Tag: alternative finance

Banks see that the future of lending to SMEs is Alternative

Author
Angus Dent
Date

The Bank of England revealed last week that lending to SME’s had dropped in the final three months of 2015 to £599 billion, down from £755 billion last September. Tradition dictates that businesses do not tend to borrow money around Christmas, and those that try are viewed as desperate. Yet these are big numbers: the £156 billion difference from Q3 to Q4 is over 31 times the £4.94 billion all-time figure Nesta estimations that P2P Lenders had facilitated for SMEs. The fact of the matter is that the banks aren’t lending to up and coming businesses that drive the economy, and an increasingly large vacuum is emerging.

The government, keen to plug this gap, had put the “Funding for Lending” scheme in place, in which the banks are offered cheap loans from the Bank of England that are aimed to reach small businesses. Clearly the scheme isn’t working: the Bank of England’s data for the Q4 of 2015 revealed that £6.3 billion (an increase of 262% on the previous quarter) had been borrowed by the bank in the same period. Unless that is going to filter through to all the SME’s in Q1 2016, where is that money going?

The emergence of challenger banks such as Aldermore, Shawbrook and Metro Bank has seen the big banks distance themselves further from SMEs. Aldermore announced that they’ve lent £6.1 billion in 2015, making them the third largest lender on the Funding for Lending scheme. Similarly Shawbrook’s loan book grew 44% to £3.36 billion in 2015 (to put that into perspective, that’s more than the entire P2P Lending industry managed in 2015). These figures are still just a drop in the ocean, however, and it is still very much a case of “if” not “when” UK SMEs are receiving the kind of funding that can help them drive GDP in the near future. In the long term, however, it will be alternative finance that steps in alongside the banks, providing a stable working relationship between the two is maintained.

The banks are already starting to turn to alternative finance platforms who are keen to facilitate funding to both consumers UK SMEs. Funding Circle, for instance, receive referrals from RBS and Sanatander and back in May, Zopa and Metro Bank announced a deal whereby the bank would lend money across their platform to consumers. The trend will continue but the traditionally clunky banking processes are reflected in building the working relationships: banks like to take their time and tend to cherry pick. It is no surprise that only the two bigger players in the UK market have formal partnerships. The emergence of so many Peer to Peer lending platforms, though, specialising in such diverse and niche products, has meant they simply can’t keep up. And if they can’t beat them, they will start to join them in swathes.

Zopa CEO Giles Andrews has said in the past that they don’t allow any institutions to do their own credit analysis on those customers, something that seems unbelievable, given the depth the banks go into even just to set the relationship up in the first place. Furthermore, it’s not as if Zopa can stop anybody carrying out their own credit analysis, especially one of their potentially biggest institutional lenders. But his attitude in general is right: if the banks want to lend to consumers and businesses through alternative finance providers they should be treated the same as all other lenders. It is a democratic process after all.

The lull in funding for SMEs since the credit crunch of 2009 continues, but not for long. Alternative Finance is here to help, and if the banks want a piece of the action they will have to do so on the same terms as everybody else.

In defence of Fintech

Author
Angus Dent
Date

Head of Ernst & Young’s FinTech department, Imran Gulamhuseinwala, recently asked if anyone was actually using FinTech. His question, whilst flippant in tone, raises a couple of issues with both the conceptual definition and the uncertain future of “FinTech”. The word is a rather nasty portmanteau that covers a broad spectrum of businesses that have attracted around $12 billion worth of investment in the last year alone, ranging from crowdlending platforms to payment software and digital currencies, and then the rest. Advocates of the virtues of FinTech bristle at any suggestion of a repeat of the “Dot-Com” bubble, yet you can’t ignore the sense of déjà vu as every man and his dog tries to get a piece of the action, with valuations skyrocketing as a result. Saying that, the drop in venture capital funding for technology businesses at the end of 2015 looks to continue into 2016, although that will be in “number of transactions” rather than a drop in dollars pledged. Companies and sectors that have ridden the FinTech boom may be first to distance and reinvent themselves should the bubble burst. Efficacy is the name of the game for FinTech, and yet there are worries that software is being developed without a clear sight of what it will actually be used for. That will always be the case with technology, and it isn’t to say that there are plenty of instances where financial technology is working very well. It is therefore ludicrous to suggest nobody is actually using it in one form or another.

It is true that reviews of FinTech tend to come from the providers extolling the virtues of the technology, rather than from actual users. However, accountancy firm Ernst & Young produced a survey revealing that 14.3% of UK “digitally active customers” are using FinTech; one in seven isn’t a bad ratio for a nascent industry and leaves room for more involvement, which will continue the growth. Whilst there is certainly a supply glut, the payments sector will trim itself down through a simple process of “survival of the fittest”, and in the peer-to-peer lending and crowdfunding spaces there will have to be a more painful process of consolidation. “Democratisation” away from the banks will be through competitors with brands stronger than their balance sheets: more Funding Circle’s and Ratesetter’s, in other words. Standard & Poor’s December report on “The Future of Banking: How FinTech Could Disrupt Bank Ratings” alludes to as much; the big banks will swallow up the smaller fry by saying that “acquisitions will largely be limited to small players, especially in light of strengthened regulatory capital requirements for banks, and gaps in valuation metrics between FinTech players and banks”.

Kadhim Shubber’s response to the S&P report for FTAlphaville raises some good points, but I take issue with the general tone of the article which seems to belittle financial technology as a series of potholes that littler the smooth tarmacked autobahn of banking brilliance. I agree that “the largely unregulated nature of FinTech at some point is likely to come back to bite”; however he doesn’t mention the willingness of FinTech businesses to be regulated. FCA regulation may come sooner rather than later in Peer to Peer Lending, something that the naysayers have also taken umbrage with, arguing that the FCA has forgone its primary role as the strictest of regulators in order to help shift business away from the banks; he may have a point there. Yet FinTech, for Shubber, is a just a nifty opportunity for savvy entrepreneurs to get rich before the banks step in to clean up the competition. FinTech companies wear “big, frightening costumes in an attempt to scare established players into taking you out, at a hefty premium of course.” He cynically portrays the partnership between OnDeck and JP Morgan as an example of a FinTech company “eager to offer up their technologies to large banks who are willing to give them the credibility of a partnership”, instead of a bank seeking to evolve with the times and in doing so putting itself ahead of many of its peers. Read this article published by Reuters for a fairer view of the JP Morgan/On Deck deal than Mr Shubber provides us with. Nobody in their right mind believes the waffle the FinTech will “kill off” the banks; they are already working alongside each other or in partnership and long may it continue.

Rubbish
It is lazy, inaccurate marketing tripe like this that gives people the wrong ideas: Banks and FinTech are already working together and will continue to do so

 

Alternative Finance: the Outlook for 2016

Author
Angus Dent
Date

The Alternative Finance sector in general, and the P2P crowdlending platforms in particular, had everything going their way in 2015: low interest rates, traditional banks still dabbing their wounds, economy picking up, helpful new legislation (e.g. Innovative Finance ISA) from a newly-elected Tory Government, no major ‘car crashes’ in the industry and dramatically heightened interest from institutional investors. It is hardly surprising that the industry grew to a cumulative total of £4.6 billion lent (source: AIR) – indeed, it would have been more surprising if it hadn’t.

However, 2016 is likely to be a lot more challenging and will, I believe, start to “sort the men from the boys” – those who are in it for a quick opportunist buck and those who are in it for the longer haul. Interest rate increases cannot be far away now that America has made the first move in an upward direction. The big question is what impact is that likely to have on the savers who have been turning away from the banks and building societies in pursuit of a better return. In my opinion, this may affect consumers concerned about safety, but will have little effect on the outlook of HNW investors or institutions more used to balancing risk against reward.

Centre stage next year will be the FCA in its key role of granting authorisation to the scores of platforms that have applied – a vital step in stimulating the hugely influential IFA community to get behind P2P after the new Innovative ISA goes live in April 2016.

Finally, the scramble by the big institutional battalions to grab a piece of the Alternative Finance action is also set to gather pace. One of the final corporate actions of 2015 was the sudden departure of CEO Geoff Miller from GLI Finance, one of the great Altfi consolidators – a sure portent of things to come in an industry where the struggle for dominance has only just begun.

The other slightly disturbing question is whether in time, though not necessarily in 2016, the dis-intermediation brought about by the P2P revolution will fade away in the face of restored institutional dominance – bringing with it the need, once more, to pay the middle man at the expense of the ordinary punter. I do hope that does not come to pass. Then again, it is not always easy to turn away institutional money.

How Alternative Finance is Transforming Invoice Discounting and Factoring

Author
Angus Dent
Date

We all know that SMEs are the engine of the UK economy. The weakest two parts of the recovery are productivity and export and finance can help bring both up to speed. But for SMEs to continue to grow they need better access to finance. Nowadays the banks aren’t providing it, so who else can SMEs turn to? Factoring and Invoice Discounting providers are readily available. Yet the cost is very high: businesses are losing profit from their services which inevitably hinders growth. The process is clunky and restricts access to other funding. Directors are forced to take out unwelcome Personal Guarantees that muddle the process even more. This is not what SMEs who are running flat out in order to grow need. They need dynamic, flexible finance that offer bespoke solutions to their requirements.

That isn’t to say there aren’t any positives at all to invoice discounting and factoring; it certainly improves a business’s cash flow whilst suppliers can still continue to maintain a direct relationship with customers. Yet the biggest drawback of invoice discounting is how difficult it is to escape from. Once a business enters an arrangement with a provider, they become reliant on the cash flow injection and the debilitating cost of the facility inevitably means they become hooked: it is no wonder it is referred to the crack cocaine of business finance.

Finance has been crying out for diversification and, fortunately, there are some alternatives to be found in the Alternative Finance sphere. “AltFi” is providing the finance that businesses actually need, the finance that’s appropriate to individual SMEs. Directors forced into invoice discounting by an inability to secure a term loan have been able to find a loan through platforms like Funding Circle or ArchOver, which allow them to plan ahead rather than be constantly tied down. At the other end of the scale, Platform Black and Market Invoice offer single invoice discounting which allows businesses to keep control of their invoices, improving the cash flow whilst continuing to grow. However, this does come at a cost. UK Exim provides SMEs engaged with import and export with order book trade finance.

This is the transformation that SMEs need, and the UK economy will benefit from it.