The primary role of a traditional bank providing financing and capital is set to be challenged further by non-banks, according to PwC’s report, ​Securing your tomorrow, today – The future of financial services. ​

​ The​ ​ report predicts that alternative providers of capital are set to become an even more important part of the global financial system.

For insurers and asset and wealth managers, the challenges are equally daunting. PwC’s report says that a combination of near zero interest rates and the rise of digital-only players will create tighter margins across product portfolios, thereby emphasising the need to digitise rapidly, gain cost efficiencies and register real gains in productivity.

Arthur Wightman, PwC Bermuda leader and Insurance leader​, said: “While the financial-services industry has stood up well in light of the pandemic, our report argues that it ​will be hardest hit by so-called second-order effects​ –​ deteriorating credit quality of customers, along with a continued low interest rate environment.

“​The challenge for the financial-services industry is in how they are able to navigate this difficult environment.”

A positive credit environment that lasted more than a decade is coming to an end, and increasing numbers of both personal and business defaults will occur, the PwC report says. This is already being reflected in first- and second-quarter bank loan loss reserves. In addition, any hope of a medium-term normalisation of interest rates has been dashed as central banks have been forced to further reduce them.

For established financial institutions, the rise of alternative lending brings into question a bank's role as a capital provider versus an intermediary.

“This shift will have a significant impact on their business model,” says ​Sean Kelly, PwC Bermuda partner​. “Banks need to rapidly think about alternative ways to participate in the value chain as the industry migrates to a platform-based model.”

In 2019, non-banks – including private equity funds and sovereign wealth funds – lent $41 trillion compared to the $38 trillion lent by traditional lenders. In particular, the analysis by PwC shows 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.

Scott Watson-Brown, PwC Bermuda Asset and Wealth Management leader​, said: “The Covid-19 crisis brings many challenges and uncertainties, but with these challenges come opportunities for financial-services institutions. Changes in the geopolitical setting, the structure of the global financial system and a difficult credit environment provide banks, insurers and asset and wealth managers with opportunities to support clients in dealing with these challenges, adjusting portfolios and developing new investment opportunities.”