Tag: fintech

Are Commerzbank about to blaze the P2P Lending trail?

Author
Angus Dent
Date

In the Twittersphere, the word “Fintech” tends to provoke a lot of hot air. Speculation leads to everything from wild estimations and massive valuations to doomsday predictions and floccinaucinihilipilification. You aren’t going to get that word into 140 characters easily, but the exaggerated fervorous lexicon endemic to “#FinTech” dictates that you should try to if you want to fit in. And it isn’t just Twitter; print media and digital news services regularly produce supercharged opinion articles that try so hard to “think the unthinkable” that the “thinkable” (and usually the reasonable) is of seemingly negligible importance. As I’ve said before, that is what happens when you create a portmanteau that attempts to define such far-reaching businesses and sectors. Readers will start to think that Bitcoin price fluctuations become, all of a sudden, of tantamount importance to a Peer to Peer lending platform.

In light of this, Crowdfund Insider’s headline “Germany’s Second Largest Bank, Commerzbank, said to Launch P2P Platform this Year” seems to suggest a familiar speculatory path is being trodden, particularly as it comes from “informed sources” whispering in the ear of the P2P-Banking.com blog. The article claims that German behemoth Commerzbank plans to launch its own P2P Lending marketplace, “Main Funders”, in 2016. Yet what is particularly interesting here is that this would be the first sign of a bank directly implementing an in-house peer-to-peer lending operation. Why is this interesting? Because it makes a lot of sense, and it could herald a huge change in the way people see peer to peer lending. Plenty of banks, both big and small, are showing an increased appetite for lending across platforms in both the UK, US and Europe. Under German law, only banks can fund loans; to bypass this all existing P2P lending companies in Germany partner with a transaction bank which originates the loan and then sells the proceeds (repayments and interest) to the investors: a complex procedure that is hardly widespread. By building its own platform, Commerzbank would circumvent some of the legal hurdles and provide the tailored, modern and agile solution to SME borrowing that the banks in the UK can’t (or won’t) provide, whilst also offering investors and savers an increase on the miserable rates they are all too used to.

Commerzbank has Main Incubator as their fintech accelerator offering venture capital to start ups, so it is an area that they should know well and more importantly have a vested interest in. This may sound like bad news for smaller peer to peer lending platforms who may fear being muscled out. However, it is more likely a case of “imitation is the sincerest form of flattery”: established banks bring the wealth, history and stature that could help Peer to Peer Lending escape from the bubble of hot air that is “Fintech”. However, is this really P2P lending? We have a bank, a highly regulated entity, entering a market that isn’t so highly regulated, certainly in terms of capital requirements. One of the things that has driven the banks away from SME lending is the large amounts of capital they have to put aside for these loans. This is behind the drive towards Invoice Discounting, which requires less capital to be put aside. Commerzbank’s solution could be that their P2P requires less capital than ordinary SME lending. There’s also the question as to whether Commerzbank, and other German banks, have made sufficient provision for the bad lending of the past. Is this a case of smoke and mirrors in the form of moving things around the balance sheet?

What is certain is that banks’ enthusiasm for P2P lending would produce solid, mutually beneficial relationships that can help SMEs and savers alike. Yes, there will inevitably be teething problems as the banks adapt to the fleet-footed world of P2P lending and the P2P lenders adapt their models to fit the strict regulatory processes of the banks. But Commerzbank’s embryonic P2P marketplace could be the trailblazer that sets the way for future banking… if it exists at all.

Disruptive Fintech, the FSCS and the World Economic Forum: busting some Peer to Peer Lending myths

Author
Angus Dent
Date

Barely a day goes by without some media coverage on the Peer to Peer Lending sector. The good news is that knowledge of the sector continues to grow, to such an extent that the standard sporadic “What is Crowdlending” articles indicative of a nascent sector are being replaced by up to date reporting of relevant industry news. Coupled with increased coverage in mainstream print and digital media has come an increase in independent industry reports. This year has seen (to name only a few) Citi’s “Digital Disruption” report, KPMG’s “Pulse of Fintech” and the annual Nesta Alternative Finance Guide, all using statistical data to shed light on the trends and outlook for peer to peer lending.

However, the news concerning the application of the Financial Services Compensation Scheme (FSCS) to peer-to-peer lenders is an example of a grey area that can emerge from misleading reporting. The FT Adviser article by Laura Miller published on 18.4.16 and titled “FSCS reveals how it will consider P2P claims” gives an accurate representation of what the FSCS has said in its report, but fails to deduce the significance (if any) behind a potential ruling. The FSCS was brought in to protect the savers who put their money with banks, who in turn would lend out the money without the discretion of those savers. Peer to peer lending gives individuals the chance to choose to whom their money is lent, on what terms and rates, and how much. They know the risks and mitigate these risks accordingly by lending to many projects, and even across many platforms. Now for a platform such as RateSetter, which chooses where the money is dispersed, the news that the FSCS will cover up £50,000 of defaults may come as good news, although their provision fund covers this anyway. There is also an issue with the wording- the FSCS will pay out only if “bad advice” is deemed to have been given. I don’t need to tell you why such woolly language is wholly unsuitable for financial compensation schemes. The FSCS was set up to apply for the banks and it should stay that way- instead of massaging an unsuitable solution to fit peer to peer lending, another form of protection could be made available to lenders over P2P platforms. The less said about FT Adviser’s choice of interviewee, the better- another case of an IFA dinosaur using scaremongering tactics. He chooses to neglect the fact that P2P platforms’ due diligence on potential borrowers is as thorough as the banks- ArchOver even has the benefit of a second opinion from the credit insurers.

Which leads me onto the World Economic Forum report written in conjunction with Oliver Wyman. The report warns that consumers could face big losses from peer to peer lenders; “even if alternative sources of credit are monitored appropriately, many actually shift risk to the end consumer – which has the potential for sizeable losses to be directly incurred by average investors who may not understand the product or its associated risks.” The FCA regulation that will come into place for peer to peer lenders should help dispel some of these fears. Investors already are well aware of any risks involved in lending over platforms, as there are risk warnings at every stage of the process. And the FCA will do more to ensure that investors need to be HNWI or educated investors to invest with large single payments, despite in doing so slightly undermining the democratic processes of lending.

Peer to peer lending gives people a chance to throw off the shackles of the bank and escape from the miserable interest rates on offer, or paying the 1% management fees that wealth management charge for riskier investments into the likes of equity markets (for a poor return in the current climate). All this with the benefit of credit insurance, provision funds, the confidence in joining a crowd of institutions (family offices, schools, councils, banks etc.) and other individuals in lending to a business. And these individuals should not be patronised or considered naïve- the general demographic is very much aged 55+, ex-directors and professionals who are careful with their savings and conduct their own checks on who they are lending to. Yes, there has to be a certain amount of trust and research done on the peer to peer lender chosen- they do that as well.

And it isn’t just critical articles concerning alternative finance that are oft inaccurate- some of the “pro-Fintech” articles seem to be barking up the wrong tree as well. Take Matthew Lynn’s comments in the Telegraph this week, for instance. I share his enthusiasm for fintech’s potential, but it really isn’t about bashing the banks- as has been said many times before, banks and fintech platforms will work together in the future for the benefit of borrowers and lenders alike. Banks will continue to lend alongside individuals and smaller institutions on the ArchOver platform, at the same rates and same terms- it really is all about democracy. The banks will learn a lot from working with fintech, just as fintech can benefit from the wealth of experience and vast networks the banks have.

 

A response to Mark Tluszcz’s article published in the Financial Times: 4th April 2016

Author
Angus Dent
Date

On this blog, I have already discussed my issues with the word “Fintech”. The umbrella term just covers too many businesses in different sectors to justify the sweeping generalisations that tend to accompany it. A comparison close to home would be to tie in all the various forms of investment management and define them by the characteristics of the most aggressive hedge fund in the pack. Unfortunately, the hype surrounding “FinTech” means a fragile bubble is increasingly stretching across multiple sectors, and the possibility that one of them will blow up will mean the mess lands at the door of everybody else. There’s no doubt that such hype is irresponsible and can be misleading, and Mark Tluszcz’s article published in the Financial Times yesterday is an example of the misinformation peddled as a result.

Tluszcz works for a Luxembourg-based Venture Capital firm and was an early stage investor in Skype, a business whose growth, albeit in a virgin field, was absolutely staggering. Therefore, I find it extraordinary that he uses Skype as the benchmark to judge whether “Fintech” has had an equivalent breakthrough- there really aren’t many equivalents out there at all! Interestingly, he uses Amazon as his other example: let’s not forget that their unorthodox business model led many to believe that a 5-year old Amazon barely justified the hype surrounding it all, particularly when taking into account its lack of profit. Most FinTech platforms have been around for less time, certainly in the Peer-to-Peer Lending space that was born largely from the flames of the 2008/2009 financial crisis. And for the basis of my response, I will be focusing on P2P Lending, as Tluszcz suggests that is the area of Fintech that everybody needs to be most worried about…

fintech 2015
Courtesy of PitchBook

Firstly, anybody that suggests that P2P Lending carries more risk than equity crowdfunding and poses a threat akin to the subprime mortgage crisis clearly does not understand the fundamental principles about what P2P Lending is all about. From ArchOver’s perspective, we have yet to have a default on one of our loans and our lenders are comfortable that our “secured and insured” model provides them with robust security. Indeed, the whole Peer to Peer lending industry is leaps and bounds ahead of equity crowdfunding in that regard; just take a look at some of the provision funds on offer with providers such as RateSetter, where no investor has lost their money to date. The reason? We go through rigorous due diligence checks that involve monthly monitoring and client visits, not to mention the weight of the credit analysis independently provided by the Credit Insurance providers. Tluszcz suggests that the benchmark for success in our industry is purely “speed and volume”. That just isn’t the case: yes, it’s important to grow, but the businesses and HNWI that invest in, own or lend across P2P platforms just would not stand for such reckless abandon. Hampden Group, who back ArchOver, have a far more long term outlook than Mr Tluszcz seems to suggest, and the quality of our borrowers must reflect that.

Alluding to the subprime crisis, as Turner did last month in the FT, shows a lack of understanding as to the key mechanics behind the Crash: borrow short, lend long. Peer to peer loans are matched, with investors lending money to borrowers on fixed terms. Investors/lenders are fully aware of the risks involved with lending, and if there was another economic apocalypse such as in 2009, it would be some of those investments they might lose; there certainly would not be an unfair bail out by the taxpayers to atone for the mistakes of greedy bankers. And to even mention Lonon’s Fintech “scene” in the same breath as the enormous $7.6 billion Ponzi scheme ran by China’s Ezubao shows enormous disrespect, firstly to the UK’s financial regulatory bodies who are in the process of regulating the P2P Lending industry, and secondly to the Government who have introduced the Innovative Finance Isa to help investors benefit from lending directly to UK SMEs. Greater regulation is on the way; it is hardly the fault of the Peer to Peer Lenders who are waiting patiently for the FCA to finish what is an understandably long and arduous process.

It seems to me that at the heart of Tluszcz’s disdain for P2P Lending is what he perceives as a lack of true innovation. It isn’t “different” enough, so it is merely a “mirage” that isn’t worth the capital invested. He doesn’t take into account the service provided for lenders, who wish for an increase on the measly interest offered by the banks but without having to dip into the risky and complicated world of stocks and shares. And he certainly doesn’t acknowledge the reality that the banks haven’t got the drive to facilitate lending to UK small businesses: the middle office bank manager has been axed, and Basel III means that money previously available for lending must now be held in reserve. The result? Costly, inflexible, lengthy, process-laden finance that just cannot keep up with the range of options provided by specialist SME alternative finance providers. And as SMEs drive the UK economy, the fallout is far-reaching. The banks understand, and are starting to come round to the idea of working together: already banks lend money from their balance sheets across platforms, joining other institutional lenders such as family offices, schools and councils in doing so. Criticism of Fintech will grow in tandem with unnecessary hype; however, in the meantime, Fintech will continue to innovate alongside the traditional institutions.

 

Banks see that the future of lending to SMEs is Alternative

Author
Angus Dent
Date

The Bank of England revealed last week that lending to SME’s had dropped in the final three months of 2015 to £599 billion, down from £755 billion last September. Tradition dictates that businesses do not tend to borrow money around Christmas, and those that try are viewed as desperate. Yet these are big numbers: the £156 billion difference from Q3 to Q4 is over 31 times the £4.94 billion all-time figure Nesta estimations that P2P Lenders had facilitated for SMEs. The fact of the matter is that the banks aren’t lending to up and coming businesses that drive the economy, and an increasingly large vacuum is emerging.

The government, keen to plug this gap, had put the “Funding for Lending” scheme in place, in which the banks are offered cheap loans from the Bank of England that are aimed to reach small businesses. Clearly the scheme isn’t working: the Bank of England’s data for the Q4 of 2015 revealed that £6.3 billion (an increase of 262% on the previous quarter) had been borrowed by the bank in the same period. Unless that is going to filter through to all the SME’s in Q1 2016, where is that money going?

The emergence of challenger banks such as Aldermore, Shawbrook and Metro Bank has seen the big banks distance themselves further from SMEs. Aldermore announced that they’ve lent £6.1 billion in 2015, making them the third largest lender on the Funding for Lending scheme. Similarly Shawbrook’s loan book grew 44% to £3.36 billion in 2015 (to put that into perspective, that’s more than the entire P2P Lending industry managed in 2015). These figures are still just a drop in the ocean, however, and it is still very much a case of “if” not “when” UK SMEs are receiving the kind of funding that can help them drive GDP in the near future. In the long term, however, it will be alternative finance that steps in alongside the banks, providing a stable working relationship between the two is maintained.

The banks are already starting to turn to alternative finance platforms who are keen to facilitate funding to both consumers UK SMEs. Funding Circle, for instance, receive referrals from RBS and Sanatander and back in May, Zopa and Metro Bank announced a deal whereby the bank would lend money across their platform to consumers. The trend will continue but the traditionally clunky banking processes are reflected in building the working relationships: banks like to take their time and tend to cherry pick. It is no surprise that only the two bigger players in the UK market have formal partnerships. The emergence of so many Peer to Peer lending platforms, though, specialising in such diverse and niche products, has meant they simply can’t keep up. And if they can’t beat them, they will start to join them in swathes.

Zopa CEO Giles Andrews has said in the past that they don’t allow any institutions to do their own credit analysis on those customers, something that seems unbelievable, given the depth the banks go into even just to set the relationship up in the first place. Furthermore, it’s not as if Zopa can stop anybody carrying out their own credit analysis, especially one of their potentially biggest institutional lenders. But his attitude in general is right: if the banks want to lend to consumers and businesses through alternative finance providers they should be treated the same as all other lenders. It is a democratic process after all.

The lull in funding for SMEs since the credit crunch of 2009 continues, but not for long. Alternative Finance is here to help, and if the banks want a piece of the action they will have to do so on the same terms as everybody else.