Tag: borrow

Disintermediation

Author
Angus Dent
Date

There has been much speculation about the potential impact of the IFA and wealth manager communities eventually throwing their weight behind the P2P sector. Why they haven’t done so up until now hinges on the argument that without FCA approval they have not felt able or willing to recommend P2P products to their clients. The FCA’s lengthy deliberations regarding which P2P platforms are granted full authorisation – a process that is still ongoing for most of the major platforms, including ArchOver – have obviously not helped the cause.

Crucially, authorised status will dictate which platforms will be able to offer an Innovative Finance ISA product. It is widely anticipated that, for those who pass the FCA test, this could act as the trigger that will prompt IFAs/wealth managers to give their active endorsement to P2P through IF ISAs. The hope is that, once the regulatory shackles come off, the floodgates will open as lenders/investors pile in to take advantage of tax free returns on P2P loans (obviously within annual ISA limits), which we know would generate far more attractive returns than those based on bank or building society deposits.

P2P Lending

It all sounds great. My only question is: why do we need the wealth managers and IFAs now? Surely disintermediation lies at the very heart of the whole P2P lending project – a process by which the investor receives a greater share of the return because the middle man has been removed from the equation.

This can be easily demonstrated in the world of investment management where investors are forced to give up part of their gain in the form of fees. An investment of, say, £100,000 may produce an annual return of 7%, or £7,000. A return reduced to 6%, of £6,000, by fees would mean a reduction of £1,000 in one year alone. Over a period of five years, arithmetic shows that the cumulative loss would be £17,797, assuming annual returns are reinvested. Removing the middle man may involve slightly more effort on the part of the investor – virtually none if you are being charged fees to invest in a tracker fund – but the savings can be considerable. And it makes still less sense to be charged fees in the years when investments fall in value.

And the same applies to the world of debt finance where the banks are a classic case to point. For decades, they have enjoyed low cost of capital which, when combined with the low returns offered to depositors, explains how they can afford to maintain a presence in the High Street.

The internet has been one of the driving forces behind disintermediation – it allows the dissemination of information to large numbers of people at low cost. And the process has only just begun.

To ‘re-intermediate’ by inserting a layer of fee-charging organisations between the client and the product provider – IFAs, wealth managers and P2P aggregators, to name a few – represents an unnecessary step backwards. Those who take the risk should keep the gain

Skin in the Game

Author
Angus Dent
Date

The term ‘skin the game’ is a fairly recent addition to the P2P business lending sector’s collection of ‘cool’ phrases. An import from the equity finance side of the fence, it is meant to comfort lenders/investors with the thought that, if they lose their money, others – particularly the borrowers, but also other lenders – will lose theirs, too. But apart from sounding modern and slick, does it send a message that typical lenders necessarily want to hear? And does it have any real value anyway?

‘Skin in the game’ has crept into the picture because a few P2P lenders have taken the step of putting money from their own balance sheets into selected projects. The motive for taking this kind of risk appears to be to help certain borrowers raise the cash they need because (a) some loans do not meet the usual lending criteria and (b) in the platform’s estimation, the borrower company nevertheless deserves support. Their action bears all the hallmarks of bank lending, which is why some commentators are beginning to ask whether this is the first step towards achieving that ultimate ambition. It suggests that everyone in the P2P sector secretly wants to trade their original disrupter ticket in order to become a bank.

plant-money-grow

We can’t possibly comment on the corporate plans of our competitors, but ArchOver’s position on this is quite clear: we are not a bank and neither do we have any ambitions in that direction. We are not a venture capital company, either. We provide a matching service between borrowers and lenders, using a unique business model designed to protect the interests of all parties, but especially lenders.

Furthermore, it is our contention that having the right business model – in our case we use credit insurance to protect assets valued at 125% of the loan – offers far better lender protection than having a borrower prepared to risk their own money to the tune of, say, 5% of the total as a gesture towards the ‘skin in the game’ culture.

On the issue of fairness, surely it is far better to treat all lenders the same, irrespective of whether they are individuals, family office or small institutions; there should be no special deals for anyone. And we would also argue that it is better to conduct rigorous due diligence in the first place, and to stick to the criteria rather than try to justify special cases. We do not subscribe to the notion that borrowers and lenders want to see platforms putting their own solvency at risk through approving poor loans. That’s something the banks do!

ARCHOVER RAISES THE BAR FOR P2P LENDER SECURITY WITH EXTENDED 3 YEAR CREDIT INSURANCE AGREEMENT

Author
Ashlee Dutton
Date

ArchOver, the premier P2P business lending platform which successfully completed its second year in business in September with no borrower defaults, late payments or losses, has extended its exclusive partnership with international credit insurer and collections company Coface by a further three years.

The deal will enable ArchOver to maintain what is widely recognised within the industry as the highest standards of initial and ongoing due diligence and to provide continuous protection to all its lenders through the use of £100m of borrower turnover cover.

Commenting on the new arrangement, Ian Anderson, ArchOver’s Chief Operating Office, said: “The credit insurance element is central to our unique ‘Secured and Insured’ business model. We began our partnership with Coface a year ago because we identified the need to offer our lenders insurance cover and to bring a distinctive element to our offering which has allowed us to stand out in a sector that is heavily criticised for lax security and monitoring. The agreement has contributed to our ability to complete two years of operations without a single bad debt, late payment or default.”

“Building a relationship with a long-standing organisation such as Coface only complements our offering and we look forward to continuing to offer our lenders this type of protection. It will enable us to scale the business and expand our offering to borrowers who do business outside the UK.”

“Coface is a world leader in credit insurance, operating in 100 countries with over 40,000 clients and holding key financial data on 67 million companies worldwide. It is a true global giant with an acknowledged expertise in international trade risk. Coface is the perfect partner for our future expansion plans.”

Frédéric Bourgeois, Managing Director of Coface in the UK & Ireland, added: “The partnership between ArchOver and Coface goes from strength to strength and fits perfectly with our own corporate objectives. ArchOver’s business model demonstrates that, after our first year of operation, it is possible to protect lenders without compromising competitive edge. We are very much looking forward to the next stage of our collaboration.”

 

ENDS

 

Coface

 

  1. With its headquarters in France, Coface is a trade risk expert and a world leader in credit insurance. The company employs over 4,500 staff across 100 countries, including the UK.
  2. Coface has 40,000 client companies domiciled in over 200 countries around the world.
  3. Coface constantly reviews 2.5 million debtors for which it is at risk. It holds detailed information on 67 million companies worldwide.
  4. Coface conducts Global Credit Insurance underwriting through 660 risk underwriters and credit analysts.
  5. Coface had an annual turnover of Euros 1,490 million in 2015. Its client retention rate was over 88 percent in 2015.
  6. Coface is the number one credit insurer in South America and the Asia-Pacific region (excluding export credit agencies). It is ranked number two in France, Germany and North America and ranks third largest in the UK.

Industry Profitability

Author
Angus Dent
Date

Throwing huge sums of money at a new or particular market in order to achieve dominance is nothing new. The corporate landscape is littered with the financial corpses of over-zealous entrepreneurs who hurtled down the growth path without sparing a thought for the day of reckoning when someone – usually one of the backers – pauses to ask when all this investment is going to result in a profit. The ‘jam tomorrow’ argument eventually wears thin.

Some commentators are already starting to pose the question in relation to the long term future of Alternative Finance providers, including P2P business lenders like ArchOver. It is a fair question since it is no secret that the largest players in the sector – companies like Funding Circle, Ratesetter and Zopa – have all posted bumper losses as if there was some kind competition running to see which of them could lose the most money fastest. The observation that the vast majority of Altfi operators have never been through an economic recession is equally true. Eventually, the music has to stop and there will be some casualties, at which point the pundits will doubtless have a field day.

profitability

In the meantime, it is not for us to question the wisdom of others in our sector – we can only speak on our own account. The dash for growth at the expense of profitability or, more importantly, quality has not been the ArchOver way because there has been no need to adopt such a strategy. We are not under pressure from voracious venture capitalists who simply want their money back plus a massive return for their trouble. ArchOver is backed by a 300 year-old institution with a proud reputation to maintain – something infinitely more precious than making a fast buck.

ArchOver’s approach to the vital due diligence processes, backed by the ‘Secured and Insured’ model, not only works, but has been seen to work. £25m of loans facilitated over two years with no losses and no arrears is a considerable achievement. Whether individuals, family offices or small institutions, all of our lenders have been treated equally and have received exactly what they were told to expect at the outset.

On the flip side, borrowers over the ArchOver platform have been treated fairly, with no nasty surprises in terms of hidden fees or charges. The fact that many have returned to seek more finance is testimony to the appeal of our business model and the way in which they have been treated by the team.