Amit Seru, a Stanford University Professor, presented his most recent data updates on the role of shadow banks and FinTechs at the FDIC’s 19th Annual Research Conference last week.
The slides he used can be found here.
The trends show that more and more lending is originated by non-depository institutions in both the mortgage and consumer lending arenas.
Two of his slides (#10 & 11) illustrate this growing market penetration geographically by county between 2008 and 2015.
These alternative financial firms enter markets as depository firms withdraw primarily due to their lack of profitability.
Seru was especially interested in the role of FinTechs firms, which he defines as firms relying on virtual channel operations that can be completed from beginning to end without human intervention.
The FinTech advantages of faster processing, use of broader data sets for marketing and decisioning, and a superior quality online experience, are well known.
But he also suggests their success is not because of a price advantage over banks. In some cases consumers pay more for online convenience and speed.
Why the loss of market share?
Seru concludes that the Fintech technical advantages account for only 30-40% of the shift in market share. He asserts the most important factor (60-70%) in this ten-year market share change is the impact of regulation on banks’ ability or willingness to continue serving specific markets. This regulatory burden has increased substantially since the 2008 financial crisis primarily as a result of regulations from the Dodd-Frank legislation.
Even with a lesser regulatory burden, FinTechs are not all-powerful. He points out they are mostly dependent on the secondary market for final loan funding. Importantly, the balance sheets of depository institutions gives them more flexibility in certain products such as jumbo loans. Should the secondary markets become more selective or volatile, then the banks traditional funding advantages may reassert themselves.
Credit union takeaways
For both traditional and new entrants in the consumer and small business lending markets, the key factor to long term growth and resilience is access to liquidity. Generally depositor relationships are more stable and often less expensive than wholesale and secondary market reliance. Convenience, not price, seems to be the primary reason FinTechs disrupt traditional service models. However this advantage in the digital channel is rarely permanent. An all-channel strategy is especially valuable for community institutions.
Credit union relationships based on loyalty and trust are a significant advantage versus competitors focused on transaction capture. For 110 years the cooperative model has followed a second-to-market innovation strategy that has resulted in growth and evolving business models. Cooperative design, aligning with members’ needs, would seem to be a continuing advantage regardless of where disruption may occur.