Industry Profitability

Author

Date

10th November 201615th November 2016

Throwing huge sums of money at a new or particular market in order to achieve dominance is nothing new. The corporate landscape is littered with the financial corpses of over-zealous entrepreneurs who hurtled down the growth path without sparing a thought for the day of reckoning when someone – usually one of the backers – pauses to ask when all this investment is going to result in a profit. The ‘jam tomorrow’ argument eventually wears thin.

Some commentators are already starting to pose the question in relation to the long term future of Alternative Finance providers, including P2P business lenders like ArchOver. It is a fair question since it is no secret that the largest players in the sector – companies like Funding Circle, Ratesetter and Zopa – have all posted bumper losses as if there was some kind competition running to see which of them could lose the most money fastest. The observation that the vast majority of Altfi operators have never been through an economic recession is equally true. Eventually, the music has to stop and there will be some casualties, at which point the pundits will doubtless have a field day.

In the meantime, it is not for us to question the wisdom of others in our sector – we can only speak on our own account. The dash for growth at the expense of profitability or, more importantly, quality has not been the ArchOver way because there has been no need to adopt such a strategy. We are not under pressure from voracious venture capitalists who simply want their money back plus a massive return for their trouble. ArchOver is backed by a 300 year-old institution with a proud reputation to maintain – something infinitely more precious than making a fast buck.

ArchOver’s approach to the vital due diligence processes, backed by the ‘Secured and Insured’ model, not only works, but has been seen to work. £25m of loans facilitated over two years with no losses and no arrears is a considerable achievement. Whether individuals, family offices or small institutions, all of our lenders have been treated equally and have received exactly what they were told to expect at the outset.

On the flip side, borrowers over the ArchOver platform have been treated fairly, with no nasty surprises in terms of hidden fees or charges. The fact that many have returned to seek more finance is testimony to the appeal of our business model and the way in which they have been treated by the team.

What is the best option for Elderly Savers?

Author

Angus Dent

Date

15th December 2015

An article published in The Telegraph last week showed just how far the national media is from providing adequate advice to savers looking to explore the alternative finance sector for investment opportunities. The offending article on this occasion was published in the “Personal Finance: Savings” section, written by James Connington. Click here for the article: http://bit.ly/1mlDZLC

He writes against the backdrop of the imminent end of the Government’s one year “pensioner bonds”, which will not be renewed in all likelihood. This leaves savers, and particularly elderly savers, on the hunt for short term, secure accounts that offer a decent yield with plenty of security.

In attempting to recommend viable alternative options, Connington repeatedly makes errors in his article. To start with, he seems to have been misled into thinking that “high interest current accounts” are “risk free”, clearly forgetting the plight of Northern Rock less than a decade ago, that saw regular savers embark on the nation’s first “bank run” in 150 years as they feared their savings in “risk-free” accounts would be lost in the event of receivership. Furthermore, the Government have announced that the Financial Services Compensation Scheme will only cover deposits of up to £75,000 in January 2016 despite regulators striving to avoid a repeat of the Northern Rock fiasco. Many pension pots will be larger, of course.

The high interest current accounts cited by Connington are also not a suitable replacement for the outgoing “pensioner bonds”. For example, TSB Classic Plus requires the saver to put in £500 pounds monthly up to a maximum of £2000 pounds overall, and set up internet banking. Once again, I stress that that the article is geared towards those who invested in the pensioner bonds, and therefore by default is aimed at elderly savers. I’m not saying this account wouldn’t work, say, for a young professional, but I doubt it would appealing to a pensioner.

His next suggestion that elderly savers should aim to invest in longer term fixed-rate ISAs and bonds is laughable, really. Not only is the time-frame inappropriate, but the yield is pretty feeble as well. The article then suggests “regular saver” accounts; again, would these accounts prove suitable for elderly savers? 6% per annum is offered on a sum of up to £300 per month in the First Direct regular saver account. You don’t need me to tell you why tucking away a limited amount like £300 per month (so a total of £3600 for the whole year) is inappropriate for the elderly; the pensioner bond allowed investment up to £10,000 after all.

Connington finishes his article with a measly 44 words on “Investing”, where he states that a high-risk investor can expect to earn 6% per annum with no guarantees of a return. At no point in the article is Peer to Peer Lending mentioned or even hinted at as an option, and considering the Innovative Finance ISA comes into force a month after the “pensioner bond” will come to an end, it is a sign of the weak journalism that is a theme in Mr Connington’s article. The investment risk in lending money through platforms is far less than investing in the stock market and the returns are healthier. Invest through the right P2P Lender and the risk is negligibly more than a bank account (see RateSetter and their provision fund if you need persuading on that one) and the returns are in a different league. And before anyone accuses Peer to Peer lending through online platforms as too complicated for the elderly, it is worth noting that the median age of an ArchOver investor is above the pension age in the UK. There are a range of loan terms to choose from to suit the lender, and the diversity on offer allows investors to spread the risk far more than in a savings account.

The P2P revolution has begun; even the banks know that, as shown by their willingness to work with the P2P lenders. The Government can see it- just look at the British Business Bank’s announcement today that they are going to work with RateSetter to lend money to SMEs. It is time that national print journalism kept up with the times as well.

Why P2P Platforms are Slowly Usurping Traditional Savings Accounts

Author

Angus Dent

Date

6th November 201517th May 2016

The prospect of boosted savings returns has seen traditional savers become SME lenders through Peer to Peer lending platforms. In fact they are flocking in their masses, and both the banks and building societies are running scared. The Yorkshire Building Society has taken particular umbrage at what it views as “bad investment decisions” and “would urge anyone considering riskier investments such as P2P or equity-based investment to take independent financial advice before doing so”, according to a scaremongering article in the Daily Telegraph. It’s worth noting that such “independent financial advice” can of course be received at the Yorkshire Building Society for any Telegraph readers particularly affected by what they had read.

Yet it is hardly a surprise that the banks are launching their own counter offensive: they are losing out on bucket loads of low cost capital. The implementation of the Innovative Finance ISA next year should see even more switch to P2P lending, as they will be afforded tax breaks on profits earnt through peer to peer lending platforms. This is obviously good news for all the platforms, but is better news for existing lenders who should see more security as the money comes in.

Whilst there are risks when investing through Crowdlending websites, the larger platforms are doing everything they can to mitigate the risk to ensure that they can offer savers a viable alternative to banks. RateSetter, in my view, have the best offering from the big players. They have operated a provision fund since 2010 that proudly boasts a 100% record of reimbursing investors who have lost their money when a borrower has defaulted on repaying a loan. The fund contains over £16 million, offering more than 150% cover against claims. Every borrower contributes to the fund by paying a compulsory fee when they agree to lend over the platform, and should a default occur, the money is paid back in full. Should the fund become depleted for any reason, all outstanding loans would be redirected to the provision fund and pooled repayments would be shared back proportionately to investors to ensure they aren’t fully exposed to a particular default. To put this in perspective: the government guarantees the banks at the cost of the taxpayer. Furthermore, the guarantee only pays out if the bank goes bust and then only to up £75k. If a P2P platform fails, the FCA’s rules dictate there’s always an alternate supplier who will run off the loan book.

My response to Yorkshire Building Society’s view that investors are entering peer to peer lending with their eyes closed would be to say that investors are in fact more likely to act cautiously when lending across online platforms. People should always question what looks at face value and exceptionally good rate, and should always choose an investment on the value of its security first and foremost. There are enough platforms who operate provision funds, and who also demand borrowers take out credit insurance or in some cases personal guarantees. Transparency is, and should be, prioritised above all else; it is hard for banks to argue that platforms are complicated to use when it was the banks themselves that propounded the concept of “borrow short term, lend long term”, a notion that stimulated the financial crisis and the demise of the likes of Bear Stearns. P2P lenders instead advocate a “lend for 12 months, borrow for 12 months” policy that is wholly transparent. And with no leverage used to facilitate the loans, arguably the two major structural causes of the financial crisis won’t be an issue for Peer to Peer lenders.

Whilst more money is poured into Peer to Peer lending platforms, the alternative finance industry as a whole will see some consolidation as well. The bigger companies will obviously continue to get bigger, but the consolidation will also help smaller players offering niche services to replace traditional banking facilities such as invoice discounting and property lending. The result? More streamlined, better-run companies who prioritise lender security and endeavour to minimalize the risk for regular individual investors, who can offer a viable alternative to those sick of the miserable rates offered by banks, but without the appetite for investing in the risky world of stocks and shares.

Moreover, institutions with a low cost of money, such as family offices, schools and county councils, will be drawn into investing over peer to peer lending platforms rather than leaving their money to stagnate in bank accounts. Local government treasurers would be particularly keen to lend to platforms that subsequently lend the money to constituents or local SMEs in an attempt to further support their local community. This could see an increase in localized Peer to Peer lending companies such as Folk2Folk, who operate solely in the West Country.

The result of all this? Bad news for banks, good news for savers and SMEs.