Non-bank lending is a crucial part of the overall lending landscape and provides financing to millions of consumers and businesses as well as catering to those underserved by high street banks.
Post-2008 we have seen a fundamental change in the approach the large banks take to lending markets, as they retreat and narrow their focus. The gap has been filled by non-bank lenders who provide carefully tailored products across diverse credit types such as mortgages, consumer credit, equipment finance, financing for home improvements and more.
Non-Bank Lending – The driving forces
Increased capital requirements, cost pressures, and data and technology challenges are all driving banks to narrow their focus. This has provided the opportunity for non-bank lenders to fill the void being left behind.
There are a number of long-term secular changes to lending markets that are driving growth:
Structural change – Traditional lenders have responded to the financial crisis by simplifying their business models. As they simplify, traditional lenders increasingly focus on scale efficiencies by addressing the largest sectors of the lending market and have prioritised lending high volumes of commoditised products such as retail mortgages, certain parts of the consumer and SME markets that lend themselves to a standardised approach.
Customer Demands – Customers, seeing improved service and delivery across other sectors, are demanding high quality service and are willing to pay more for specialist providers that can offer quick turnaround times and flexible products that reflect a deep understanding of the customer and the market.
Talent and Entrepreneurialism – highly seasoned “through-the-cycle” underwriters and originators have been setting up dedicated and specialised lending platforms, usually focusing on one or two segments of the lending market. These teams bring extensive dedicated product experience, relevant through-the-cycle underwriting expertise as well as a long list of broker/client contacts that have been built up over many years in the market. The principals of these dedicated platforms tend to be senior experienced lenders who now share closely in the business success and profits versus acting as bank employees with limited alignment. These platforms can build strong lending relationships based on speed of execution and ability to close quickly, and the teams are able to maintain their longstanding, valuable borrower relationships and benefit from repeat business.
Data and Technology –Technological developments enable smaller, more nimble businesses to deliver excellent customer propositions (both online and offline) with more innovative product propositions and/or routes to market, and often at reduced cost.
Investment themes in non-bank lending
So, what markets are we talking about?
Typically, non-bank lenders are specialists in specific end markets, making them a crucial part of the credit economy. These markets often require a combination of knowledge, expertise, technology, systems and processes tailored to the specific asset class or borrower group in order to provide a high quality lending proposition. These businesses can typically generate very strong returns and often do not rely on scale to be successful.
These products are often not suited to standardisation and therefore are not the target for traditional lenders as they continue their quest for efficiency through scale and commoditisation.
Markets of focus include:
- Working capital finance
- Finance for training and education
- Specialist real estate, including bridging, agricultural finance and development
- Cashflow settlements
- Litigation finance
- Aircraft and other leasing
- Asset finance
- Equipment finance
- Trade finance
- Insurance linked finance
- Financing for home improvement and energy efficiency improvements
- Specialist consumer and SME receivables financing
What does this mean?
Non-bank lenders are able to lend to millions of consumers and businesses, as well as catering to those underserved by high street banks. In many ways, they can be seen as ushering in the future of lending for modern organisations and individuals who are looking for a less standardised approach than traditional banks are able to provide.
In the coming years, we are likely to see non-bank lenders continue to gain momentum as more consumers and businesses seek out a specialised, individual approach to accessing the financing they need. At Pollen Street Capital, we’re committed to funding more of these innovative products as this burgeoning industry moves forward.
Matthew Potter is a partner at Pollen Street Capital.