Banks Face Two Difficult Challenges Going Forward

[Corey Dutton]

Banks, both small and large, are facing two extremely difficult challenges that threaten their continued existence in the financial services industry. Blindsided by the financial technology sector that has produced successes like PayPal, big banks are struggling to keep up the pace. The second biggest challenge that banks are facing is in the compliance with new regulations under Dodd Frank. For example, many banks can no longer be competitive in the U.S. mortgage lending market, for example, due to the higher costs of doing business under new regs. Even the big banks are bowing out of the mortgage lending space due to the higher costs of doing business. With these two challenges to face, it will be interesting to see what the banking landscape will look like in just five years from now.

The arena of private money lending, also called “Shadow Banking” in Europe, is not subject to the same regulatory requirements as are the depository institutions. For this reason, private money, non-bank sources of financing are taking increasingly more market share, particularly in U.S. mortgages. In fact, private money lenders took 53% of the U.S. mortgages last year, according to the Financial Times. Banks simply cannot handle the increased costs associated with complying with new regulations and are bowing out of offering mortgage products altogether, or are merging with other banks to take advantage of economies of scale.

Posted by Corey Dutton, Private Money Lender