Tag: banks

Was it acceptable in the 80’s?

Author
Angus Dent
Date

So the results are in, we have stood up as a nation to be counted and the surprise result is that rose tinted nostalgia seems to have taken us in a direction none expected – back to the golden era of the 80’s. There’s the funny side of course, big hair, even bigger shoulder pads and at the end of the decade enormous mobile phones. Of course it’s the bleaker side that’s worrisome; British soldiers on the streets of the UK, 3m+ unemployed, a surrogate civil war with the miners……That’s said, the effect that had on asset prices was only beneficial to the humble man on the street  and you could get married, buy a house and an Aston Martin, as a poorly paid Chartered Accountant ( I know I did ). Pity about all that equity that might go to waste and for those who came along later and paid higher prices.

 

brexit flags

 

What we didn’t have in the 1980s, or at anytime until this decade and really only the last couple of years in anything approaching a measurable volume was an AltFi sector. A real alternative provider of finance that may just keep the economy going through this particular period of uncertainty and beyond.

 

Substantially AltFi was born of the last financial crisis; a hunger for yield from those with cash and a need / want to borrow from people and businesses. Some of us saw this opportunity and established businesses that arch over from the lenders to the borrowers. The problem is that the sector while growing very quickly in macro economic terms remains small when compared with the banks. Mind you much micro economic theory, some of it written and tried in the 1980s, suggests that the biggest effect can be had on the margin, deploying relatively small amounts of money.

 

What might this mean; the banks continue to carry the base load in value terms and AltFi provides finance alongside. The banks continue to lend to the larger corporates and AltFi takes more of the personal lending and the lending to small and medium sized enterprises. This of course is what has been happening over the last seven or eight years. I expect that our sector, the AltFi sector has just received a boost. Crisis makes us all more cautious, makes us retreat to where we feel most comfortable. For the banks that’s corporate lending for AltFi its SMEs and personal lending. So we’ll both be playing to our strengths, working in the areas we know like and understand.

 

One other thing makes me more optimistic; increasingly AltFi and the banks are working together. We’ve moved from a position of say three years ago, when we, metaphorically, spat at each other to one today where we’ve realised that we provide different services and should therefore work together. Working together we’ll get the UK economy through this crisis, maybe without it even becoming a crisis, and forge a larger more robust AltFi sector in the process.

 

Media and finance industry need to work together to show that P2P comes in more than one flavour

Author
Angus Dent
Date

Once again, we find mainstream media treating the diverse alternative finance sector as one homogenous group and misleading or alarming investors in the process.

This time, we have Ruth Lythe of the Daily Mail launching with a headline on 7 June, “MPs attack risky online firms offering 7% returns from lending savers’ cash to strangers to buy cars and even phones”.

The article refers to Zopa’s recent announcement of its point-of-sale partnership with Unshackled.com.

In essence, the article can be summarised in one of the lines within it: ‘P2P loans are risky’.  This is written without providing any context for the reader, which is both naïve and does a great disservice to existing and potential investors.

  • A comment on the losses experienced to date by peer-to-peer investors would have been good (they are below what the banks accept as ‘normal’ and are published by the largest platforms in the smallest detail for all to see, which is something the banks never do).
  • A comment on the variety of models available in P2P would have been helpful too, rather than bracket everything under one, doom-laden label.

Of course a judgement has to be made when investing in peer-to-peer. Judgement is required in most forms of investment, but what really matters and needs explaining when making sweeping assessments of this nature is how the likelihood of loss is mitigated and managed, which differs from platform to platform.

In the case of Archover, all business loans have to pass the scrutiny of not only our own lending specialists, but also those of leading credit insurers, who provide cover on the underlying asset that we use as security. If we were even tempted to lower our standards we would not be allowed to do so. I know of no bank that can provide that same level of comfort.

Daily Mail Old

In other parts of the market, RateSetter and others have provision funds which cover all losses. This means that, to date, nobody has ever lost money lending over their platforms. The banks rely on the good old UK tax payer for such a guarantee.

I think I speak for the entire industry here when I say the FCA is doing an excellent job in making sure investors are as informed as possible about the nature of their investments.

Andrew Tyrie’s letter to the FCA on behalf of the Treasury Select Committee is perfectly reasonable and I have no doubt the Regulator will provide a full and well considered response in good time. This will no doubt include some of the facts, such as net returns for investors after default being in the range of 5%-7% since the inception of the industry, the never before seen level of transparency in financial services and the resilience of the sector to economic shocks – even against the most stringent scenario laid out by the Prudential Regulation Authority (PRA).

The Regulator will certainly have our full backing if even more improvements can be made to help investors.

As an industry, we do not criticise the Daily Mail or the media at large for advising caution, but we do implore it to examine the facts and make a more rounded assessment on behalf of its readers.

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.

The Autumn Statement: the Upshot for Alternative Finance

Author
Angus Dent
Date

The Chancellor’s Autumn Statement has come and gone without much focus on the alternative finance sector. Back in July, the Innovative Finance ISA (IFISA) was propositioned amidst much fanfare from P2P lending platform CEOs keen to see investors receive encouragement to lend money from the government. Yet the March budget was a little light on the details of the ISA’s mechanics, and very little has been revealed in Osbourne’s Autumn Statement. Here is the subparagraph concerning the IFISA in full:

“The list of qualifying investments for the new Innovative Finance ISA will be extended in Autumn 2016 to include debt securities offered via crowdfunding platforms. The government will continue to explore the case for extending the list to include equity crowdfunding”

So, still no place for equity crowdfunding: this should not change before April 2016 and it is unlikely to be a feature of the ISA whilst the government continues to fear that investors are ignorant of the differences between debt- and equity- based lending. Debt-based securities are included, however; good news for Wellesley and UK Bond Network particularly. The good news for P2P lenders to SMEs comes with the declaration that Credit Reference Agencies (CRAs), such as Experian, will have to provide equal access to all finance providers. This will ensure that P2P lenders are afforded the same privileges as banks and will go some way to ensuring investors can feel confident in the SMEs they are lending to. Competition in the market place can only be healthy for the UK economy.

Coupled with the budget’s release came the outcome of the Bank of England’s stress tests, that saw Standard Chartered and RBS labelled the weakest lenders. The general consensus seems to be that the banks have learnt from their mistakes, yet the reality that two of the top seven banks in the UK are deemed not to have enough capital strength is still a stark warning that the UK banking system is not as resilient as it needs to be. Yes, nobody failed the stress tests, however all the banks have still been urged to hold back more capital despite evidence that they are handling their risk more carefully. The upshot for alternative finance providers? The government is trying to level out the playing field, whilst the banks still face restrictions in the wake of a financial crisis that they caused. The government clearly want the banks to remain cautious and drive economic growth from a wider pool of alternative sources. The ISA won’t bring in a flood of investors in the first year necessarily, but in five years’ time expect to see SMEs benefitting from the wisdom of a bigger and better educated crowd.