Tag: banks

Why P2P Platforms are Slowly Usurping Traditional Savings Accounts

Author
Angus Dent
Date

The prospect of boosted savings returns has seen traditional savers become SME lenders through Peer to Peer lending platforms. In fact they are flocking in their masses, and both the banks and building societies are running scared. The Yorkshire Building Society has taken particular umbrage at what it views as “bad investment decisions” and “would urge anyone considering riskier investments such as P2P or equity-based investment to take independent financial advice before doing so”, according to a scaremongering article in the Daily Telegraph. It’s worth noting that such “independent financial advice” can of course be received at the Yorkshire Building Society for any Telegraph readers particularly affected by what they had read.

Usurping

Yet it is hardly a surprise that the banks are launching their own counter offensive: they are losing out on bucket loads of low cost capital. The implementation of the Innovative Finance ISA next year should see even more switch to P2P lending, as they will be afforded tax breaks on profits earnt through peer to peer lending platforms.  This is obviously good news for all the platforms, but is better news for existing lenders who should see more security as the money comes in.

Whilst there are risks when investing through Crowdlending websites, the larger platforms are doing everything they can to mitigate the risk to ensure that they can offer savers a viable alternative to banks. RateSetter, in my view, have the best offering from the big players. They have operated a provision fund since 2010 that proudly boasts a 100% record of reimbursing investors who have lost their money when a borrower has defaulted on repaying a loan. The fund contains over £16 million, offering more than 150% cover against claims. Every borrower contributes to the fund by paying a compulsory fee when they agree to lend over the platform, and should a default occur, the money is paid back in full. Should the fund become depleted for any reason, all outstanding loans would be redirected to the provision fund and pooled repayments would be shared back proportionately to investors to ensure they aren’t fully exposed to a particular default. To put this in perspective: the government guarantees the banks at the cost of the taxpayer. Furthermore, the guarantee only pays out if the bank goes bust and then only to up £75k. If a P2P platform fails, the FCA’s rules dictate there’s always an alternate supplier who will run off the loan book.

My response to Yorkshire Building Society’s view that investors are entering peer to peer lending with their eyes closed would be to say that investors are in fact more likely to act cautiously when lending across online platforms. People should always question what looks at face value and exceptionally good rate, and should always choose an investment on the value of its security first and foremost. There are enough platforms who operate provision funds, and who also demand borrowers take out credit insurance or in some cases personal guarantees. Transparency is, and should be, prioritised above all else; it is hard for banks to argue that platforms are complicated to use when it was the banks themselves that propounded the concept of “borrow short term, lend long term”, a notion that stimulated the financial crisis and the demise of the likes of Bear Stearns. P2P lenders instead advocate a “lend for 12 months, borrow for 12 months” policy that is wholly transparent. And with no leverage used to facilitate the loans, arguably the two major structural causes of the financial crisis won’t be an issue for Peer to Peer lenders.

Whilst more money is poured into Peer to Peer lending platforms, the alternative finance industry as a whole will see some consolidation as well. The bigger companies will obviously continue to get bigger, but the consolidation will also help smaller players offering niche services to replace traditional banking facilities such as invoice discounting and property lending. The result? More streamlined, better-run companies who prioritise lender security and endeavour to minimalize the risk for regular individual investors, who can offer a viable alternative to those sick of the miserable rates offered by banks, but without the appetite for investing in the risky world of stocks and shares.

Moreover, institutions with a low cost of money, such as family offices, schools and county councils, will be drawn into investing over peer to peer lending platforms rather than leaving their money to stagnate in bank accounts. Local government treasurers would be particularly keen to lend to platforms that subsequently lend the money to constituents or local SMEs in an attempt to further support their local community. This could see an increase in localized Peer to Peer lending companies such as Folk2Folk, who operate solely in the West Country.

The result of all this? Bad news for banks, good news for savers and SMEs.

piggyBank

Jargon busting the journey from Startup to SME: Part II

Author
Angus Dent
Date

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So far then, our startups have traversed the so-called “valley of death” and toiled their way to revenue generation and potential profitability. First they took seed funding from friends, family and angel investors to kick start business development, then they looked to professional investors for series funding to provide working capital, strengthen areas such as sales and marketing, and perhaps even facilitate expansion of property and other assets. So now that these startups are past the early stages of the business cycle, where should their directors turn to fund the next phases of business growth and development?

All these companies will now have traded for at least a few years, acquiring a financial track record and hopefully a steady customer base too. This increased business maturity and stability tends to translate into lower risk (and lower reward) for potential investors, an evolution in the risk profile that changes the nature of the available sources of finance.

Some companies with more robust balance sheets will now be in a position to seek out senior debt in the form of loans secured against assets of the business. Senior debtholders are those that are most likely to be repaid in the event that a business gets into financial difficulty. Gaining a loan from a bank at this this stage of development is notoriously difficult however. As such, businesses are increasingly turning to newer sources of finance, such as marketplace lending platforms, to provide them with the credit lines they need.

Others businesses that lack assets against which to secure debt, or the stable cash flows to service it, may look to invoice financing to improve their cash flow. Invoice financing can be split into discounting and factoring, both of which involve the third party finance provider advancing the money owed to a business by its customers, minus a service fee. With factoring, the finance provider takes control of the debtor book, whilst with discounting the relationship between a business and its customers is left untouched.

jargon part ii

For those businesses that seek to expand aggressively though, either of these forms of financing alone may not be enough, leading them to seek out mezzanine finance to help them achieve their goals. Mezzanine finance is usually unsecured and sits behind senior debt in terms of repayment priority. Because of this increased risk for the lender, it carries a much higher interest rate and also a clause that converts the debt into equity in the company if the loan is not repaid.

The above types of funding will suffice to meet business requirements of many companies, allowing for growth whilst keeping ownership in private hands. At the end of the financing road though, for those that choose it, is an IPO, or Initial Public Offering. There are a number of reasons why a company might consider ‘going public,’ such as reducing the burden of interest payments or generating publicity. Over and above any of these considerations though is the ability that being publically listed brings to raise large amounts of capital on a consistent basis. That said, firms must take into account the significant costs of the listing process, as well as the increased regulatory requirements that will be in place once public.

And so with IPOs we reach the end of the startup cycle, and the jargon that comes with it. It goes without saying that following the path through from seed funding to listing involves a huge amount of hard work and I dare say an element of luck. But with 99.3% of UK private businesses ranked as “small firms,” it is a journey we must hope many will complete successfully.

A Response to Robert Reoch’s article on The Growth Outlook for Market Place Lending

Author
Angus Dent
Date

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Thomson Reuters recently published an informative blog post in which Robert Reoch offered his views on the “growth outlook for marketplace lending.”

In his role as Global Head of Products and Strategy at Crowdnetic, a provider of technology and market data solutions to marketplace lending companies (MPLs), Robert is part of a team which aims to educate investors and institutions on the direction in which the  alternative finance industry is moving. MPLs have been quick to offer an alternative finance source to SMEs, providing a service distinct from the antiquated and costly financing options that banks in particular had been providing. And as the industry has grown, innovation by FinTech companies has seen the provision of increasingly niche and bespoke services, as competitors attempt to stand out from the crowd and bid to woo investors. Yet I agree with Robert’s statement that “there is real economic benefit for banks to actively collaborate with MPLs” in order to attract prospective borrowers.

MPL subsets

The MPLs that are most successful could be those that actively maintain a symbiotic relationship with a specific bank or banks. The banks would provide the MPL with a network of suitable borrowers who at the moment just aren’t aware of the opportunities out there.In return, as pointed out by Robert, banks can keep their fee-paying client “without the associated balance sheet and the capital cost”. In light of such exposure, the cost is minimal for the MPL, who would also save on often unnecessary and expensive advertising campaigns, especially as a much smaller group of institutions rather than a large pack of individuals is increasingly seen as the future of the ‘crowd’. This in turn helps Borrowers, who can receive funding faster and with a lessened prospect of a project going unfunded.

MPL bank lending

As Robert alluded to, it remains to be seen how much of the enormous market MPLs can gain access to. After all, a percentage point or two would transform the MPL industry and create a flood of funding to SMEs. The timing couldn’t be better. UK business lending from banks in June 2015 saw the sharpest fall – almost £5.5 billion – in at least four years (since records began). And with SMEs positioned as the main drivers of UK GDP, it is in the best interest of all involved that these businesses receive the finance they need to grow. Marketplace lending companies will be chomping at the bit to fill the void left by the banks; it remains to be seen when the shift happens.

Banks ‘Straitjacketed’, Alternative Finance Growth ‘Fantastic’

Author
Charlie Mahalski
Date

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Thanks to the jaded approach to economic policy of the two main political parties we have no balanced, imaginative and focused ideas to provide hope for pulling us out of recession and rebuilding the economy. At ArchOver, we believe that an economic policy focused on small companies is the ‘big idea’ that is needed.

Small businesses are the lifeblood of our economy. They dominate employment and vital innovation. There are five million such businesses giving direct employment to at least 11 million people. A further circa four million aspire to work for themselves.

We recognise good ideas when we see them and the right wing but independent think tank, The Centre for Policy Studies, has produced a paper ‘The Road From Serfdom’ which brilliantly outlines the importance of small companies to the economy.

The paper was written by Lord Saatchi, a former chairman of the Conservative Party and a Thatcherite to his bootstraps. Margaret Thatcher was excited by the idea of popular capitalism and, in the context of attracting secured and insured capital to fund small companies, so are we.

In a closely reasoned paper, Lord Saatchi suggests that if all corporation and capital gains taxes were removed from small companies, the £11 billion cost to the Treasury would be eradicated in the life of one Parliament and then we would have the annuity benefit of small companies to lift and revitalise the economy for the future.

We are sceptical about the political appeal to our jaded leaders of the £11 billion cost, in these straightened times, but we like the imaginative approach.

Small companies are about economic growth but they are also about social well-being. People who run small companies are able to follow their own instincts and ideas. They avoid the frustrations revealed in a study of 1,000 young employees by the financial services firm EY. It has found that fewer than a third believe that the companies they work for are sufficiently innovative and 82 per cent claim they have ideas that might have been used to create new opportunities for their organisations had they been not ignored. As a result, a stonking 70 per cent of these young people would rather set up on their own than work for somebody else.

The two major parties have paid lip service to helping small businesses and credit must be given to Government initiatives to make it easier to register patents and making it less onerous to set up companies. There is also the support that’s been given to small businesses and, in particular, to the alternative finance, crowd-lending sector, through the Business Bank. These are worthy initiatives but they are tinkering at the edges of the issue. Now, radical policies are needed to rebalance the whole UK economy in favour of small companies.

The fact that the banks have been put in a straight jacket by European Union Basel III agreements, which stop them from lending, is killing small business. The Bank of England has pointed to the fact that just four banks control more than 80 per cent of all lending to companies. It identifies a £14 billion annual shortfall in lending to those vital engines of our economy.

The alternative finance sector can be a major source of finance for these small companies. It is growing at a fantastic rate partly because low interest rates attract investors who are seeking higher returns and also because both lenders and borrowers are sick of dealing with the banks and other large financial institutions. The brand new sector shows every prospect of being able to fill that £14 billion gap and more.