Category: Blog

FinTech & Guildhall: Where new money meets old

Author
Angus Dent
Date

This week, ‘new’ money met ‘old’ under the watchful gaze of City guardians.

Interesting to note that the venue chosen to hold the Innovative Finance Global Summit 2017 – the show piece event for the techiest of FinTech aficionados – was Grade I-listed Guildhall, in the heart of the City of London. It is a place where money men have gathered for centuries (apparently, even the name means ‘payment’ in Anglo Saxon) and also home to effigies of Gog and Magog, the giant guardians of the City, who get hauled out once a year to be paraded at the head of the Lord Mayor’s Show.

These two must have shared a silent chuckle this week when it was a case of those with a vision for the future, but no money, meeting in the heartland of those who have bundles of the stuff, but who stubbornly insist on clinging to the old ways that made them rich. The unavoidable truth is that both factions actually need each other if London is to preserve its reputation as the FinTech capital of the world.

Perhaps the other inescapable conclusion is that, although its consequences currently dominate our thoughts and headlines, Brexit actually means very little in terms of addressing the world’s overriding priorities. FinTech wizards may find ways to cut down on the time it takes to make faster money transactions or process loan applications – objectives that appeal to developed countries and those in charge of financial systems – but they will contribute very little to solving the massive problems facing the under-developed world that represents most of humanity.

What is needed is more widespread access to capital so that billions of people can be lifted out of poverty, to live in millions more homes that have yet to be built (estimated circa 50m in India alone) and to eat food that still has to be produced. Capitalism works, but it still only serves the minority.

FinTech has a lot to deliver and expectations are sky high. There is an abundance of good ideas, some may even be brilliant and world-changing. But they will not progress to anything remotely useful without the support of ‘old’ money. And therein lies the greatest challenge.

Brexit: Keep Calm and Carry On

Author
Angus Dent
Date

The longer Brexit, and the impending doom it will apparently drag in its wake dominates the headlines, the more I find myself wondering: is it really relevant? There’s a tendency among the press – on every part of the political spectrum – to blame Brexit for just about everything. Taking a glance at the papers this week, you would be forgiven for believing Brexit is all that anyone cared about, and is the only significant factor at play in the whole of the UK and Europe. Increasingly, however, I think Brexit is just a political sideshow to the less headline-worthy forces that are driving fundamental, irrefutable change.

Take car manufacturing, currently a great success story for the UK. For a start, thanks must be given to Ratan Tata and an Indian appetite for risk, which is pretty far removed from anything Brexit or even EU related. But aside from this, the wind of change is certainly blowing through this industry. BMW, JLR and Tesla are all focusing their efforts ever more on electric cars, while Toyota, who has never built an all-electric car, is now heading for hydrogen. This is not a Brexit-inspired change. It was in 1925 that the founder of Toyota dreamed of freeing Japan from its dependence on imported oil by using hydroelectric power, decades before the European Union even came into being. It is perhaps more to do with a dwindling supply of hydro-carbons and a wish not to joke ourselves that we press ahead with this new technology, which will bring profound and lasting change the car manufacturing industry, and little more than coincidence that it is happening just as the UK drifts away from its neighbours on the continent.

Another story that has cropped up recently is Lloyd’s of London’s decision to establish their European base in Brussels. Surely motivated by Brexit, I hear you say! The press certainly thinks so, but in light of another, less prominent article about Lloyd’s, I would disagree. Here, they acknowledge that dramatic change, a euphemism for drastic improvements in productivity, is needed if they are to remain competitive. Likely this will involve a wholesale adoption of new technology. Meanwhile, Lloyds recognise that to underwrite large risks, and there are many large risks in Europe, you need to be able to meet and deal face to face, and to look the other party squarely in the eye. Again, it appears, Brexit is coincidental and is not driving change.

It’s safe to say, we will not be seeing an end to Brexit related news anytime soon. While it is easy to get swept up in the drama of the divorce, it is now down to the politicians and the civil servants to get it done. For us laymen, it’s a compelling sideshow. If we are to keep our chins up and our powder dry during this uncertain time, we would do well to remember that Brexit is not the only force at play. It’s just one more opportunity in a world of change, so let’s keep calm and carry on.

Inflation & The Plight of the Honest Saver

Author
Angus Dent
Date

Anyone clinging to the belief that their deposits with the bank, building society or National Savings are holding their value must surely have received a wake-up call this week with the news that inflation hit 2.3% in February. At this level – the highest since September 2013 and already ahead of the Government’s 2% target for the year – the purchasing power of their money is going backwards in real terms. Furthermore, those looking to take advantage of the new National Savings Bond announced in the Budget only two weeks ago may stop to consider that the 2.2% on offer from next month for a deposit of £3,000 will effectively render them a loser from Day One.

As for those with money in traditional, easy access deposit accounts paying 1% or less, their cash is being eroded at an alarming rate of knots. And the use a tax-free ISA wrap does not even come close to bridging the gap.

The sad thing is that, while honest savers stoically see the value of the nest egg slip away by stealth, they are encouraged to believe that they are protected by the Financial Services Compensation Scheme (FSCS). They are protected, of course, if a bank or building society goes bust, but, since that will probably never be allowed to happen, the safety net is largely an illusion – and a cruel one at that given that the FSCS does not protect them from good old-fashioned inflation, which is the real enemy. Bank and building society depositors may not be losing their capital in one hit, but they are losing part of its value with the passage of each day.

The fact is that, even if they wanted to, the banks are virtually powerless to do anything about the plight of the saver – their access to cheap capital through deposit and current accounts to pass on to borrowers at astronomical rates of interest is what they live off. In modern parlance, they have very little ‘wriggle room’ because of their structure and overheads.

With interest rates glued to rock-bottom for the foreseeable future and inflation on the march, consumers are being forced to look at the various alternatives, such as P2P loans, where the market is young, ambitious and nimble. Risk is obviously – and very understandably – a big factor in many consumers’ minds, but returns of up to 8.5% with a good measure of security are not only available, but also sustainable in the current market. The advice must surely be to look around, research what is available, from whom, and to spread the risk by not putting money in one place.

In ArchOver’s case, the money will be lent out to ambitious, creditworthy SMEs through a robust risk assessment process. Surely, that has to be better than just sitting back watching the value of your capital gradually slip away.

The Balancing Act

Author
Angus Dent
Date

From former City regulators like Lord Adair Turner to current ones like Andrew Bailey, the chief executive of the FCA, everyone overseeing or commenting on P2P appears to be convinced that the sector is sitting on a time-bomb of bad loans. Inevitably, the mainline Press has taken up the cry by issuing grave warnings of impending disaster alongside constant reminders to lenders that their money is not covered by the Financial Services Compensation Scheme (FSCS). Scaremongering abounds.

The argument runs that the dash for volume is pressurising loss-making platforms to approve poor quality loans to earn the fees to pay the staff and keep the lights on. The cries have become all the more strident since it has become evident that there is an imbalance between willing P2P lenders, of which there is a surfeit, and quality borrowers, who are short supply. The situation simply reflects the lack of yield available through traditional banking/National Savings products and the reluctance of well-run SMEs to borrow money while the medium to long-term economic outlook remains so uncertain. Both sides are acting perfectly sensibly which may be frustrating for the P2P operators, but is ultimately for the good.

In the circumstances, the latest action by Zopa, the founder of P2P lending, to introduce a waiting list for lenders is all the more commendable. The management has decided, quite rightly in my view, that it will be better in the long run to maintain the quality of borrowers to protect its lender base – in other words, far better to impose a short-term delay in placing the money than scramble to find borrowers at any cost. Zopa has also taken the opportunity to point out that its stance is designed to look after the interests of existing borrowers rather than use the best deals to entice new customers – a policy that the banks and building societies would do well to replicate.

Some of the other platforms – Funding Circle, for example – have been raising institutional money which, ultimately, will have to yield an institutional-size return. That doesn’t mean to say that it will necessarily be forced to take silly risks and, to date, there has been no hard evidence that credit standards have been lowered.

Balancing borrowers and lenders isn’t new – we do it all the time and always will. The trick is not to be tempted by the short-term expedient over building a robust business for the longer term. Pain, in the form of losses, may be needed to achieve this, which means that the fittest will survive while others may fall by the wayside. Again, all perfectly normal for a young, rapidly-developing sector.