Tag: p2p lending

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.

 

Why Late Payments are an SME’s worst nightmare

Author
Angus Dent
Date

The Market Invoice presentation on late payment brought back into focus the traditional scourge of the SME. Whilst I think that invoice finance and factoring are definitely not the way to finance a business struggling with late payment, the presentation certainly made interesting viewing.

I thought I would add a few points to prove just how damaging late payment can be for SMEs, but first it is worth stressing that a term loan from an alternative finance provider with a light touch approach is the best solution for an SME suffering with late payment from their debtors. A term loan through an alternative finance provider can help SMEs facilitate finance quickly, without hassle and with tailored solutions. The banks’ turnaround time often takes one year plus; through AltFi borrowers can receive the funds within a couple of months. As the banks increasingly funnel more business to AltFi providers, the industry is slowly gaining the respect it deserves. However, this should not extend to invoice financing. It is the crack cocaine of finance, incredibly difficult to shirk and once the cycle is entrenched an SME will find it very hard to escape from.

Back to late payment…

Small and medium-sized enterprises (SMEs) were owed £26.8bn as of July according to Bacs. In attempting to recover this debt, these businesses are spending £10.8bn a year. This downward spiral causes many SMEs to go into panic mode, fuelled by the fear of losing reputation and offending customers when chasing payment. And as approximately 99% of businesses nationwide fall into the category of SMEs, this is a major drag on the economy.

According to a Zurich poll one in five SMEs reported that they are owed more than £25,000, one in 10 more than £100,00 and more than 43,000 SMEs are owed more than £1 million. The affect for an SME? Expansion in terms of cash flow and hiring staff is inhibited and most importantly up to 130 hours of valuable time is wasted per year chasing invoices which could be used effectively elsewhere.

Existing legislation is supposed to provide SMEs with assistance; late payments can be recouped according to the Late Payment of Commercial Debts Act (1998). From an outside perspective this may seem like the answer to an SME’s problems; however 58% of SMEs say that they will not claim compensation for any late payment even though they are legally entitled to this. Once again the fears of the losing business and ruining relationships far outweigh the immediate compensation in terms of cash. The solution? Everybody pay on time – fat chance. The tonic to sooth the pain can come in the form of alternative finance providers such as peer-to-peer lenders who understand the needs of SMEs and can provide practical solutions to real problems.

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.