The bank for a changing world

Disintermediation or Intermediation: striking the right balance

  • 03.03.2016

Up until the 1980s, companies in search of funding relied almost exclusively on bank loans. But things have changed since then: banking disintermediation is on the rise as companies have more access to other financing options. Large companies now turn to capital markets, while crowdfunding has recently emerged as a viable alternative for SMEs and VSBs. 

Banking disintermediation takes root

Both when starting and expanding their business activities, companies relied almost exclusively on bank loans through the 1980s. 
But since then, a phenomenon known as banking disintermediation has taken root: 

  • This process has accelerated since 2008 when the difficult economic context made banks more prudent lenders with companies facing greater financial uncertainty 
  • Changes in banking regulation intensified this phenomenon – with new prudential rules adopted on both a pan - European and international level, methods of financing the economy have also continued to change.

Indeed, the liquidity ratios set by the Basel regulations alter banks’ ability to issue credit: the Basel III solvency ratio further raises the level of capital a bank must hold to hedge risk, which in turn limits the lending capacity of banks. 

Disintermediation across the Atlantic

This means that Europe is gradually reproducing the U.S. model, which relies heavily on disintermediation, but in much different proportions: 

  • In the Euro zone, bank lending accounts for 70% of corporate funding, while the remaining 30% comes from financial markets.
  • In the United States we find the opposite proportion: financial markets deliver 70% of loans to companies, while banks provide the remaining 30%.

Types of disintermediation

When companies seek funds from sources other than banks, they turn to financial markets, which provide financing primarily in the form of bonds

By issuing bonds, raising capital and going public, major European companies raised more than €100 billion on Euronext in 2014.
In this way, institutional investors, and insurers in particular, are providing a growing share of the funds needed by major corporations as well as smaller businesses. 

Of course, SMEs could not imagine accessing the market directly in such a way. In 2014, 95% of their funding came from intermediated loans. However, their access to credit is becoming more limited of late.  

So to offer new opportunities to SMEs, a dedicated exchange was created in 2013: Enternext. Active across markets in Amsterdam, Brussels, Paris and Lisbon, Enternext enabled 32 new businesses to raise €771 million in funding throughout the first quarter 2014. 

SMEs also have access to capital investment, which is gaining popularity in France, through start-up, creation and development operations: some 80% of investments in these funds go to SMEs. 

Crowdfunding and FinTechs change the game 

In recent years, SMEs, as well as VSBs and startups, have seen new financing models emerge through crowdfunding: small businesses no longer need to rely solely on financial markets, now they can turn to individuals to find new solutions. A product of digitization, like other FinTechs devoted to crowdlending for example, this solution is now playing a stronger role among SMEs, by placing individual investors searching for capital gains in touch with innovative small businesses. 

Why will banks remain essential?

Disintermediation is making slow progress in the banking industry. Banks remain one of the essential sources of funding for companies. In addition to loans, they offer a full range of services that businesses need. While big corporations prefer the markets, banks stand as the best intermediary to finance smaller businesses. 

Banks still predominate in the funding market

Despite the growing trend of banking disintermediation, a full 70% of European businesses still seek funding from banks on average – and that rate is even higher among SMEs and VSBs. 

However, it remains an upward trend: in a recent study of corporate financing, Standard & Poor’s reported that in 2014 bond financing as a share of corporate funding reached 29% in the United Kingdom, 22% in France and 12% in Italy. However, it concluded that “bank loans are still the main pillar of corporate debt funding in Europe”. 

“Market and/or alternative funding solutions in the Euro zone should not be seen as a systematic substitute, but instead as a complementary source of financing to bank loans,” explains the report entitled “Financing businesses in the Euro zone: recent changes and future prospects” (May 2015) published by BNP Paribas. 

Essential assistance and support

In addition, the disintermediation process does not signal a withdrawal of the banking industry from the economy. It simply enables a new balance in financing, between banks and institutional investors, while banks continue to play a key role for large corporations in a number of ways

  • Banks provide market assistance to their business customers when issuing bonds or going public 
  • New practices are emerging in Europe, such as theoriginate to distributephenomenon. The concept: banks continue to provide credit, but rely for most of the amount on funding provided by an institutional investor
  • Banks continue to finance overdrafts, or short-term loans, for example through outsourcing services like factoring, while developing treasury management and optimization services, or financial services like payables management
  • They also handle complex financial operations, such as mergers & acquisitions or business transfers.