One door closes, another opens: Positioning your business to compete in a disintermediated lending market

by Robert Boulding Partner, PwC United Kingdom

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PwC's Portfolio Advisory Group is a market leader in loan portfolio sales and credit related transactions globally. They are seeing new trends in the banking landscape creating new and exciting transaction opportunities for market participants. This was a theme discussed at PwC’s recent European Bank Restructuring Conference.

Participants at the conference were asked what proportion of today’s bank lending will be replaced by non-banks in five years’ time, more than two-thirds reckoned that at least a quarter would switch. While this would be a huge loss of revenue for banks, it is also forcing them to look closely at how they can be more productive with their balance sheets and lending expertise. So, what’s shaping the new playing field and how can you as either a bank or non-bank lender ensure your business is in the best position to compete?

Lending is a market in flux. Pressure on banks to de-risk, shrink balance sheets and put aside more capital has made providing loans for some higher risk borrowers costlier and less viable. The need to maintain stable long-term funding under post-crisis liquidity rules has also disrupted their ability to borrow short and lend long, which was at the heart of many business models. Scope for long-term lending has reduced as a result.

Institutional lenders have been stepping into the breach. While more favourable capital and funding costs mean that they’re able to undercut banks on certain types of lending, the yields have have in many cases been higher than traditional fixed income investments such as government bonds and some institutional investors now have sophisticated ‘alternative investment’ strategies to achieve these higher returns.

While banks’ share of lending is under threat as a result, they can still play an important role in the manufacturing of product due to their reach into various customer segments. Banks can bring to bear their lending network, sector and geographic expertise, while non-bank partners offer their capital to efficiently fund the lending. Indeed, many banks are happy to redirect certain clients to what may be more efficient alternative lending options, while focusing their own capital on lending that better suits their balance sheet requirements. This does of course raise the question of exactly what loans should be retained on the balance sheet and what should be offloaded, and could there be a tension between the two?

Muddying the waters

This originate-to-distribute model is a well-trodden path in the US and would appear to offer a mutually beneficial way forward for banks and non-bank market participants in Europe. However, banks now risk being cut out of the loop as insurers and other non-bank lenders look to originate in areas such as mortgages for example. Developments in technology and distribution are enabling them to get closer to customers without the need for the extensive infrastructure of branches that used to be a unique selling point of banks back. Further competition for the customer relationship is coming from the move to open banking.

This disruption is set to provide a further catalyst for the emergence of new business models. These range from banks that solely act as manufacturers for customer-facing partners to those that operate as platforms for both their own and others’ products. At various times, the bank will be in the background or even invisible as the consumer interacts with other companies. Rather than operating right along the value chain, banks would only carry out part of the end-to-end activity within a complex web of interactions between multiple companies’ systems.


Partnership is critical both in asset management and in securing the necessary expertise for investment in unfamiliar areas such as infrastructure projects for example. Participants in the panel I chaired stressed the importance of clear explanation and transparency from asset managers in encouraging pension funds and other institutional money to explore a broader range of lending and investment opportunities.

As panellists further highlighted, there would also be openings for greater partnership between banks and institutional lenders. In relation to infrastructure development, for example, there would be opportunities for banks to focus on the construction phase, where their expertise, risk management and short-term funding are most valuable. They could then pass on management to an insurer or pension fund, with the long duration of the asset providing an efficient match for their long-term liabilities.

Deal drivers

The need to reshape business models and develop new capabilities is providing an important driver for M&A. 

Many insurers and pension funds will be looking to develop their origination capabilities. Further targets include the scalable asset management capabilities needed to manage investments in complex areas such as infrastructure, aviation finance and other heterogeneous corporate lending segments. Interestingly, some conference participants raised the possibility of consolidation among these institutional investors further down the line to combine asset management and investment capabilities to become multi product/asset managers.

Depending on the model they follow, banks will be looking to strengthen 'originate and distribute' capabilities, offering scale that many others don’t currently have.  This reorientation and rationalisation will spur both acquisition and divestment.

We are already seeing more and more partnerships between lenders and institutional monies and we think this trend will continue due to the market drivers above. But it isn’t just the banks that need to find the right model. New non-bank lenders with lean operating models are attracting institutional money and are proving they can grow fast which risks some of the banks being left behind in certain areas they would normally want to compete in. So there is a pressing need to review and shape business models going forward and those that don’t consider this now may be left behind in the medium term.

by Robert Boulding Partner

Email +44 (0) 7970 829669