Tag: ArchOver

A response to Mark Tluszcz’s article published in the Financial Times: 4th April 2016

Author
Angus Dent
Date

On this blog, I have already discussed my issues with the word “Fintech”. The umbrella term just covers too many businesses in different sectors to justify the sweeping generalisations that tend to accompany it. A comparison close to home would be to tie in all the various forms of investment management and define them by the characteristics of the most aggressive hedge fund in the pack. Unfortunately, the hype surrounding “FinTech” means a fragile bubble is increasingly stretching across multiple sectors, and the possibility that one of them will blow up will mean the mess lands at the door of everybody else. There’s no doubt that such hype is irresponsible and can be misleading, and Mark Tluszcz’s article published in the Financial Times yesterday is an example of the misinformation peddled as a result.

Tluszcz works for a Luxembourg-based Venture Capital firm and was an early stage investor in Skype, a business whose growth, albeit in a virgin field, was absolutely staggering. Therefore, I find it extraordinary that he uses Skype as the benchmark to judge whether “Fintech” has had an equivalent breakthrough- there really aren’t many equivalents out there at all! Interestingly, he uses Amazon as his other example: let’s not forget that their unorthodox business model led many to believe that a 5-year old Amazon barely justified the hype surrounding it all, particularly when taking into account its lack of profit. Most FinTech platforms have been around for less time, certainly in the Peer-to-Peer Lending space that was born largely from the flames of the 2008/2009 financial crisis. And for the basis of my response, I will be focusing on P2P Lending, as Tluszcz suggests that is the area of Fintech that everybody needs to be most worried about…

fintech 2015
Courtesy of PitchBook

Firstly, anybody that suggests that P2P Lending carries more risk than equity crowdfunding and poses a threat akin to the subprime mortgage crisis clearly does not understand the fundamental principles about what P2P Lending is all about. From ArchOver’s perspective, we have yet to have a default on one of our loans and our lenders are comfortable that our “secured and insured” model provides them with robust security. Indeed, the whole Peer to Peer lending industry is leaps and bounds ahead of equity crowdfunding in that regard; just take a look at some of the provision funds on offer with providers such as RateSetter, where no investor has lost their money to date. The reason? We go through rigorous due diligence checks that involve monthly monitoring and client visits, not to mention the weight of the credit analysis independently provided by the Credit Insurance providers. Tluszcz suggests that the benchmark for success in our industry is purely “speed and volume”. That just isn’t the case: yes, it’s important to grow, but the businesses and HNWI that invest in, own or lend across P2P platforms just would not stand for such reckless abandon. Hampden Group, who back ArchOver, have a far more long term outlook than Mr Tluszcz seems to suggest, and the quality of our borrowers must reflect that.

Alluding to the subprime crisis, as Turner did last month in the FT, shows a lack of understanding as to the key mechanics behind the Crash: borrow short, lend long. Peer to peer loans are matched, with investors lending money to borrowers on fixed terms. Investors/lenders are fully aware of the risks involved with lending, and if there was another economic apocalypse such as in 2009, it would be some of those investments they might lose; there certainly would not be an unfair bail out by the taxpayers to atone for the mistakes of greedy bankers. And to even mention Lonon’s Fintech “scene” in the same breath as the enormous $7.6 billion Ponzi scheme ran by China’s Ezubao shows enormous disrespect, firstly to the UK’s financial regulatory bodies who are in the process of regulating the P2P Lending industry, and secondly to the Government who have introduced the Innovative Finance Isa to help investors benefit from lending directly to UK SMEs. Greater regulation is on the way; it is hardly the fault of the Peer to Peer Lenders who are waiting patiently for the FCA to finish what is an understandably long and arduous process.

It seems to me that at the heart of Tluszcz’s disdain for P2P Lending is what he perceives as a lack of true innovation. It isn’t “different” enough, so it is merely a “mirage” that isn’t worth the capital invested. He doesn’t take into account the service provided for lenders, who wish for an increase on the measly interest offered by the banks but without having to dip into the risky and complicated world of stocks and shares. And he certainly doesn’t acknowledge the reality that the banks haven’t got the drive to facilitate lending to UK small businesses: the middle office bank manager has been axed, and Basel III means that money previously available for lending must now be held in reserve. The result? Costly, inflexible, lengthy, process-laden finance that just cannot keep up with the range of options provided by specialist SME alternative finance providers. And as SMEs drive the UK economy, the fallout is far-reaching. The banks understand, and are starting to come round to the idea of working together: already banks lend money from their balance sheets across platforms, joining other institutional lenders such as family offices, schools and councils in doing so. Criticism of Fintech will grow in tandem with unnecessary hype; however, in the meantime, Fintech will continue to innovate alongside the traditional institutions.

 

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.

Institutional Investors are a welcome addition to any Crowd

Author
Angus Dent
Date

Marc Shoffman’s recently published article on ThisisMoney.co.uk last week was a bit of mixed bag, from an Alternative Finance perspective. First and foremost, I salute his noble efforts to raise awareness for his father and others battling with Parkinson’s disease. He is raising finance for speech therapy through a social enterprise reward-based crowdfunding campaign through the Crowdfunder platform. The article itself focuses on the increased presence of institutional money in crowdfunding, with some muddled references to “peer to peer” thrown in. With a fairly mainstream readership, however, I felt that a response could be somewhat beneficial to clear up some of the more glaring errors in the article. As a starting point, any article on alternative finance that fails to clearly differentiate peer-to-peer lending from crowdfunding is counter-productive, especially for an uninitiated reader. The article raises some questions on where the alternative finance industry is heading, but he seems to have misunderstood the true nature of Crowds; his statement that “as the sector becomes more mainstream, it may also become less attractive” is a case in point. It isn’t really about a popularity contest: the wisdom of the crowd comes from a group of people making informed decisions, not a bunch of people throwing caution to the wind in the name of doing something a little bit different.

picture_crowdsourcing

First, let’s dispel some myths and nip some clichés in the bud. To say that “[Alternative Finance] no longer has that jazzy alternative tag which in the long run could hit its popularity” is a belittlement of an industry that is in the process of becoming FCA regulated. The word “alternative” is used here in its purest sense as something that departs from or challenges traditional norms; alternative finance is not some hipster “Jazzy”-ness. In reference to the allusion to the FSCS compensation scheme, it isn’t really relevant to our industry; this article on AltFi will shed some light on a few of the peer to peer lending contingency funds and how platforms strive to protect investors. There is also, of course, the ArchOver “secured and insured” model as an exemplar as well.

It is important to emphasize that the institutions that lend over any platform are valued members of the crowd, and they lend on exactly the same terms as everybody else. That’s the alternative finance ethos, that’s where this movement began. It’s a process of democratisation and we mean that sincerely. The wisdom of the crowd is greatly boosted by the presence of institutions lending money to SMEs, or indeed buying equity. Individual investors can take a hell of a lot of comfort knowing that schools, county councils and family offices lend across the various platforms on the same terms and at the same rates as they get; it benefits all the parties involved. The banks and funds are coming around to accepting that. Those that don’t will sit on the side-lines and that’s fine too. The great thing about democracy is that you have a choice.

The point he makes about larger pledges and shutting out the little guy is a question of balance. Marc uses BrewDog as an example of a business that “value smaller investors”. Yet BrewDog is probably the prime example of how a business has taken advantage of unsuspecting crowdfunders by masquerading as anti-establishment whilst using good old-fashioned bankers’ tactics. Their crowdfunding should be for fans of their beer, not for people to invest their hard earned savings into. This article, again by AltFi, serves as a cautionary tale of what to look out for, using BrewDog as a case in point. On the one hand you want people to think about what they are doing and to take the time to understand what they are doing. On the other you want as many as possible taking part and benefitting. As you know ArchOver set the minimum pledge at £1k per project, which obviously I believe ensures that the balance is met. Of course, this won’t be appropriate for everybody, and that is why small lenders are looked after so well at the likes of RateSetter and Funding Circle.

A bigger, wiser, democratic crowd with the ability to invest over a range of platforms to spread their risk, and soon to enjoy the benefits of the Innovative Finance Isa? Now all of that does sound “jazzy” to me.

 

In response to Scaremongering and book Promotions…

Author
Angus Dent
Date

Lord Turner certainly knows how to grab a headline. Speaking with all the authority of someone who knows a thing or two about disasters – he presided over one himself as the former head of the disastrous and now defunct Financial Services Authority (FSA) – he is now predicting that the P2P crowdlending market is destined to come to grief because of poor credit risk processes that are indigenous to the sector.

Predictably, the business Press have been only too eager to seize upon his gloomy assertions, made during an interview with the BBC, on the usual premise that bad news makes better headlines than good news. Don’t let the facts get in the way of a good story, etc….

His most explosive proclamation was that: “The losses on P2P lending that will emerge within the next five to 10 years will make the bankers look like absolute lending geniuses …..”

The first thing to point out is that, in terms of size, the UK’s P2P lending market is, for all its undoubted success, minuscule compared to the size of the whole market place; the major banks still control 90 per cent of lending to SMEs. The second point is that the credit risk processes in P2P lending are at least as thorough as they are with the majority of the banks. Indeed, many of the lending officers in the P2P sector used to work for banks in the days when they actually lent money to SMEs.

In ArchOver’s case, the process is actually far tougher because borrowers over our platform are obliged to cover their loan against default through credit insurance. No bank that I know does that as a matter of strict policy.

However, more important still is the fact that all P2P loans are matched; they have a set duration at a fixed rate agreed between borrowers and lenders. This sort of arrangement is in direct contrast to the banks which ‘borrowed short and lent long’ – precisely the toxic combination that led to liquidity problems and contributed hugely to the banking crisis.

Criticism is one thing, but scaremongering on this scale, especially from someone who should know better, is neither appropriate nor helpful. It is made worse by a blatant distortion of the facts.