Tag: lending

The Autumn Statement: the Upshot for Alternative Finance

Author
Angus Dent
Date

The Chancellor’s Autumn Statement has come and gone without much focus on the alternative finance sector. Back in July, the Innovative Finance ISA (IFISA) was propositioned amidst much fanfare from P2P lending platform CEOs keen to see investors receive encouragement to lend money from the government. Yet the March budget was a little light on the details of the ISA’s mechanics, and very little has been revealed in Osbourne’s Autumn Statement. Here is the subparagraph concerning the IFISA in full:

“The list of qualifying investments for the new Innovative Finance ISA will be extended in Autumn 2016 to include debt securities offered via crowdfunding platforms. The government will continue to explore the case for extending the list to include equity crowdfunding”

So, still no place for equity crowdfunding: this should not change before April 2016 and it is unlikely to be a feature of the ISA whilst the government continues to fear that investors are ignorant of the differences between debt- and equity- based lending. Debt-based securities are included, however; good news for Wellesley and UK Bond Network particularly. The good news for P2P lenders to SMEs comes with the declaration that Credit Reference Agencies (CRAs), such as Experian, will have to provide equal access to all finance providers. This will ensure that P2P lenders are afforded the same privileges as banks and will go some way to ensuring investors can feel confident in the SMEs they are lending to. Competition in the market place can only be healthy for the UK economy.

Coupled with the budget’s release came the outcome of the Bank of England’s stress tests, that saw Standard Chartered and RBS labelled the weakest lenders. The general consensus seems to be that the banks have learnt from their mistakes, yet the reality that two of the top seven banks in the UK are deemed not to have enough capital strength is still a stark warning that the UK banking system is not as resilient as it needs to be. Yes, nobody failed the stress tests, however all the banks have still been urged to hold back more capital despite evidence that they are handling their risk more carefully. The upshot for alternative finance providers? The government is trying to level out the playing field, whilst the banks still face restrictions in the wake of a financial crisis that they caused. The government clearly want the banks to remain cautious and drive economic growth from a wider pool of alternative sources. The ISA won’t bring in a flood of investors in the first year necessarily, but in five years’ time expect to see SMEs benefitting from the wisdom of a bigger and better educated crowd.

Crowdfunding the Gaming Industry

Author
Angus Dent
Date

An article in the Financial Times today highlighted the difficulty that the UK’s creative industry has had in securing funding from banks since the government started to advocate investment into the tech start-ups. The article specifically makes reference to the government-backed British Business Banks’s investment in a private equity fund worth £40 million that focuses on nascent media and gaming companies. Britain certainly can boast a range of success stories; King Entertainment, manufacturer of the omnipresent (and entirely vacuous, in my view) Candy Crush, was sold for $5.9 billion.

British Business Bank

The majority of gaming companies however, fall into the SME bracket, and won’t suitable for the PE funds: the aforementioned fund run by Edge Investments will only back between 12 and 15 companies. Moreover, they have fallen victim to the bank’s decision to withdraw funding to small businesses; software companies are particularly vulnerable to “computer-says-no”-ism of the banks. Some of the biggest success stories of the past are subsidiaries of much bigger companies but continue to operate under their own brand name. For instance, Sports Interactive Ltd, the creative studio behind the Football Manager games, were able to benefit from the support of Japanese giant Sega. The company was initially loss making, however the profits have steadily increased to over £3 million last year.

Sports Interactive_0

Yet most games manufacturers are run by enthusiasts who aren’t happy to just sign over all of the equity in their business to a big corporate. Reward-based crowdfunding has been a fantastic way to exploit the willingness of fans to take a small portion of equity in a games manufacturer along with “tangible assets” such as a copy of the game, and the less tangible reward of increased standing within the game itself. The business is able to hold onto most of its own equity but can still receive funding. See my article on the success of Star Citizen for an example of the potency of gaming fans to drive a company’s growth projections through the roof. The article can be found here:  https://www.archover.com/demystifying-crowdfunding-part-1-donation-and-reward-based-crowdfunding/.

Yet there is every chance that a novel concept without an entrenched fan base could go unfunded. However, there is still the option of debt-based P2P lending if directors and major shareholders are unwilling to dilute their share in the company. Enthusiasts could invest in the business without the risk of just an equity stake, and established SMEs could continue to grow the business organically without the need to handover their brainchild to a corporate. Established companies with a debtor book to match, often funded by sponsors hoping to flog their product into the subconscious mind of the avid gamer, have consistent revenue streams from blue-chip sources. Sports Interactive, after all, had over £20 million worth of debtors in 2014, up from £16 million in 2013. These debtors were made up of retailers and sponsors keen to have their brand represented in the game. P2P lending could be the answer to the next generation of gaming companies looking to follow in their footsteps.

 

 

 

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.

Peer to Peer Lending Regulation: the benefit for SMEs

Author
Angus Dent
Date

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A recent article written by Dr Avinash Persaud of Intelligence Capital caught my eye this morning in which he discussed the major issue of financial regulation and the difficulties facing SMEs in trying to raise finance through the traditional lending avenues. Persaud is a well-qualified source of knowledge: a former governor of the London School of Economics, a former member of the UN Commission on Financial Reform and a visiting scholar in both the European Central Bank and the International Monetary Fund, as well as the Chairman and former employee of a range of private, public and investment banks. The article is written for an Indian digital newspaper, but it certainly is written from a global outlook. It can be found here:  http://www.livemint.com/Opinion/fQpaevJ8DX7KUpwBVdeXQK/Crowd-financing-is-not-banking.html

I have identified two important points from his article. Firstly, he is at pains to highlight the importance of facilitating finance to SMEs to drive economic growth, and he recognizes that banks cannot be expected to provide all of the finance. He recognizes that “a large part of the problem of financing development is not the absence of cash but an inability to mobilize it“. In my view, this is the result of the lending vacuum left in the wake of the Basel III rulings that ensure banks must have proportionately more capital in the bank when lending to small businesses than they would lending to more established businesses, tying up more of funds than banks would like. Dr Persaud recognizes the need to “use technology to match untraditional borrowers with untraditional lenders and provide opportunities for diversification and other forms of risk and information management.” Persaud fails to recognize that the bulk of the lending can come from institutions who will pledge alongside individuals on the same terms. Dynamic, flexible and secure Peer to Peer (P2P) crowdlending platforms that are properly regulated will fill the SME lending vacuum, facilitating finance from SMEs from a range of institutions and investors whose money would otherwise be unavailable to borrowers.

Dr Avinash Presaud
Dr Avinash Presaud

This leads me to the second main point: regulation. I think Dr Persaud is right to highlight the importance of differentiating lending platforms from traditional banks, a job that the regulators must do to ensure that prospective lenders know exactly what the risks are. The P2P industry itself wants FCA regulation for clarity as much as credibility. Regulation needs to be a long, drawn-out process to avoid simply bracketing it with banking regulation. Persaud reasons that “regulating crowd financing platforms as a bank and not an exchange would not only undermine the point of it, but would create systemic risks”. However, Persaud’s belief that P2P alternative finance platforms should drop “conventional” nomenclature is not necessarily the answer. I disagree with his statement that the banking terminology “Market Place lending” shouldn’t be used by alternative finance P2P lenders because that is exactly what is on offer to SMEs wishing to borrow money and individuals willing to lend.

In the words of Dr Persaud, “moving to the next level of social and economic development depends on these borrowers getting through”, which in turn depends on regulated Peer to Peer crowdlending platforms facilitating the finance from a range of savvy individual and institutional investors.