Tag: Borrowing

Fashionable Revolutions

Author
Angus Dent
Date

Revolutions often involve a degree of fashion. One minute they capture the imagination and are all the rage, the next they old-hat and face apathy or even outright derision. It feels a bit like that with the P2P sector which, having been once the darling of the financial market place, is now viewed with grave suspicion – especially by the massed ranks of the media, which helped to put the whole alternative finance movement on a pedestal in the first place. ‘Hero to zero’ is an understatement.

There are other examples, of course, as in the New Towns which came into being after World War Two by way of the New Towns Act 1946. The first wave saw towns like Stevenage, Crawley and Basildon spring up; the second saw Telford, Redditch and Runcorn; and the third, fifty years ago, ushered in Milton Keynes, Peterborough and Northampton.

While it is undeniable that some of these towns have been on the receiving end of a joke or two over the years, few can argue with the fact that, in many respects, they have been a success. They have been so because they filled a gap in the national fabric that existed because of the circumstances of the time; i.e. much of the UK had been flattened and there was a desperate shortage of housing.

And so it has been with P2P. The sector exists because there was a gaping hole in the financial marketplace left by the banks, which were, and still are, abandoning small businesses in order to rebuild their balance sheets. That the process remains ongoing can be seen from the latest round of bank results out this week.

SMEs are turning to P2P in increasing numbers because that is where they are more likely to be treated as customers. And the same can be said for people with money who are considering P2P loans because that is the only way they are going to secure a reasonable return on their cash, albeit with an element of risk.

Fashions come and go and sometimes they even come back into favour. New Towns are currently back on the agenda and for the same reason they were created at the outset – they fulfil the requirement of providing more and better housing for all. Maybe it will be the same for P2P when commentators, politicians and regulators finally accept that this is what the public wants. My only hope is that it won’t take half a century for the hands on the clock to turn full circle.

 

Consolidation and The Plight of Thrifty Consumers

Author
Angus Dent
Date

The storm clouds are gathering for the P2P sector – they have been for about a year now, ever since a few prominent platforms (e.g. Lending Club and Funding Knight) started to get into trouble and the mainline media’s enthusiasm for all things ‘Alternative Finance’ suddenly took a 180 degree about-turn.

We are still enjoying low interest rates, which means that there is currently no shortage of lender appetite, but bank statistics show that SMEs are trying very hard to live within their means and not to borrow. The uncertainty created by Brexit and Trump is not a myth, but a fact.

Despite it all, the giants of the business, Zopa and Funding Circle, have managed to achieve some serious momentum – the former having recently passed the £2bn lending landmark, the latter not too far behind. But both have been losing money and so, it seems reasonable to assume, have most of their smaller rivals. In the meantime, the FCA is sitting on dozens of applications for full authorisation and, accompanied by dark warnings of foreboding from politicians and even the Governor of the Bank of England, it seems that the regulator’s new book of rules (due this summer) will usher in far tougher controls. Many platforms may not be able to survive, while others may simply draw stumps and leave the field.

Is this the beginning of the end for P2P? I think not, but it would be naïve to ignore the warning signs that maybe the honeymoon is over. Far more likely is that we are about to enter a period of consolidation, when the well-conceived, better-financed platforms are either picked off or merge in order to achieve scale and make some cost savings.

In the event of an outright take-over, it would be interesting to see the terms; what realistic value can be placed on a loss-making business operating in a relatively young industry? It might take an entity with very deep pockets and patient shareholders to take such a bold step – a bank, maybe?

The reality is that, if a handful of small platforms got together to form one platform operating under one brand name, the result would probably not amount to a row of beans in a financial sector dominated by giants. But if two of the biggest got together – those writing new loans at a rate of up to, say, £1bn each per annum – then that would be worth doing, particularly if you could halve the marketing costs. The result could be a very profitable company. Would that be allowed under the Monopoly rules? I suspect that someone will have to try it first to find out.

In the meantime, inadvertently or not, the Government is adding to the attractions of the P2P sector by cutting the interest rates available on National Savings & Investments (NS&I) accounts by up to 0.25%. The number of monthly Premium Bond prizewinners is also to be reduced to create the same effect.

In May this year, the return on the NS&I Direct ISA will reduce from 1% to 0.75%. The return on its Direct Saver Account will be adjusted down to 0.7%. As one national newspaper pointed out, that is less than half the expected rate of inflation.

Many private sector products from the banks have been adjusted in line with the NS&I. The average easy access savings and ISA accounts reportedly pay 0.37% and 0.65% respectively. That is one hell of a price to pay for guaranteed returns and the security provided by the FSCS. All of which explains why an increasing number of consumers are prepared to accept an element of risk in return for a yield on 6% on P2P loans. It will be interesting to learn what, if anything, Chancellor Philip Hammond is prepared to do in his Budget early next month to help honest savers.

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.

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