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The financial services space has seen major disruption. In a short period, innovative technologies have helped the so-called shadow banking system steal a march on traditional lenders, especially in financing small business and startups. Meanwhile, fintech innovators have begun to rely increasingly on non-bank sources for financing. These are powerful trends, but investors would do well to heed the words of the world’s new literary Nobel laureate: “The wheel is still in spin.” Banks now seem poised to reassert themselves into the area, on their own and in partnership with non-bank lenders. This latest change will likely open opportunities for fintech even faster than before.

Data are striking. Updates of a September 2015 study by researchers at the Chicago and Philadelphia Federal Reserve banks reveal that non-bank lenders of all sorts have risen from obscurity about a decade ago to originating some $200 billion of all outstanding small business and startup loans. Though banks still originate some $350 billion of such loans, this is a loss of market share at a prodigious pace. Smaller community banks, once overwhelmingly dominant in the area, have suffered the most. Their share of small business lending has dropped from 77 percent of the total at the turn of the last century to some 43 percent recently, while lending to startups has dropped from fully 82 percent of the total to a mere 29 percent. Such a sudden rise for non-bank lenders from next to nothing to nearly a fifth of the entire market surely constitutes a revolution. It speaks to the radical nature of this change that most of today’s dominant non-bank lenders did not exist a decade ago.

Several factors are responsible for this turn of events. One is the decision among bankers to pull back from risk, especially in real estate and small business lending. It is easy enough to understand why. The 2008-09 financial crisis bankrupted many small and large banks and would have done more damage were it not for support from the federal government and the Federal Reserve. If that experience were not enough to instill timidity into bankers, regulatory behavior since the crisis, especially the Dodd-Frank financial reform legislation, has made it expensive for them to take risk by insisting that they hold greater amounts of capital to back such loans. These regulatory restrictions are too much to ask for from smaller community banks. Even though larger institutions, those designated “too big to fail,” must hold greater capital reserves and meet more comprehensive reporting requirements than smaller banks, the implicit government guarantee against failure has given them a comparative advantage that more than compensates. It is noteworthy in this regard that about a fifth of the nation’s community banks have closed their doors since the law was passed.

Meanwhile, the low interest rate environment fostered by the Fed has further dissuaded banks from lending. By lowering short-term interest rates, policy makers have reduced financing costs at depository institutions to nearly zero. Though longer-term bond yields on U.S. treasuries and other high-quality securities have dropped with declining short-term interest rates, they have not fallen nearly so far. On average during this time, the rate gap between short-term deposits and 10-year treasuries, for instance, has, according to Federal Reserve Board data, averaged about 200 basis points. This situation has given banks, large and small, an attractive arbitrage with which to turn a profit without having to take either lending risk or incur the disapproval of regulators.

A more exciting story emerges from the non-banking side of the loan market. These lenders would no doubt have filled the financing gap left by the banks in one way or another but fintech has given them tremendous competitive advantages. To be sure, non-bank lenders use a bewildering array of business models including some act that as a kind of facilitator for peer-to-peer lending. Lending clubs, which started in this way, have since broadened sources of their own financing, sometimes from banks, and have begun to make comparatively large unsecured business loans. Some so-called “balance sheet lenders” raise funds through private equity and debt financing in capital markets and then actually keep the loans they originate on their balance sheets. Many of these are associated with so-called “payment processors” for internet-based transactions, such as PayPal and Google Wallet. For all this variety, all these non-bank lenders count on fintech innovations to make their lending arrangements more appealing to the ultimate borrowers, many of which are, of course, the fintech startups themselves.

Though the list of specific fintech applications might seem infinite, fundamentally these lenders draw strength from powers in data collection, manipulation, and analysis so that they can develop a more complete picture of the borrower than was previously possible, allowing them to go ahead confidently with loans that would seem too risky in another context. This approach has benefited startups, specially those that could never have passed muster under traditional credit tests. Facility with data has allowed fintech innovators to transfer funds flexibly to find sources of financing and get around state usury laws, both of which have enabled them to gratify borrowers who otherwise would have faced rejection, though they have often done so at steep rates. When working with payment processors, tech-driven non-banks can reduce risk in still another way by arranging to have repayments come through automatic deductions from incoming receipts.

The whole package makes the entire process easier for both borrower as well as lender and more likely to end in success. At once, it relieves much of the burden of applying for the loan, shortens the application to response time and, critically, allows the lender to make more flexible trade-offs between interest rates, loan covenants, and lending limits. That helps the lender to control its risk all while fashioning a deal that has more appeal to the borrower.

But now the lending environment is changing yet again. For one, the Fed is raising rates. As its policy, as it inevitably will, narrows the gap between what it costs deposit-taking institutions to fund themselves and what they can get on high-quality bond purchases, banks surely will again begin to tolerate the risk needed to get higher-paying loans. Meanwhile, community banks, seeing the advantages of their non-bank competitors, have begun to work with them instead of against them. The developing links has potential to benefit for both players. The community banks, of course, will get access to financial technologies they could not otherwise develop for themselves, enabling them to qualify a prospective lender more quickly and more thoroughly than previously. Cooperation will also enable them to serve customers they could not in the past. Instead of the outright rejections, they will gain the ability to refer a questionable borrower to an affiliated non-bank lender. At the same time, the non-bank lender gains by broadening its field for marketing and acquiring a way to offer customers loan support and other essential banking services that these notoriously staff-short firms could not in the past.

Three things are apparent as this scenario unfolds. First, non-banking lenders will remain a force in the market for financing small business generally and startups in particular. Second, though the differences between non-bank and bank lenders, especially community banks, seem to blur, the business models that non-bank interlopers have developed and their effective use of fintech will clearly have a place in tomorrow’s environment. Third, the move toward cooperative ventures seems set to give greater innovative scope to fintech, by creating demands for them to apply their skills to still more areas of banking and finance.

Milton Ezrati is a prominent economist and author who has worked in the financial services industry for decades and currently serves as chief economist of Vested.

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