Tag: lending

The Sharing Economy – Driven by Peer Review and Trust

Author
Angus Dent
Date

A couple of weeks ago, while most of us were distracted, PWC posted ‘The Sharing Economy’ report. The main point taken from the sharing economy piece would be ‘never settle for stable’. The sharing economy explains that businesses cannot be taken for granted in a fast-changing world, todays changes can be changed again by tomorrow and so businesses cannot stand still. To maximise, companies must embrace change and continuously develop in order to maximise consumer benefit and competitive advantage.

The key points I’d take from the Sharing Economy piece:

–          Peer review is far and away the main driver of trust, 92% said they valued peer review above all other forms of marketing and advertising.

–          Without trust services aren’t used much, 89% said that ‘trust’ was a major factor.

–          A mind shift has begun in business from offering a product, an item, and hoping it will sell to building relationships and providing service and thereby creating a greater perceived value.

–          Embrace change/disruption in industry. We should always be looking for new ways, never standing still. Always be thinking about your competitors and how they may be changing.

sharing economy

The suggestion of the report is that only companies willing to rise to the challenges and expand are ‘poised to survive – and the potential ahead will be constrained only by the imagination of decision makers’. As companies utilise the sharing economy and create partnerships and collaboration they will find more ways to profit and aid their businesses – while helping the community and its industry sector to grow and sustain success.

Of course there’s nothing new in suggesting that only those who adapt will survive, Charles Darwin being the master of this theory – “It is not the strongest or the most intelligent who will survive but those who can best manage change.”

The crowdlending sector was born from an inability of the banks (and other providers of finance, banks becoming the collective noun for a failing sector) to adapt to changed circumstances, their failure was dramatic, public and adversely affected all of us. The lesson is clear we must keep adapting not to go the way of the banks that may yet follow the dodo.

Was it acceptable in the 80’s?

Author
Angus Dent
Date

So the results are in, we have stood up as a nation to be counted and the surprise result is that rose tinted nostalgia seems to have taken us in a direction none expected – back to the golden era of the 80’s. There’s the funny side of course, big hair, even bigger shoulder pads and at the end of the decade enormous mobile phones. Of course it’s the bleaker side that’s worrisome; British soldiers on the streets of the UK, 3m+ unemployed, a surrogate civil war with the miners……That’s said, the effect that had on asset prices was only beneficial to the humble man on the street  and you could get married, buy a house and an Aston Martin, as a poorly paid Chartered Accountant ( I know I did ). Pity about all that equity that might go to waste and for those who came along later and paid higher prices.

 

brexit flags

 

What we didn’t have in the 1980s, or at anytime until this decade and really only the last couple of years in anything approaching a measurable volume was an AltFi sector. A real alternative provider of finance that may just keep the economy going through this particular period of uncertainty and beyond.

 

Substantially AltFi was born of the last financial crisis; a hunger for yield from those with cash and a need / want to borrow from people and businesses. Some of us saw this opportunity and established businesses that arch over from the lenders to the borrowers. The problem is that the sector while growing very quickly in macro economic terms remains small when compared with the banks. Mind you much micro economic theory, some of it written and tried in the 1980s, suggests that the biggest effect can be had on the margin, deploying relatively small amounts of money.

 

What might this mean; the banks continue to carry the base load in value terms and AltFi provides finance alongside. The banks continue to lend to the larger corporates and AltFi takes more of the personal lending and the lending to small and medium sized enterprises. This of course is what has been happening over the last seven or eight years. I expect that our sector, the AltFi sector has just received a boost. Crisis makes us all more cautious, makes us retreat to where we feel most comfortable. For the banks that’s corporate lending for AltFi its SMEs and personal lending. So we’ll both be playing to our strengths, working in the areas we know like and understand.

 

One other thing makes me more optimistic; increasingly AltFi and the banks are working together. We’ve moved from a position of say three years ago, when we, metaphorically, spat at each other to one today where we’ve realised that we provide different services and should therefore work together. Working together we’ll get the UK economy through this crisis, maybe without it even becoming a crisis, and forge a larger more robust AltFi sector in the process.

 

Media and finance industry need to work together to show that P2P comes in more than one flavour

Author
Angus Dent
Date

Once again, we find mainstream media treating the diverse alternative finance sector as one homogenous group and misleading or alarming investors in the process.

This time, we have Ruth Lythe of the Daily Mail launching with a headline on 7 June, “MPs attack risky online firms offering 7% returns from lending savers’ cash to strangers to buy cars and even phones”.

The article refers to Zopa’s recent announcement of its point-of-sale partnership with Unshackled.com.

In essence, the article can be summarised in one of the lines within it: ‘P2P loans are risky’.  This is written without providing any context for the reader, which is both naïve and does a great disservice to existing and potential investors.

  • A comment on the losses experienced to date by peer-to-peer investors would have been good (they are below what the banks accept as ‘normal’ and are published by the largest platforms in the smallest detail for all to see, which is something the banks never do).
  • A comment on the variety of models available in P2P would have been helpful too, rather than bracket everything under one, doom-laden label.

Of course a judgement has to be made when investing in peer-to-peer. Judgement is required in most forms of investment, but what really matters and needs explaining when making sweeping assessments of this nature is how the likelihood of loss is mitigated and managed, which differs from platform to platform.

In the case of Archover, all business loans have to pass the scrutiny of not only our own lending specialists, but also those of leading credit insurers, who provide cover on the underlying asset that we use as security. If we were even tempted to lower our standards we would not be allowed to do so. I know of no bank that can provide that same level of comfort.

Daily Mail Old

In other parts of the market, RateSetter and others have provision funds which cover all losses. This means that, to date, nobody has ever lost money lending over their platforms. The banks rely on the good old UK tax payer for such a guarantee.

I think I speak for the entire industry here when I say the FCA is doing an excellent job in making sure investors are as informed as possible about the nature of their investments.

Andrew Tyrie’s letter to the FCA on behalf of the Treasury Select Committee is perfectly reasonable and I have no doubt the Regulator will provide a full and well considered response in good time. This will no doubt include some of the facts, such as net returns for investors after default being in the range of 5%-7% since the inception of the industry, the never before seen level of transparency in financial services and the resilience of the sector to economic shocks – even against the most stringent scenario laid out by the Prudential Regulation Authority (PRA).

The Regulator will certainly have our full backing if even more improvements can be made to help investors.

As an industry, we do not criticise the Daily Mail or the media at large for advising caution, but we do implore it to examine the facts and make a more rounded assessment on behalf of its readers.