Tag: finance

Inflation & The Plight of the Honest Saver

Author
Angus Dent
Date

Anyone clinging to the belief that their deposits with the bank, building society or National Savings are holding their value must surely have received a wake-up call this week with the news that inflation hit 2.3% in February. At this level – the highest since September 2013 and already ahead of the Government’s 2% target for the year – the purchasing power of their money is going backwards in real terms. Furthermore, those looking to take advantage of the new National Savings Bond announced in the Budget only two weeks ago may stop to consider that the 2.2% on offer from next month for a deposit of £3,000 will effectively render them a loser from Day One.

As for those with money in traditional, easy access deposit accounts paying 1% or less, their cash is being eroded at an alarming rate of knots. And the use a tax-free ISA wrap does not even come close to bridging the gap.

The sad thing is that, while honest savers stoically see the value of the nest egg slip away by stealth, they are encouraged to believe that they are protected by the Financial Services Compensation Scheme (FSCS). They are protected, of course, if a bank or building society goes bust, but, since that will probably never be allowed to happen, the safety net is largely an illusion – and a cruel one at that given that the FSCS does not protect them from good old-fashioned inflation, which is the real enemy. Bank and building society depositors may not be losing their capital in one hit, but they are losing part of its value with the passage of each day.

The fact is that, even if they wanted to, the banks are virtually powerless to do anything about the plight of the saver – their access to cheap capital through deposit and current accounts to pass on to borrowers at astronomical rates of interest is what they live off. In modern parlance, they have very little ‘wriggle room’ because of their structure and overheads.

With interest rates glued to rock-bottom for the foreseeable future and inflation on the march, consumers are being forced to look at the various alternatives, such as P2P loans, where the market is young, ambitious and nimble. Risk is obviously – and very understandably – a big factor in many consumers’ minds, but returns of up to 8.5% with a good measure of security are not only available, but also sustainable in the current market. The advice must surely be to look around, research what is available, from whom, and to spread the risk by not putting money in one place.

In ArchOver’s case, the money will be lent out to ambitious, creditworthy SMEs through a robust risk assessment process. Surely, that has to be better than just sitting back watching the value of your capital gradually slip away.

The Balancing Act

Author
Angus Dent
Date

From former City regulators like Lord Adair Turner to current ones like Andrew Bailey, the chief executive of the FCA, everyone overseeing or commenting on P2P appears to be convinced that the sector is sitting on a time-bomb of bad loans. Inevitably, the mainline Press has taken up the cry by issuing grave warnings of impending disaster alongside constant reminders to lenders that their money is not covered by the Financial Services Compensation Scheme (FSCS). Scaremongering abounds.

The argument runs that the dash for volume is pressurising loss-making platforms to approve poor quality loans to earn the fees to pay the staff and keep the lights on. The cries have become all the more strident since it has become evident that there is an imbalance between willing P2P lenders, of which there is a surfeit, and quality borrowers, who are short supply. The situation simply reflects the lack of yield available through traditional banking/National Savings products and the reluctance of well-run SMEs to borrow money while the medium to long-term economic outlook remains so uncertain. Both sides are acting perfectly sensibly which may be frustrating for the P2P operators, but is ultimately for the good.

In the circumstances, the latest action by Zopa, the founder of P2P lending, to introduce a waiting list for lenders is all the more commendable. The management has decided, quite rightly in my view, that it will be better in the long run to maintain the quality of borrowers to protect its lender base – in other words, far better to impose a short-term delay in placing the money than scramble to find borrowers at any cost. Zopa has also taken the opportunity to point out that its stance is designed to look after the interests of existing borrowers rather than use the best deals to entice new customers – a policy that the banks and building societies would do well to replicate.

Some of the other platforms – Funding Circle, for example – have been raising institutional money which, ultimately, will have to yield an institutional-size return. That doesn’t mean to say that it will necessarily be forced to take silly risks and, to date, there has been no hard evidence that credit standards have been lowered.

Balancing borrowers and lenders isn’t new – we do it all the time and always will. The trick is not to be tempted by the short-term expedient over building a robust business for the longer term. Pain, in the form of losses, may be needed to achieve this, which means that the fittest will survive while others may fall by the wayside. Again, all perfectly normal for a young, rapidly-developing sector.   

 

The Bank Model: Broken?

Author
Angus Dent
Date

Each day brings fresh evidence that the traditional UK banking model is under intense pressure, if not actually on the verge of breaking down altogether. RBS was on the receiving end of some elaborate media speculation last weekend that it was planning to shed a further 15,000 jobs to save £800m per annum in costs; not surprisingly, the report failed to elicit any official response from the bank in advance of it publishing its results later this month. However, that it is still in business at all, having lost a reported £50bn since its original Government bail-out in 2008, is little short of a miracle. In any other sector, losses on this scale would not be tolerated. The financial institutions, including the banks themselves, would simply call time on the business and its management.

RBS clearly has some special problems, including the need to replace an obsolete IT system that is prone to breaking down, but there is one common and lethal trend that plagues all the banks – the fall in interest rates to record levels. Resulting margins are simply too fine to sustain profitable existence, which is why we also learnt last week that the Co-op Bank has put itself up for sale. Good luck with that.

Adding to the woes is the fact that low interest rates are extremely popular with politicians because, in combination with the fall in the value of sterling, they can power economic growth in this post Brexit era by helping our exporters. They also keep down the costs of borrowing, including mortgages. The irony is that, if and when interest rates do start to rise, we know from their past behaviour that the banks are likely to put up the cost of borrowing before they pass on any of the benefits to long-suffering savers. That’s how they will hope to restore margins.

It begs the question that, if the banks can’t earn a decent crust in times of low interest rates, how can they expect anyone else to, especially if they don’t enjoy the same special dispensation to make losses. The picture becomes even more disturbing when set against the backdrop of rising inflation, which we learn was 1.8% in January, up from 1.6% in December. Already, this is almost alongside the Bank or England’s target of 2% for this year and racing towards the 2.7% predicted for 2018.

The low interest rate era looks like it will be with us for some time yet and it is hard not to feel sorry for the honest savers who have just seen another 0.25% shaved off their returns from National Savings products – a move quickly reflected in bank and building society deposit rates.

What it means is that the relatively secure returns that are readily available through P2P loans are looking more attractive with each passing day.

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.