How Financial Advisors and Their Clients Can Profit from “Non-Bank Banking”
The proliferation of non-bank banking in the residential mortgage industry contributed to the great recession that began in 2008. Ironically, the consequences of the great recession have created the next phase of non-bank banking.
What is a non-bank bank?
So what is a non-bank bank? As defined by Wikipedia, a non-bank bank (also referred to as a non-bank financial institution (NBFI), is a financial institution that does not have a full banking license or is not supervised by a state or federal or banking regulatory agency.
A finance company that lends money for the purchase of a used car is a non-bank bank. An independent mortgage company making residential mortgages is another example. And how about online peer-to-peer lenders? Yep, that’s a non-bank bank, too – but more on that later.
Back to the Future
America’s traditional banking industry, as represented by state and federally chartered banks whose deposits are state or federally insured, has changed significantly since the great recession. Two of the primary changes impacting traditional banks stem directly from the aftermath of the great recession: 1) increased capital requirements and 2) increased regulation. More capital (and changes to the way capital is calculated) and more restrictions on lending and investing activities should, in theory, equate to stronger banks, a stronger banking system, and more financial resilience during the next economic downturn.
Only time will tell if these measures will achieve the intended goals. But one thing is for sure: largely due to these influences, banks have curtailed the breadth of customers they will lend money to. Several surveys have shown that traditional banks’ share of the lending market has decreased since the great recession. This void is now being filled by the next generation of non-bank banks.
Meet the New Non-Bank Bankers
Business Development Companies (BDCs) that lend to and invest in small and middle market companies across the country are leading the way for non-bank banks. Online lenders such as OnDeck, Kabbage, and CAN Capital provide short term advances to very small businesses across the country who, for various reasons, cannot or chose not to get a loan from a traditional bank.
These lenders recently came together to form the Innovative Lending Platform Association (ILPA). The association plans to provide small businesses with standardized pricing comparison tools and explanations prior to securing a loan as early as September 2016.
Other online lenders – such as Enova – provide a wide range of loan products to individuals who can’t get a loan from a traditional bank or who don’t want to apply. Modeled on customer service leaders like Amazon and Apple, these online lenders consistently deliver a high level of customer service that traditional banks are challenged to match.
Then there are peer-to-peer (P2P) lending networks, in which an investor lends money directly to a borrower. Individual P2P lending was pioneered by online services like Prosper and LendingClub. LendingClub was the first P2P lender to register its offerings as securities with the SEC and to offer loan trading on a secondary market, and today the companies are both big players in the peer-to-peer space.
P2P lending now extends to real estate to aircraft loans to investing equity in start-up companies and everywhere in between. What was a cottage industry five years ago has become a fully functioning marketing offering opportunity -- and risk -- for advisors and investors alike.
Even traditional banks are getting in on the act. In 2015, Prosper announced a partnership with a consortium of more than 160 community banks allowing them to source their consumer loans through Prosper’s platform. If you can’t beat ‘em, join ‘em.
Challenges and Opportunities
The opportunity for investors – and for advisors who become savvy about this evolving space – include access to investment opportunities across a wide range of asset classes formerly limited to banks, hedge funds, and high net worth individuals. This is an opportunity for advisors to differentiate themselves from the competition.
However, there are risks as well. LendingClub announced the company is cutting its workforce by 12% and ousting its CEO after experiencing major stock woes resulting from increased investor scrutiny due to a rise in loan defaults, slumping revenues, and the recent discovery of accounting anomalies. Last month, Prosper announced it was slashing its workforce by 28% in response to slowing demand.
And the small business lenders are struggling as well. OnDeck reported a loss of $18M for the second quarter of 2016 and many of the other public online lenders have stock prices that are half or less as compared to a year ago. The culprits are concerns about the quality of their loans and the fear of, you guessed it, increased regulatory scrutiny.
The US financial services landscape is constantly evolving. In addition, the providers of capital and the consumers of capital are constantly changing. They are not only switching up the products they will supply or consume, but also the ways in which they provide or consume them. Non-bank banking encompasses both and offers a unique promise that can benefit advisors and their clients.
Most Read IRIS Articles of the Week: April 17-21
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, April 17-21, 2017
Click the headline to read the full article. Enjoy!
Like so many others in the industry, I was wrong. For years, I was certain that the bull market was nearing its end. I thought the market was over-extended, and that, surely, the wild equities run was coming to an end. But everyone else was bullish, and perhaps rightfully so. And while I’ve watched equities continue on their spectacular rise, I do think now is the time (really!) to put a hedge in place. Here’s why. Here’s how. — Adam Patti
The realities for fixed income investors have changed. How is this being reflected in markets? Bond investing has become increasingly difficult over the past decade. Markets have been heavily distorted by ultra-low interest rates and quantitative easing, as well as by extreme risk aversion in response to the global economic crisis and the eurozone debt crisis. — Nick Gartside
Is being a financial advisor worth it? I am an optimistic person and I encourage other people to keep a positive mental attitude (shout-out to Napoleon Hill and W. Clement Stone). However, by taking a good, hard look at the negatives in life, we can successfully pivot towards the positive aspects that will help us achieve our goals. — James Pollard
How do you treat one of your most valued, existing clients? Here’s a list of some things that come to mind. — Andrew Sobel
According to many advisors I speak with, the only clients that leave are those who have died. And while attrition may not be a big problem in this industry, I have to assume that at least a few clients change advisors without doing so via the funeral home. — Julie Littlechild
I was talking with an advisor last week about how to get into conversations about what he does. He was relaying the story of going jogging with a friend who could be a good client but is, more importantly, connected to a large network of people who fit this advisors ideal client description. — Stephen Wershing
Big picture thinkers are not unicorns - rare and mystical. And they were not born with the innate ability to think big. They do, however, pay attention to the broader landscape and take the time to think, analyze and evaluate. — Jill Houtman and Danny Domenighini
Your reputation is who you are and how you show up, Monday to Monday®. Many of us take our image and reputation for granted. Give careful thought to the kind of reputation that you would be proud of Monday to Monday® and that would resonate with your purpose and priorities. — Stacey Hanke
The generational changing of the guard is a fact of life as old as time. Young replaces old in responsibility, importance, control and culture. Outside of the family, the workplace is perhaps where this is seen most regularly by most people. — Shirley Engelmeier
Next time you hear your prospects give you price objections, it’s not because of the price. The give price objections because they don’t know the full value proposition that they’d be paying for. And it’s not based on their need, or your features and functions. It’s based on the buying criteria they want to meet internally. — Sofia Carter
Last week we wrote about the economic rationale behind going independent vs. moving to another major firm as an employee. As a follow-up topic, we thought it prudent to analyze transition packages attached to big firm moves and peel back the layers of the onion to show the components of these deals. — Louis Diamond
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