the extra regulations and capital requirements most countries have piled on since the 2008 crisis. Any new loan needs to be risk-weighted and have capital set aside to offset it, restraints that nonbank lenders can often ignore.

Even as earnings seem to be healthy, banks struggle to earn a return on all that capital, Dietz points out—particularly on corporate lending. “On paper, this is the most profitable business in the world,” he says. “But on average globally, corporate banking is adding no value.”

Banks’ long histories and diverse business lines leave them lagging behind newer, more-focused rivals, as competition…