Alternative Finance and Shadow Banks – Voodoo or Hail Mary?

abf-wl2015x200Ha, that ugly world the democrats tossed around during their debate last week – shadow banks.  Like it’s some form of disease, or worse, a curse on your generations to come.

Seriously, there is a massive movement to create non bank entities to fund wholesale and consumer credit. We are dealing with many of those platforms that enable the transfer of assets here on Trade Financing Matters and Spend Matters – companies like Tungsten, Basware, Nipendo, PrimeRevenue and Taulia. The trick is understanding the various nuances of how they do it.

Why this rush to Non Banks?

Structural and regulatory changes are enabling new entrants to replace banks. 

New capital standards to boost bank capital combined with stringent Know Your Customer and AML compliance is impacting the supply side, zero short term rates (or even negative if you have Euro bank deposits) and coming changes to money market fund legislation is impacting demand. New entrants such as asset managers, insurance companies, hedge funds, pension funds, online peer-to-peer lending platforms, etc. are finding ways to become investors for business credit.

Banks now have to compete with these shadow lenders and also work with different investors to redistribute loans on their books. It used to be when the banks had too much Sri Lankan or Pharma risk, they could resell to each other. That is changing fast.

The irony in the shadow bank market is that many banks lend to non banks precisely to invest in alternative assets. In fact, it’s one of the growth stories for banks who solicit factors, hedge funds, etc. for credit lines.

Are we pushing risk where it cannot be seen?

The reason this is considered “shadow” (doesn’t that term really scare people) is that these loans are not regulated in the same way as banks. If we assume risk doesn’t change regardless of owner, is pushing loans to a more unregulated environment a bad thing?  Perhaps.  But it does look like there is some regulation coming after the election.

Will this be hot money?

The big concern with non banks is “here today and gone tomorrow” to find the next best investment. If you are lending money and turning it over when terms expire, will non banks roll over business credit? Banks will claim they were lending even during the financial crisis.

But the irony is that many banks lend to non banks precisely to invest in corporate debt. In fact, it’s one of the growth stories for banks who solicit factors, hedge funds, etc. for credit lines.

We have already seen public examples in the Purchase to Pay space of vendors and non bank partners, such as Nipendo and Integrate Financial, Tungsten and Insight Investments, and Taulia and Greensill Capital.

Over the ensuing months, we will be profiling the Alternative Business Finance segments and individual companies within the segments.  If you believe you should make our Watch List, contact me at dgustin at

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First Voice

  1. Magnus Lind:

    Hi David

    Thanks for another good article.

    Just highlighting your note that shadow banks often don’t lend in a severe crises. Well, we learnt, in 2009-10 in particular, neither do banks.

    Stay a champ!


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