Tag: alternative finance

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.

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.   

 

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.