Tag: fintech

Finance from alternative sources to the tune of £12.04 billion can help SMEs drive economic growth

Author
Angus Dent
Date

An old adage that features regularly on this blog is that “SMEs are the lifeblood of the UK economy” and provide the primary driving force for growth. The capacity for SMEs to outperform the market is a factor, but a host of global permutations aligned to the plunging oil price and the Chinese equity “realignment” have curtailed certain growth expectations in the UK despite our healthy performance relative to the rest of Europe.

So, in light of Mark Carney’s recent revelation that the Bank of England had cut its growth forecasts for 2016 and 2017 from 2.5% to 2.2% and 2.6% to 2.3% respectively, here is a theoretical look at whether SMEs could make up the 0.3% difference, financed only by sources of alternative finance. The £5.5 billion of finance facilitated by P2P Lenders and Crowdfunders to date (2013-2015) is just a drop in the ocean, despite last week’s comments from a bewildered and misguided Adair Turner trying to convince the public that “The losses on P2P lending that will emerge within the next five to 10 years will make the bankers look like absolute lending geniuses …..”. Let’s just put things into perspective; Adair Turner failed to predict the sub-prime mortgage crisis when he was Vice-Chairman of Merrill Lynch between 2000 and 2006. By 2008, the bank had lost $51.8billion from mortgage backed securities. I won’t be asking him to read my palm any time soon.

A quick outline of the sums: the UK’s GDP was measured at $2.9889 trillion in 2014. It grew by 2.4% in 2015 (according to the World Bank). The 0.3% downward swing in Carney’s growth projections for 2016 (2.5% down to 2.2%) is worth around $10.1 billion, which converted to GBP is around £7.04 billion. 2014 saw growth of 161% for the alternative finance sector; The Telegraph was quick to point out that growth had “slumped” to 84% for 2015, although in such a young industry there will be skewed statistics early on. Nesta’s 2015 UK Alternative Finance Industry report has projected between 55% and 60% growth for 2016; a 57.5% growth rate will see the industry lend £5.04 billion. This figure will have to be included in my 2016 GDP projections, meaning the alternative finance sector in 2016 would have to grow 337.5% to £12.08 billion from £3.2 billion 2015 to make up the 0.3% of GDP lost in Carney’s latest finger in the wind. And that is assuming that all of the other facets that make up GDP remain true to prediction. See the graphic below for an illustration of the figures:

updated graph

So, what can we take from all this? Firstly, whilst the figures aren’t exactly astronomical, nobody in their right mind would guarantee such a large jump in the space of a year. But crucially, the potential is there for alternative finance to really make a difference in driving GDP growth through helping SMEs, the lifeblood of the economy. As banks and platforms start to work together, we will see the industry continue to grow at steady rates, and the money lent to SMEs help drive economic growth. The industry should at least be aiming for that extra £7 billion for 2016; with a push anything is possible.

In defence of Fintech

Author
Angus Dent
Date

Head of Ernst & Young’s FinTech department, Imran Gulamhuseinwala, recently asked if anyone was actually using FinTech. His question, whilst flippant in tone, raises a couple of issues with both the conceptual definition and the uncertain future of “FinTech”. The word is a rather nasty portmanteau that covers a broad spectrum of businesses that have attracted around $12 billion worth of investment in the last year alone, ranging from crowdlending platforms to payment software and digital currencies, and then the rest. Advocates of the virtues of FinTech bristle at any suggestion of a repeat of the “Dot-Com” bubble, yet you can’t ignore the sense of déjà vu as every man and his dog tries to get a piece of the action, with valuations skyrocketing as a result. Saying that, the drop in venture capital funding for technology businesses at the end of 2015 looks to continue into 2016, although that will be in “number of transactions” rather than a drop in dollars pledged. Companies and sectors that have ridden the FinTech boom may be first to distance and reinvent themselves should the bubble burst. Efficacy is the name of the game for FinTech, and yet there are worries that software is being developed without a clear sight of what it will actually be used for. That will always be the case with technology, and it isn’t to say that there are plenty of instances where financial technology is working very well. It is therefore ludicrous to suggest nobody is actually using it in one form or another.

It is true that reviews of FinTech tend to come from the providers extolling the virtues of the technology, rather than from actual users. However, accountancy firm Ernst & Young produced a survey revealing that 14.3% of UK “digitally active customers” are using FinTech; one in seven isn’t a bad ratio for a nascent industry and leaves room for more involvement, which will continue the growth. Whilst there is certainly a supply glut, the payments sector will trim itself down through a simple process of “survival of the fittest”, and in the peer-to-peer lending and crowdfunding spaces there will have to be a more painful process of consolidation. “Democratisation” away from the banks will be through competitors with brands stronger than their balance sheets: more Funding Circle’s and Ratesetter’s, in other words. Standard & Poor’s December report on “The Future of Banking: How FinTech Could Disrupt Bank Ratings” alludes to as much; the big banks will swallow up the smaller fry by saying that “acquisitions will largely be limited to small players, especially in light of strengthened regulatory capital requirements for banks, and gaps in valuation metrics between FinTech players and banks”.

Kadhim Shubber’s response to the S&P report for FTAlphaville raises some good points, but I take issue with the general tone of the article which seems to belittle financial technology as a series of potholes that littler the smooth tarmacked autobahn of banking brilliance. I agree that “the largely unregulated nature of FinTech at some point is likely to come back to bite”; however he doesn’t mention the willingness of FinTech businesses to be regulated. FCA regulation may come sooner rather than later in Peer to Peer Lending, something that the naysayers have also taken umbrage with, arguing that the FCA has forgone its primary role as the strictest of regulators in order to help shift business away from the banks; he may have a point there. Yet FinTech, for Shubber, is a just a nifty opportunity for savvy entrepreneurs to get rich before the banks step in to clean up the competition. FinTech companies wear “big, frightening costumes in an attempt to scare established players into taking you out, at a hefty premium of course.” He cynically portrays the partnership between OnDeck and JP Morgan as an example of a FinTech company “eager to offer up their technologies to large banks who are willing to give them the credibility of a partnership”, instead of a bank seeking to evolve with the times and in doing so putting itself ahead of many of its peers. Read this article published by Reuters for a fairer view of the JP Morgan/On Deck deal than Mr Shubber provides us with. Nobody in their right mind believes the waffle the FinTech will “kill off” the banks; they are already working alongside each other or in partnership and long may it continue.

Rubbish
It is lazy, inaccurate marketing tripe like this that gives people the wrong ideas: Banks and FinTech are already working together and will continue to do so

 

AIM, Peer-to-Peer Lending and the Innovative Finance ISA: predicting the Crowd’s next move

Author
Angus Dent
Date

I will start this blog with a question: what can the Government learn from the Alternative Investment Market’s evolution over the last twenty years when it comes to finalising the regulation for the incoming Innovative Finance Isa?

Let’s start by having a look at the Alternative Investment Market in its current state. AIM is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital. It has helped over 3600 companies access finance and is the biggest market of its type in the world.

However, the demise of private client brokers has meant that the Crowd no longer can easily access Alternative Investment Market-listed companies. In their place, sophisticated investors have moved in, with IPO’s and listings funded by institutions. Subsequently, it has become a more established market containing companies that have outgrown the index. AIM can no longer provide private clients with an accessible route to investing in innovative SMEs that have the potential to grow.

However, Peer-to-Peer finance has afforded the Crowd another chance to invest their money in new ways, cutting out the Private Client Brokers of old. GLI Finance’s unsuccessful capital raise is a case in point: the Crowd has the power to do what it wants without the need of third party interference. The good news keeps on coming: the Innovative Finance ISA will bring even more individual wealth to the table and afford tax breaks on earnings made through Crowdlending.

And that is why the recent news limiting users of the new Innovative Finance ISA to only one platform is a hammer blow for both parties involved. Whilst it is possible to build a diversified investment portfolio on a single platform, part of the allure of Peer-to-Peer Lending has been the ability to choose to lend money to a range of companies across multiple platforms. At ArchOver, and I am sure this is the case at other platforms, we interested to find lenders who have lent over other platforms, and are therefore both wise to the general processes and are aware of the benefits and risks of lending money to UK SMEs. Taking away this variety will inhibit growth within the industry, and more importantly restrict the flow of private money to SMEs looking for alternative forms of low cost finance. The investor becomes exposed to more risk by lending to a P2P lender who could have overexposure to a specific market (Landbay and property being an obvious example), or uses a particular financial tool that only works for specific businesses (Market Invoice and invoice finance, for instance). And that’s not even considering the apocalypse if a P2P Lender actually failed.

The Government’s commitment to Peer to Peer Lending shouldn’t be questioned: the Isa is a huge vote of confidence for what is still a fledgling industry, and the regulation that has been introduced is certainly well-intentioned. But ensuring that investors have a greater choice when lending will encourage price competition and innovation and allow the small platforms to grow. There is a willingness on the Government’s behalf to continue to alter the regulation, which is a positive; obviously the sooner the better for platforms so as the technical side of things runs like clockwork come April.

The evolution of the Alternative Investment Market (whilst not necessarily a bad thing) should be seen as a cautionary tale for Alternative Finance. Peer-to-Peer Lending in particular is already in a state catharsis. Indeed, the reality that Goldman Sachs, the behemoth synonymous with banking opulence, has a presence in the Peer-to-Peer Lending sector in the US is evidence that history already may well be repeating itself. It is important for platforms to continue to welcome the Crowd alongside, and on the same terms as, the institutions, maintaining the democracy that saw alternative finance really take off in the first place.

Demystifying Peer to Peer Lending

Author
Angus Dent
Date

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Following on from the two posts that explain equity and reward based crowdfunding, we move on to debt-based crowdlending, also known as Peer to Peer (P2P) lending, sometimes Market Place lending and in FCA speak as debt based investing. For brevity I’ll use P2P, although this is somewhat confusing as some of the borrowers are businesses, or P2B. A newcomer to alternative finance, whether it be through conversation or news, is more likely to have heard of crowdfunding, largely due to press interest in that specific area of FinTech and in particular the innovative crowd raises that businesses and individuals have employed. Yet in the UK, the P2P lending industry is worth just under £4.5 billion, compared to £132.5 million cumulative total raised through crowdfunding. Borrowers are attracted by a less clunky process that is competitively priced and easy to use. The vast range of alternative finance solutions available means that both businesses and consumers can find a loan tailored to their needs. Lenders, meanwhile, are drawn to the sweet spot of statistically lower risk investment at interest rates that go beyond the bounds of anything offered by a bank.

The P2P lending sphere can be broadly broken down into three categories: P2P consumer loans, P2P business loans and invoice financing. The biggest player in the consumer loans market is Zopa, who are the oldest and arguably the biggest alternative finance company in the world. They have lent over £1 billion to consumers at an average loan size of £7,500, offering investors a return of 5%. Every consumer loans company is only as good as their borrowers; Zopa have reported 0.04% actual defaults so far this year, a figure which is made even lower by the Zopa Safeguard Trust which helps pay-out in case of bad debts. The fund is taken from the fee that each borrower pays when their loan is approved. Another of the major P2P consumer lenders, RateSetter, have their own provision fund to help bail out lenders to borrowers who have defaulted. RateSetter operate a platform that allows lenders and borrowers to pair up through a process of bidding, over four set term lengths. The model has proved very popular with both individuals who appreciate the transparency of the loan structure and lenders enjoy decent interest rates. RateSetter also offer business loans in the region of £25k to £1 million.

demist

The business lending market is diverse for both investors and borrowers; loan size, terms, length, funding and structure vary from platform to platform. Just dipping a toe into the water in terms of range and variety, you can facilitate finance for property loans through Assetz Capital, Wellesley have their own listed bond that offer lenders 4.75% per annum over three years or 5.5% per annum over five, Folk to Folk specialise in regional lending in the South-West, Landbay secure lenders’ money against residential mortgages, MarketInvoice and Platform Black allow investors to access funds in outstanding invoices and factoring. The list goes one: the Best place to explore the full array of P2P operators and the services they provide is on the AltFi news website. The banks do not appear to have the will or resources to compete, despite their own admission that most of the platforms are supplying an updated version of services that they have provided for years.

Mitigate the risks and P2P Lending is a fantastic way to save wisely whilst helping SMEs and consumers drive UK economic growth. The incoming Alternative Finance ISA will bring in a whole host of new lenders; it is crucial that the industry is properly regulated and that platforms adapt sufficiently to ensure that the optimism continues.