Institutional Investors are a welcome addition to any Crowd

Author

Date

4th March 201628th July 2020

Marc Shoffman’s recently published article on ThisisMoney.co.uk last week was a bit of mixed bag, from an Alternative Finance perspective. First and foremost, I salute his noble efforts to raise awareness for his father and others battling with Parkinson’s disease. He is raising finance for speech therapy through a social enterprise reward-based crowdfunding campaign through the Crowdfunder platform. The article itself focuses on the increased presence of institutional money in crowdfunding, with some muddled references to “peer to peer” thrown in. With a fairly mainstream readership, however, I felt that a response could be somewhat beneficial to clear up some of the more glaring errors in the article. As a starting point, any article on alternative finance that fails to clearly differentiate peer-to-peer lending from crowdfunding is counter-productive, especially for an uninitiated reader. The article raises some questions on where the alternative finance industry is heading, but he seems to have misunderstood the true nature of Crowds; his statement that “as the sector becomes more mainstream, it may also become less attractive” is a case in point. It isn’t really about a popularity contest: the wisdom of the crowd comes from a group of people making informed decisions, not a bunch of people throwing caution to the wind in the name of doing something a little bit different.

First, let’s dispel some myths and nip some clichés in the bud. To say that “[Alternative Finance] no longer has that jazzy alternative tag which in the long run could hit its popularity” is a belittlement of an industry that is in the process of becoming FCA regulated. The word “alternative” is used here in its purest sense as something that departs from or challenges traditional norms; alternative finance is not some hipster “Jazzy”-ness. In reference to the allusion to the FSCS compensation scheme, it isn’t really relevant to our industry; this article on AltFi will shed some light on a few of the peer to peer lending contingency funds and how platforms strive to protect investors. There is also, of course, the ArchOver “secured and insured” model as an exemplar as well.

It is important to emphasize that the institutions that lend over any platform are valued members of the crowd, and they lend on exactly the same terms as everybody else. That’s the alternative finance ethos, that’s where this movement began. It’s a process of democratisation and we mean that sincerely. The wisdom of the crowd is greatly boosted by the presence of institutions lending money to SMEs, or indeed buying equity. Individual investors can take a hell of a lot of comfort knowing that schools, county councils and family offices lend across the various platforms on the same terms and at the same rates as they get; it benefits all the parties involved. The banks and funds are coming around to accepting that. Those that don’t will sit on the side-lines and that’s fine too. The great thing about democracy is that you have a choice.

The point he makes about larger pledges and shutting out the little guy is a question of balance. Marc uses BrewDog as an example of a business that “value smaller investors”. Yet BrewDog is probably the prime example of how a business has taken advantage of unsuspecting crowdfunders by masquerading as anti-establishment whilst using good old-fashioned bankers’ tactics. Their crowdfunding should be for fans of their beer, not for people to invest their hard earned savings into. This article, again by AltFi, serves as a cautionary tale of what to look out for, using BrewDog as a case in point. On the one hand you want people to think about what they are doing and to take the time to understand what they are doing. On the other you want as many as possible taking part and benefitting. As you know ArchOver set the minimum pledge at £1k per project, which obviously I believe ensures that the balance is met. Of course, this won’t be appropriate for everybody, and that is why small lenders are looked after so well at the likes of RateSetter and Funding Circle.

A bigger, wiser, democratic crowd with the ability to invest over a range of platforms to spread their risk, and soon to enjoy the benefits of the Innovative Finance Isa? Now all of that does sound “jazzy” to me.

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

Author

Angus Dent

Date

19th February 201614th June 2016

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:

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 response to Scaremongering and book Promotions…

Author

Angus Dent

Date

11th February 201615th June 2016

Lord Turner certainly knows how to grab a headline. Speaking with all the authority of someone who knows a thing or two about disasters – he presided over one himself as the former head of the disastrous and now defunct Financial Services Authority (FSA) – he is now predicting that the P2P crowdlending market is destined to come to grief because of poor credit risk processes that are indigenous to the sector.

Predictably, the business Press have been only too eager to seize upon his gloomy assertions, made during an interview with the BBC, on the usual premise that bad news makes better headlines than good news. Don’t let the facts get in the way of a good story, etc….

His most explosive proclamation was 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 …..”

The first thing to point out is that, in terms of size, the UK’s P2P lending market is, for all its undoubted success, minuscule compared to the size of the whole market place; the major banks still control 90 per cent of lending to SMEs. The second point is that the credit risk processes in P2P lending are at least as thorough as they are with the majority of the banks. Indeed, many of the lending officers in the P2P sector used to work for banks in the days when they actually lent money to SMEs.

In ArchOver’s case, the process is actually far tougher because borrowers over our platform are obliged to cover their loan against default through credit insurance. No bank that I know does that as a matter of strict policy.

However, more important still is the fact that all P2P loans are matched; they have a set duration at a fixed rate agreed between borrowers and lenders. This sort of arrangement is in direct contrast to the banks which ‘borrowed short and lent long’ – precisely the toxic combination that led to liquidity problems and contributed hugely to the banking crisis.

Criticism is one thing, but scaremongering on this scale, especially from someone who should know better, is neither appropriate nor helpful. It is made worse by a blatant distortion of the facts.

In defence of Fintech

Author

Angus Dent

Date

27th January 201615th June 2016

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.