The primary role of a traditional bank, providing financing and capital, is set to be fundamentally challenged in a post COVID-19 world by non-banks.

A new report from PwC has predicted that alternative providers of capital are set to become an even more important part of the global financial system.

In the last 10 years, aggregate lending by non-banks has outstripped the pace of growth of traditional lenders, with non-banks seeing a 2.3 per cent compound annual growth rate (CAGR) of lending, compared to a 0.6 per cent CAGR for banks.

This trend is likely to accelerate as declining core capital ratios - caused by asset impairments resulting from the pandemic - will limit the lending capacity of banks, particularly in Europe.

Non-traditional sources of finance, such as private equity, sovereign wealth funds, credit funds and governments themselves, will need to step into the breach to finance the recovery and its aftermath.

The PwC report pointed out that in 2019, non-banks lent $41 trillion, compared to the $38 trillion lent by traditional lenders. The analysis showed that private debt has seen substantial growth, which is set to propel the asset class into a significant category of non-bank lending. Since 2010, CAGR in private debt has risen 11 per cent.

For established financial institutions, the rise of alternative lending brings into question a bank's role as a capital provider versus an intermediary, according to John Garvey, global financial services leader of PwC US.

“The rise in alternative providers of capital and the impact of COVID-19 on traditional lenders has put a spotlight on how various funding models will evolve in the future - for traditional financial institutions, this shift will have a significant impact on their business model - and ultimately their bottom line," he stated.

"Banks need to rapidly think about alternative ways to participate in the value chain as the industry migrates to a platform-based model.”

For insurers and asset and wealth managers, the challenges are equally daunting, according to PwC.

The report argued that a combination of near zero interest rates and the rise of digital-only players will create tighter margins across product portfolios, emphasising the need to digitise rapidly, gain cost efficiencies and register real gains in productivity.

All of this will have to be completed as governments mandate more spending and reporting on environmental, social and governance (ESG) initiatives.

“The challenge for the financial services industry is in how it is able to navigate this difficult environment while balancing cost cutting and investment," concluded Garvey.

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