Goldman Sachs suggests larger role for Shadow Banks


In Goldman Sachs report, Future of Finance, the focus was on where new entrants and shadow banks were most likely to gain entrance.   Their conclusion was:

  • US banks earned $150bn profit from lending in 2014
  • In 5 years, $11bn of of this profit could be captured by non-bank lenders – and in particular online lenders such as Lending Club, Prosper, SoFi, Kabbage, etc.
  • The table below (click image to enlarge) shows very clearly what lending product areas they have in mind, and the competitive advantages of the online lenders.


Notice the biggest impact as it relates to B2B is small business loans, where Goldman suggests $1.6bn in bank profit is at risk over the next few years. They believe emerging players will force the incumbents to change competitive behavior, including the thinning of pricing margins, which will impact returns (not a good sign for the banks in this new world.)  They also believe you may see a round of M&A by the banks, which could potentially cannibalize some of their existing businesses.

We believe the impact may be well beyond small business credit and extend into the middle market. A report issued by Grant Thornton found that in 2014, 60% of businesses in the mid-market were already using non-bank lending as a source of finance.  This potential to erode the receivable base will impact all lenders, from Asset Based Lenders, to factors, to banks and other specialist finance firms.

While middle market companies will certainly stick to credit facilities to fund their needs, the big question will be how will networks impact lending.  So if a company can now use Amazon, CVS, Rite Aid, Walgreens and other buying clients’ systems to get finance, what’s left for lenders?  It’s a big unknown, but bets are being placed in a big way on networks like C2FO, Taulia, Viewpost and others  (as a side note, it never ceases to amaze me how much money is thrown at business models without understanding key questions such as how much erosion of receivables will occur with the mid market– sure it’s hard, but the valuations private equity are putting on these networks is banking on this materializing.

On the other hand, most SMB marketplace lending ends up being financed by banks, so Goldman’s assessment here may be overstating the impact on banks profits. In fact, with the likes of Quickbooks, Kabbage and others connecting with banks, it may significantly increase profitability given the costs eliminated in originating small business loans the old fashioned way.

Our Alternative Business Finance list will focus on a new class of shadow banks that are emerging to finance peer to peer lenders, supply chain finance structures, new online factoring solutions, supplier networks, etc.  These firms are leveraging their advantages in capital and compliance to play a new and potentially bigger role in B2B lending.

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