Tag: investment

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.

 

Bankers’ Conduct: Yet another reason why SMEs and savers are avoiding the Banks

Author
Angus Dent
Date

Potential misconduct by bankers has been included in the banks’ compulsory stress checks carried out by the European Banking Authority. Good news? Well, partly. Their hand has been forced by the stark reality that banks see litigation costs as a result of foul play by their employees as part and parcel of operating cost. This isn’t exactly a morsel, either; poor conduct accounts for 7.5% of the average bank’s operating cost, according to The Group of Thirty, an international body of financiers and academics charged with examining the consequences of private and public sector issues.

Holding back capital to account for misconduct is not the same as trying to stamp out misconduct. The rather feeble ruling lacks the teeth to punish the banks for continuing the attitude of short-termism that provided the stimulus for the financial crisis in 2008: bankers can still get away with borrowing short-term, lending long-term and apply the leverage by borrowing from each other. The bonus culture that was so vehemently criticised is still prevalent. Those who wished for prison sentences, confiscation of funds and other sanctions for the culprits of the financial crisis won’t be celebrating this new ruling. The cost of covering for this misconduct is likely to be keenly felt by ordinary savers and SMEs who find access to finance increasingly difficult to access.

The “conduct” ruling comes in light of the new stress tests that global financial regulators hope will force banks to hold sufficient capital in their reserves to absorb an economic downturn. The figure bandied around in the US press is a staggering $1.19 trillion of debt that can be written off when the banks fail. This will take away billions of pounds, dollars and euros, all of which could be lent out through directly matching lenders with borrowers. The fall guys? UK SMEs with restricted access to finance, and savers stuck with the miserable gruel of savings accounts and ISAs. The Solution? P2P Lending matches up lenders and borrowers, cuts out the banks and middle men and allows SMEs to benefit from the wisdom of a crowd. Ultimately it is a huge fillip for the global economy: surely the band of global regulators should spend less time trying to shore up a broken model that puts social cohesion and economic solidity at risk, and more time focussing on producing fully regulated P2P lending platforms.

The momentum is already shifting away from the banks: including the conduct of bankers in the stress tests is not the answer for the regulatory authorities. Investing in P2P will ultimately benefit SMEs, the lifeblood of any developed economy, and savers who can earn decent interest on their savings by matching directly with borrowers through secure, regulated platforms.

Does the UK’s low inflation present an opportunity for UK SMEs?

Author
Angus Dent
Date

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Despite UK interest rates plumbing historic lows, inflation fell negative this April for the first time since 1960. This is plainly an unusual occurrence, particularly in the face of such expansionary monetary policy, and has led some public figures to fret that it could be a “canary in the mine” of the UK recovery; a symptom of some underlying economic malaise. In truth though this gloomy outlook seems largely unwarranted, and Mark Carney has forecast that this deflationary blip will be forgotten by the end of year when inflation, he believes, will sit above 1%. Indeed, he has already been partially vindicated by news that inflation is now positive again – albeit at just 0.1%.

The Bank of England forecast should sooth fears of a Japanese-style deflationary spiral then. But this near-deflationary environment will likely remain a reality for the next few months. So will this period pose opportunities or threats to SMEs? Unsurprisingly, the answer is not entirely clear-cut.

inlfation

A low inflation environment certainly can bring many benefits to businesses, such as allowing them to capitalise on static costs to make large purchases at favourable prices. In fact, a recent poll published in Economia found that just under one third of SMEs plan to increase capital investment in the next 12 months, so it seems many small business directors have already acknowledged this. Most businesses will also benefit from energy costs remaining constrained, whilst those in the manufacturing sector specifically will profit from steady input costs. On the consumer side, the brief drop into deflation may act as a shot in the arm for business, with people’s increased purchasing power stimulating spending. And speaking more generally, the next few months will provide SMEs with a chance to reflect and streamline their expenditure in preparation for the point when inflation appears again and margins are squeezed.

So far, so good then. But at only 0.1% inflation a brief slip back into deflation remains a possibility, and this could be problematic. Most worryingly, a second dip could pique the thrifty instincts of consumers, causing individuals and businesses to postpone purchases in anticipation of lower prices rather than cashing in on good prices now. Whilst current forecasts make this seem unlikely, the message for SMEs is clear: take advantage whilst you can.