Tag: banks

Trust: The Currency of the Future

Author
Angus Dent
Date

Angus Dent, chief executive of ArchOver, explains how P2P and the banks can co-exist in fruitful competition underpinned by growing lender trust

Alternative finance may appear to be shaking things up for traditional lenders like the high street banks, but in fact it is injecting a greater sense of consumer trust in the financial industry as a whole. As P2P matures, it must carve out a space for itself that grows this trust while delivering attractive returns.

P2P doesn’t have the scale or the intention to pose a major risk to the big boys, but a shake-up of the ways people access finance can only be a good thing for an industry that has remained largely unchanged for the past 400 years. While radical change in too short a period leads to the type of risk that threatens us all, the P2P sector’s considered approach so far, and its core tenets of lender control and transparency, are inspiring trust in both lenders as well as borrowers. And trust, we all know, is fast becoming the currency of the future.

This is just the start for P2P. As it matures, it will be in a great position to work in tandem with the banks to expand their services.

Working alongside the banks

Until significant scale is achieved in P2P lending, with further products on offer for borrowers and a deeper sense of opportunity for lenders, the banking system is unlikely to invest seriously in the sector. In the US, which is a few years ahead of the UK in respect of funding, P2P has already begun to form a part of the smaller banks’ strategies – which suggests the course the UK market will take.

In this scenario, P2P will remain a bothersome, if small, source of competition rather than a partner asset. That competition will help keep the banks honest: that’s a large part of the true value of P2P.

With all this in mind, the question of whether banks and P2P platforms should collaborate or compete is an important one. For the time being, the fact that P2P and the banks do things very differently is leading to more value being created for both.

Taking P2P to the next level

One of the greatest strengths of P2P is that its business model is based on lenders’ own balance sheets and not that of the P2P company. It is therefore in P2P’s best interests to work at maintaining and growing trust among lenders and borrowers. Competition is always healthy but if it gets in the way of stability and thorough processes, both lenders and borrowers will be negatively impacted.

The biggest challenge faced by borrowers is one of trust – a large portion of the businesses ArchOver represents are owner-managed, with a direct relationship between the businesses performance and the financial wellbeing of its owners. For ArchOver to raise funds for that business takes time, effort, a thorough review of their track record and shared values in terms of trust and honesty.

In the long-run, taking the time out to focus on building trust will strengthen a business while also providing security to the lender – keeping P2P and the financial industry as a whole honest, trustworthy and therefore far more stable.

Conflicting Information

Author
Angus Dent
Date

It is sometimes difficult to know who to believe when there is conflicting information emanating from two supposedly reputable sources – the pre-Brexit propaganda war immediately springs to mind. In this case, we have the NACFB proclaiming that there is a ‘plethora of lenders’ in the market, while Small Business recently reported that 1,093 small companies are expected to cease trading in January through lack of finance. This sits alongside other, equally alarming statistics such as the fact that 3,633 business failed in Q3 of 2016 and that only 41.4% of UK businesses started in 2010 survived to their fifth birthday.

Of course, some of the companies heading for the drop will not have been up to standard in the first place, but it beggars belief that they should all be in this category. Is it that the owners of these businesses simply don’t know what sources of finance are available and don’t know where to turn? Or is the NACFB mistaken? Either way, there is clearly some kind of information gap.

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We know from other sources that, partly due to the uncertainty surrounding Brexit, SMEs are currently of a mind to borrow less and to hold on to more of their cash; according to the British Bankers Association (BBA), SME lending in Q3 2016 dropped 13% against the same period in 2015. The BBA also revealed that SME deposits have risen by 5% to over £170bn.

The trends suggest fear of what the future may hold. Many SMEs are trapped in a cash flow squeeze brought about by staff who expect to be paid monthly and suppliers who routinely pay on 60 or even 90 day terms. What do you do – turn away business that might give you a 30% profit margin or borrow the working capital which may cost the equivalent of 10%? The logical answer may not be immediately apparent to everyone.

Invoice finance undoubtedly has its place in the market, but it is no panacea. Because of the high costs involved in terms of fees and maintenance, at worst it can be an expensive fix that suits the provider far more than it suits the SME.

Subject to appropriate due diligence processes and appropriate security, P2P loans are available to help with a wide variety of problems, including short term cash flow. They are also available to companies that want to borrow to invest and grow. There is no stigma attached to borrowing money for the right reason and at the right price. There has never been a better time.

 

“The P2P Sector Is Growing Up”

Author
Angus Dent
Date

There was always going to come a time when the Alternative Finance revolution would falter – maybe we have already reached that point. P2P lending and equity crowdfunding are no longer quite so new and, as the latest missive from the FCA makes clear, this particular side of the Altfi sector has outgrown the rule book. There are also early signs that the novelty is starting to wear off, certainly with the media. So, perhaps now is an ideal opportunity to take a step back and reflect.

Looking ahead into 2017, it is difficult to see how the benign conditions that have helped P2P platforms to create such a significant presence so rapidly – e.g. recovering economy, low interest rates, banks on the back foot – can continue indefinitely. Sooner or later interest rates will start to climb back up and there will be a downturn in the economic cycle. And, with so few platform operators making a profit, there are bound to be casualties.

Some platform backers may grow impatient with the expensive pursuit of acquiring market share at any cost and insist on seeing a return on their investment. Other platforms may simply ‘time out’ because their proposition is not sufficiently different or they have insufficient mass or financial backing to continue.

This could lead to business failures or, more likely, mergers/take-overs of platforms. Consolidation would be a perfectly normal phase for an emerging sector that has a myriad of players all vying for customers and profitability. The High Street banks, too, will recover their poise and may decide to dip their collective toe in the water by making a P2P acquisition or two of their own – if they do, they will almost certainly take aim at the biggest, the most established or those best placed to be scaled. All this is not so much to be pessimistic, rather it is to be realistic. Consolidation is inevitable.

The important thing is to make sure that P2P lenders do not suffer financially. If a platform fails, it does not follow that the loans in which the lenders are invested go bad. All P2P operators should have run-off plans in place to cover that eventuality – something that the FCA, quite rightly, insists upon. If private investors start to lose money, the press and other critics will have a field day.

What is also important is that the P2P sector does not allow itself to be divided into a number of component parts, either into the large and small platforms, or those with different business models. The sector should operate as one for its own protection and for the common good.

The P2P sector is growing up – it can either be in charge of that process or be at the mercy of others.

growth

The Sharing Economy – Driven by Peer Review and Trust

Author
Angus Dent
Date

A couple of weeks ago, while most of us were distracted, PWC posted ‘The Sharing Economy’ report. The main point taken from the sharing economy piece would be ‘never settle for stable’. The sharing economy explains that businesses cannot be taken for granted in a fast-changing world, todays changes can be changed again by tomorrow and so businesses cannot stand still. To maximise, companies must embrace change and continuously develop in order to maximise consumer benefit and competitive advantage.

The key points I’d take from the Sharing Economy piece:

–          Peer review is far and away the main driver of trust, 92% said they valued peer review above all other forms of marketing and advertising.

–          Without trust services aren’t used much, 89% said that ‘trust’ was a major factor.

–          A mind shift has begun in business from offering a product, an item, and hoping it will sell to building relationships and providing service and thereby creating a greater perceived value.

–          Embrace change/disruption in industry. We should always be looking for new ways, never standing still. Always be thinking about your competitors and how they may be changing.

sharing economy

The suggestion of the report is that only companies willing to rise to the challenges and expand are ‘poised to survive – and the potential ahead will be constrained only by the imagination of decision makers’. As companies utilise the sharing economy and create partnerships and collaboration they will find more ways to profit and aid their businesses – while helping the community and its industry sector to grow and sustain success.

Of course there’s nothing new in suggesting that only those who adapt will survive, Charles Darwin being the master of this theory – “It is not the strongest or the most intelligent who will survive but those who can best manage change.”

The crowdlending sector was born from an inability of the banks (and other providers of finance, banks becoming the collective noun for a failing sector) to adapt to changed circumstances, their failure was dramatic, public and adversely affected all of us. The lesson is clear we must keep adapting not to go the way of the banks that may yet follow the dodo.