Does nothing ever really change? – Angus Dent shares with Spear’s his view on Funding Circle’s IPO. Read the full piece here.
Tag: fintech
FinTech & Guildhall: Where new money meets old
This week, ‘new’ money met ‘old’ under the watchful gaze of City guardians.
Interesting to note that the venue chosen to hold the Innovative Finance Global Summit 2017 – the show piece event for the techiest of FinTech aficionados – was Grade I-listed Guildhall, in the heart of the City of London. It is a place where money men have gathered for centuries (apparently, even the name means ‘payment’ in Anglo Saxon) and also home to effigies of Gog and Magog, the giant guardians of the City, who get hauled out once a year to be paraded at the head of the Lord Mayor’s Show.
These two must have shared a silent chuckle this week when it was a case of those with a vision for the future, but no money, meeting in the heartland of those who have bundles of the stuff, but who stubbornly insist on clinging to the old ways that made them rich. The unavoidable truth is that both factions actually need each other if London is to preserve its reputation as the FinTech capital of the world.
Perhaps the other inescapable conclusion is that, although its consequences currently dominate our thoughts and headlines, Brexit actually means very little in terms of addressing the world’s overriding priorities. FinTech wizards may find ways to cut down on the time it takes to make faster money transactions or process loan applications – objectives that appeal to developed countries and those in charge of financial systems – but they will contribute very little to solving the massive problems facing the under-developed world that represents most of humanity.
What is needed is more widespread access to capital so that billions of people can be lifted out of poverty, to live in millions more homes that have yet to be built (estimated circa 50m in India alone) and to eat food that still has to be produced. Capitalism works, but it still only serves the minority.
FinTech has a lot to deliver and expectations are sky high. There is an abundance of good ideas, some may even be brilliant and world-changing. But they will not progress to anything remotely useful without the support of ‘old’ money. And therein lies the greatest challenge.
Fashionable Revolutions
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
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.