Category: Blog

Fashionable Revolutions

Author
Angus Dent
Date

Revolutions often involve a degree of fashion. One minute they capture the imagination and are all the rage, the next they old-hat and face apathy or even outright derision. It feels a bit like that with the P2P sector which, having been once the darling of the financial market place, is now viewed with grave suspicion – especially by the massed ranks of the media, which helped to put the whole alternative finance movement on a pedestal in the first place. ‘Hero to zero’ is an understatement.

There are other examples, of course, as in the New Towns which came into being after World War Two by way of the New Towns Act 1946. The first wave saw towns like Stevenage, Crawley and Basildon spring up; the second saw Telford, Redditch and Runcorn; and the third, fifty years ago, ushered in Milton Keynes, Peterborough and Northampton.

While it is undeniable that some of these towns have been on the receiving end of a joke or two over the years, few can argue with the fact that, in many respects, they have been a success. They have been so because they filled a gap in the national fabric that existed because of the circumstances of the time; i.e. much of the UK had been flattened and there was a desperate shortage of housing.

And so it has been with P2P. The sector exists because there was a gaping hole in the financial marketplace left by the banks, which were, and still are, abandoning small businesses in order to rebuild their balance sheets. That the process remains ongoing can be seen from the latest round of bank results out this week.

SMEs are turning to P2P in increasing numbers because that is where they are more likely to be treated as customers. And the same can be said for people with money who are considering P2P loans because that is the only way they are going to secure a reasonable return on their cash, albeit with an element of risk.

Fashions come and go and sometimes they even come back into favour. New Towns are currently back on the agenda and for the same reason they were created at the outset – they fulfil the requirement of providing more and better housing for all. Maybe it will be the same for P2P when commentators, politicians and regulators finally accept that this is what the public wants. My only hope is that it won’t take half a century for the hands on the clock to turn full circle.

 

The Bank Model: Broken?

Author
Angus Dent
Date

Each day brings fresh evidence that the traditional UK banking model is under intense pressure, if not actually on the verge of breaking down altogether. RBS was on the receiving end of some elaborate media speculation last weekend that it was planning to shed a further 15,000 jobs to save £800m per annum in costs; not surprisingly, the report failed to elicit any official response from the bank in advance of it publishing its results later this month. However, that it is still in business at all, having lost a reported £50bn since its original Government bail-out in 2008, is little short of a miracle. In any other sector, losses on this scale would not be tolerated. The financial institutions, including the banks themselves, would simply call time on the business and its management.

RBS clearly has some special problems, including the need to replace an obsolete IT system that is prone to breaking down, but there is one common and lethal trend that plagues all the banks – the fall in interest rates to record levels. Resulting margins are simply too fine to sustain profitable existence, which is why we also learnt last week that the Co-op Bank has put itself up for sale. Good luck with that.

Adding to the woes is the fact that low interest rates are extremely popular with politicians because, in combination with the fall in the value of sterling, they can power economic growth in this post Brexit era by helping our exporters. They also keep down the costs of borrowing, including mortgages. The irony is that, if and when interest rates do start to rise, we know from their past behaviour that the banks are likely to put up the cost of borrowing before they pass on any of the benefits to long-suffering savers. That’s how they will hope to restore margins.

It begs the question that, if the banks can’t earn a decent crust in times of low interest rates, how can they expect anyone else to, especially if they don’t enjoy the same special dispensation to make losses. The picture becomes even more disturbing when set against the backdrop of rising inflation, which we learn was 1.8% in January, up from 1.6% in December. Already, this is almost alongside the Bank or England’s target of 2% for this year and racing towards the 2.7% predicted for 2018.

The low interest rate era looks like it will be with us for some time yet and it is hard not to feel sorry for the honest savers who have just seen another 0.25% shaved off their returns from National Savings products – a move quickly reflected in bank and building society deposit rates.

What it means is that the relatively secure returns that are readily available through P2P loans are looking more attractive with each passing day.

Consolidation and The Plight of Thrifty Consumers

Author
Angus Dent
Date

The storm clouds are gathering for the P2P sector – they have been for about a year now, ever since a few prominent platforms (e.g. Lending Club and Funding Knight) started to get into trouble and the mainline media’s enthusiasm for all things ‘Alternative Finance’ suddenly took a 180 degree about-turn.

We are still enjoying low interest rates, which means that there is currently no shortage of lender appetite, but bank statistics show that SMEs are trying very hard to live within their means and not to borrow. The uncertainty created by Brexit and Trump is not a myth, but a fact.

Despite it all, the giants of the business, Zopa and Funding Circle, have managed to achieve some serious momentum – the former having recently passed the £2bn lending landmark, the latter not too far behind. But both have been losing money and so, it seems reasonable to assume, have most of their smaller rivals. In the meantime, the FCA is sitting on dozens of applications for full authorisation and, accompanied by dark warnings of foreboding from politicians and even the Governor of the Bank of England, it seems that the regulator’s new book of rules (due this summer) will usher in far tougher controls. Many platforms may not be able to survive, while others may simply draw stumps and leave the field.

Is this the beginning of the end for P2P? I think not, but it would be naïve to ignore the warning signs that maybe the honeymoon is over. Far more likely is that we are about to enter a period of consolidation, when the well-conceived, better-financed platforms are either picked off or merge in order to achieve scale and make some cost savings.

In the event of an outright take-over, it would be interesting to see the terms; what realistic value can be placed on a loss-making business operating in a relatively young industry? It might take an entity with very deep pockets and patient shareholders to take such a bold step – a bank, maybe?

The reality is that, if a handful of small platforms got together to form one platform operating under one brand name, the result would probably not amount to a row of beans in a financial sector dominated by giants. But if two of the biggest got together – those writing new loans at a rate of up to, say, £1bn each per annum – then that would be worth doing, particularly if you could halve the marketing costs. The result could be a very profitable company. Would that be allowed under the Monopoly rules? I suspect that someone will have to try it first to find out.

In the meantime, inadvertently or not, the Government is adding to the attractions of the P2P sector by cutting the interest rates available on National Savings & Investments (NS&I) accounts by up to 0.25%. The number of monthly Premium Bond prizewinners is also to be reduced to create the same effect.

In May this year, the return on the NS&I Direct ISA will reduce from 1% to 0.75%. The return on its Direct Saver Account will be adjusted down to 0.7%. As one national newspaper pointed out, that is less than half the expected rate of inflation.

Many private sector products from the banks have been adjusted in line with the NS&I. The average easy access savings and ISA accounts reportedly pay 0.37% and 0.65% respectively. That is one hell of a price to pay for guaranteed returns and the security provided by the FSCS. All of which explains why an increasing number of consumers are prepared to accept an element of risk in return for a yield on 6% on P2P loans. It will be interesting to learn what, if anything, Chancellor Philip Hammond is prepared to do in his Budget early next month to help honest savers.

“Neither a borrower nor a lender be”

Author
Angus Dent
Date

The phrase “Neither a borrower nor a lender be” sounds both elegant and wise, but if the advice contained in those words, taken from a passage in Shakespeare’s Hamlet, were to be adopted literally, the commercial world as we know it today would come to a shuddering halt. Whether we like it or not, money is the essential lubricant for any business, regardless of size, sector and location.

That is why there should be no shame or stigma attached to borrowing – provided it is for the right reasons and terms are sensible and fair. Right now, the P2P lending sector is awash with both individual and institutional investors eager to secure a reasonable return on their cash in the current low interest rate environment. But SME borrowers are not so plentiful, presumably because they are uncertain about the post Brexit world that lies ahead.

If that is the primary reason for lack of appetite then, if anything, the picture is becoming even more confusing as politicians, lawyers and other vested interests jostle for position on deciding the final terms of the UK’s exit from the EU. But, as those of us in the P2P sector know only too well, there is another, more apposite quote (this time from Benjamin Franklin) that says “Out of adversity comes opportunity”. The unvarnished truth is that, if the 2008 financial crisis had never happened, the P2P sector would probably never have taken root and flourished in the way that it has. So, for that, let us all be thankful.

In the meantime, SMEs, often described as the backbone of the UK economy, should not be encouraged to get themselves into debt simply for the sake of it, or just because the money is available, but to view borrowing as the gateway to growth and opportunity – to invest in people, technology, new plant, marketing, or a new products or services.

The trick, though, is to borrow on the right terms. The banks may be lending more to SMEs than they were, say, a year ago, but often this is not in the form of a straightforward fixed term, fixed rate loans. Customers are often encouraged to go down the invoice financing route, where fees can be extortionate and the arrangement can be difficult to escape from once signed.

The cost of borrowing is trending down because of competition, which is exactly the way it should be. And the ‘one size fits all type of finance’ is a thing of the past; there is an immense variety of options available if you can be bothered to shop around. That lenders will want their money back is obvious, but you don’t necessarily have to give up your precious equity, or risk losing your house through signing personal guarantees, just to gain access to the right type of finance. Alternative finance has brought genuine innovation to financial markets – it would be a pity to suffocate it with onerous regulation.