Governor of the Bank of England Predicts Revolution

Author

Date

18th July 201628th July 2020

Catching up on London FinTech PodCast 54 I was pointed to a speech by Mark Carney, Governor of the Bank of England that for horrible reasons, the murder of Jo Cox MP, was not made. It’s a pity the speech wasn’t made as it makes some good points about FinTech, the relationship between FinTech and banking and banking more generally.

The point is made that it is technology or more specifically the increasingly ubiquitous access to technology that is driving the democratising effect of FinTech. At the end of last year there were circa 2Bn smartphones worldwide. Rather than accepting that this is a process simply to be welcomed Carney goes on to say that FinTech will help in four specific areas;

“For the financial sector, these could offer shorter, speedier transaction chains; greater capital efficiency; and stronger operational resilience. For consumers, they could mean more choice; better-targeted services; and keener pricing. For everyone, FinTech may deliver a more inclusive financial system, domestically and globally; with people better connected, more informed and increasingly empowered.”

Nothing too earth shattering in the above summary, he goes on to predict revolution;

“These benefits spring from FinTech’s potential to deliver a great unbundling of banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital. This would mean revolution, fundamentally re-shaping the financial system.“

Heady stuff from a central banker……and apparently a revolution he wishes to encourage and for the bank of England to be a part of, albeit he expects the effects of the revolution to take many years to work through.

24th Hour Failure (To finish first, first you have to finish)

Author

Angus Dent

Date

22nd June 201620th July 2016

This weekend saw a huge disappointment in the ’24 Hours of Le Mans’ race, leaving the Toyota team questioning what happened, to watch success slip away in the last 3 minutes of this gruelling challenge, was heart-breaking for those involved and the most fascinating viewing for the interested spectator and commentator.

Ultimately, it appears that one vital element led to the subsequent defeat, and handed the victory to the consistently tried and tested model of their competitors in the Porsche team. On what was the most important day in the calendar with glory a single lap away the failure of one part of the package turned the whole effort into embarrassment and widespread press coverage for all the wrong reasons.

Great story – but what does this have to do with the P2P space…..? A lot of common themes and messages can be taken from this story

Let’s look at the top teams on the starting grid in the race……they all had roughly the same size team behind them, with what at face value appeared to be the same skill set and knowledge. All of the cars looked pretty identical from the outside, bar the different splashes of colours identifying their team allegiance so why would one fail so spectacularly at the critical moment?

The answer lies under the bonnet – look at all the components, the chassis, the aero package, the engines etc. perhaps at a glance they look the same but they are not. It’s the whole package that must be fit for purpose, if 1% isn’t then abject failure will result. That elusive, in the case of Toyota, 1%, became the difference between success and failure, being lorded in the press or blasted for a simple error of judgement and engineering.

The alternative finance sector is seen by most on the outside as one identical group of organisations, all competing under their own branded team colours for the same purpose and all on the starting grid in identical vehicles. Lift the bonnet however and you’ll see huge differences that will optimise an organisation to success, or cause them to crash out of the sector in a blaze of (non) glory.

Unlike the image of the homogenised group of lenders, grouped together in the media and by less informed bystanders under the title ‘P2P’ there are actually numerous variations of platform, offering, expert teams and niche areas all operating in this field. Each has their own reason to believe they should be first across the line, many will stumble at the first hurdle due to lack of due diligence and not robust enough offerings or platforms. Some will look like they are in it for the win, only to fall foul to that elusive 1% of information, security or expertise and simply roll across the finish line in failure place (there’s no second or third) – to the delight of the watching crowd – who want to be entertained by stories of failure.

Please visit www.archover.com to find out more about our winning proposition.

Crowdfunding the Gaming Industry

Author

Angus Dent

Date

24th November 201525th May 2016

An article in the Financial Times today highlighted the difficulty that the UK’s creative industry has had in securing funding from banks since the government started to advocate investment into the tech start-ups. The article specifically makes reference to the government-backed British Business Banks’s investment in a private equity fund worth £40 million that focuses on nascent media and gaming companies. Britain certainly can boast a range of success stories; King Entertainment, manufacturer of the omnipresent (and entirely vacuous, in my view) Candy Crush, was sold for $5.9 billion.

The majority of gaming companies however, fall into the SME bracket, and won’t suitable for the PE funds: the aforementioned fund run by Edge Investments will only back between 12 and 15 companies. Moreover, they have fallen victim to the bank’s decision to withdraw funding to small businesses; software companies are particularly vulnerable to “computer-says-no”-ism of the banks. Some of the biggest success stories of the past are subsidiaries of much bigger companies but continue to operate under their own brand name. For instance, Sports Interactive Ltd, the creative studio behind the Football Manager games, were able to benefit from the support of Japanese giant Sega. The company was initially loss making, however the profits have steadily increased to over £3 million last year.

Yet most games manufacturers are run by enthusiasts who aren’t happy to just sign over all of the equity in their business to a big corporate. Reward-based crowdfunding has been a fantastic way to exploit the willingness of fans to take a small portion of equity in a games manufacturer along with “tangible assets” such as a copy of the game, and the less tangible reward of increased standing within the game itself. The business is able to hold onto most of its own equity but can still receive funding. See my article on the success of Star Citizen for an example of the potency of gaming fans to drive a company’s growth projections through the roof. The article can be found here: https://www.archover.com/demystifying-crowdfunding-part-1-donation-and-reward-based-crowdfunding/.

Yet there is every chance that a novel concept without an entrenched fan base could go unfunded. However, there is still the option of debt-based P2P lending if directors and major shareholders are unwilling to dilute their share in the company. Enthusiasts could invest in the business without the risk of just an equity stake, and established SMEs could continue to grow the business organically without the need to handover their brainchild to a corporate. Established companies with a debtor book to match, often funded by sponsors hoping to flog their product into the subconscious mind of the avid gamer, have consistent revenue streams from blue-chip sources. Sports Interactive, after all, had over £20 million worth of debtors in 2014, up from £16 million in 2013. These debtors were made up of retailers and sponsors keen to have their brand represented in the game. P2P lending could be the answer to the next generation of gaming companies looking to follow in their footsteps.

Peer to Peer Lending Regulation: the benefit for SMEs

Author

Angus Dent

Date

9th October 201517th May 2016

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A recent article written by Dr Avinash Persaud of Intelligence Capital caught my eye this morning in which he discussed the major issue of financial regulation and the difficulties facing SMEs in trying to raise finance through the traditional lending avenues. Persaud is a well-qualified source of knowledge: a former governor of the London School of Economics, a former member of the UN Commission on Financial Reform and a visiting scholar in both the European Central Bank and the International Monetary Fund, as well as the Chairman and former employee of a range of private, public and investment banks. The article is written for an Indian digital newspaper, but it certainly is written from a global outlook. It can be found here: http://www.livemint.com/Opinion/fQpaevJ8DX7KUpwBVdeXQK/Crowd-financing-is-not-banking.html

I have identified two important points from his article. Firstly, he is at pains to highlight the importance of facilitating finance to SMEs to drive economic growth, and he recognizes that banks cannot be expected to provide all of the finance. He recognizes that “a large part of the problem of financing development is not the absence of cash but an inability to mobilize it“. In my view, this is the result of the lending vacuum left in the wake of the Basel III rulings that ensure banks must have proportionately more capital in the bank when lending to small businesses than they would lending to more established businesses, tying up more of funds than banks would like. Dr Persaud recognizes the need to “use technology to match untraditional borrowers with untraditional lenders and provide opportunities for diversification and other forms of risk and information management.” Persaud fails to recognize that the bulk of the lending can come from institutions who will pledge alongside individuals on the same terms. Dynamic, flexible and secure Peer to Peer (P2P) crowdlending platforms that are properly regulated will fill the SME lending vacuum, facilitating finance from SMEs from a range of institutions and investors whose money would otherwise be unavailable to borrowers.

This leads me to the second main point: regulation. I think Dr Persaud is right to highlight the importance of differentiating lending platforms from traditional banks, a job that the regulators must do to ensure that prospective lenders know exactly what the risks are. The P2P industry itself wants FCA regulation for clarity as much as credibility. Regulation needs to be a long, drawn-out process to avoid simply bracketing it with banking regulation. Persaud reasons that “regulating crowd financing platforms as a bank and not an exchange would not only undermine the point of it, but would create systemic risks”. However, Persaud’s belief that P2P alternative finance platforms should drop “conventional” nomenclature is not necessarily the answer. I disagree with his statement that the banking terminology “Market Place lending” shouldn’t be used by alternative finance P2P lenders because that is exactly what is on offer to SMEs wishing to borrow money and individuals willing to lend.

In the words of Dr Persaud, “moving to the next level of social and economic development depends on these borrowers getting through”, which in turn depends on regulated Peer to Peer crowdlending platforms facilitating the finance from a range of savvy individual and institutional investors.