Tag: uk

A Response to Robert Reoch’s article on The Growth Outlook for Market Place Lending

Author
Angus Dent
Date

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Thomson Reuters recently published an informative blog post in which Robert Reoch offered his views on the “growth outlook for marketplace lending.”

In his role as Global Head of Products and Strategy at Crowdnetic, a provider of technology and market data solutions to marketplace lending companies (MPLs), Robert is part of a team which aims to educate investors and institutions on the direction in which the  alternative finance industry is moving. MPLs have been quick to offer an alternative finance source to SMEs, providing a service distinct from the antiquated and costly financing options that banks in particular had been providing. And as the industry has grown, innovation by FinTech companies has seen the provision of increasingly niche and bespoke services, as competitors attempt to stand out from the crowd and bid to woo investors. Yet I agree with Robert’s statement that “there is real economic benefit for banks to actively collaborate with MPLs” in order to attract prospective borrowers.

MPL subsets

The MPLs that are most successful could be those that actively maintain a symbiotic relationship with a specific bank or banks. The banks would provide the MPL with a network of suitable borrowers who at the moment just aren’t aware of the opportunities out there.In return, as pointed out by Robert, banks can keep their fee-paying client “without the associated balance sheet and the capital cost”. In light of such exposure, the cost is minimal for the MPL, who would also save on often unnecessary and expensive advertising campaigns, especially as a much smaller group of institutions rather than a large pack of individuals is increasingly seen as the future of the ‘crowd’. This in turn helps Borrowers, who can receive funding faster and with a lessened prospect of a project going unfunded.

MPL bank lending

As Robert alluded to, it remains to be seen how much of the enormous market MPLs can gain access to. After all, a percentage point or two would transform the MPL industry and create a flood of funding to SMEs. The timing couldn’t be better. UK business lending from banks in June 2015 saw the sharpest fall – almost £5.5 billion – in at least four years (since records began). And with SMEs positioned as the main drivers of UK GDP, it is in the best interest of all involved that these businesses receive the finance they need to grow. Marketplace lending companies will be chomping at the bit to fill the void left by the banks; it remains to be seen when the shift happens.

Something to Copy from Germany

Author
Angus Dent
Date

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The ‘Winter Wonderland’ Christmas market staged annually in London’s Hyde Park is a seasonal shrine to all things German; a blatant pastiche of the original Christkindlmarkts located here on British shores. So popular is this imitation, too, that it would be no surprise to hear that more glüwein was drunk and more bratwurst eaten here this Christmas than at many markets on the other side of the North Sea. And this success has perhaps proved instructive, with various UK financial figures suggesting that copying a rather less frivolous Teutonic phenomenon might also bring benefits to Britain.

outside the box

The Mittelstand – a term that has no English equivalent (the closest is perhaps the bureaucratic term Small and Medium Sized Enterprise or SME) or firm definition (definitions for SME abound), but which generally relates to businesses with fewer than 500 employees, turnover under £50m and usually family controlled – is often touted as the bedrock of the German economy. The Mittelstand is recognised as their economic “engine”, contributing robustly to private sector employment and GDP. The story is similar in the UK, where, according to the FT, the 2% of UK companies which are ‘medium-sized’ generate nearly 25% of private sector GDP. Where the fortunes of the two Mittelstands diverge is in their ability to access finance. Once businesses become medium-sized in the UK, they can no longer expect to receive the government backing afforded to smaller firms, whilst in Germany, where the value of these businesses is perhaps better appreciated, government backing would likely continue.

This situation has caused the head of the CBI to call for the development of “a private placement market to issue debt to institutional investors” to fill this UK policy gap. With bank lending to SME businesses continuing to fall, he is surely right to do so.

Bank lending down

Yet in many ways such a market is already being developed by the nation’s marketplace lenders.

 

UK Peer to Peer Finance Report

Author
Angus Dent
Date

P2P Growth

Here is a link to a research note from Paul Hill of Equity Development looking at the explosive growth, trends and dynamics of the Peer to Peer Finance market within the UK .

This report summarises what is a rapidly evolving and highly diverse model of finance, which has more than doubled in size year on year from £267 million in 2012 to £1.74 billion in 2014.

UK P2P Finance February 2015

Quantitative Easing – Too Blunt an Instrument?

Author
Angus Dent
Date

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Maybe I’m not the only person who grew up in the 70s who finds a great irony in governments now trying to stimulate inflation. Just as they had little idea how to control inflation I doubt that Quantitative Easing (QE) is the best way to stimulate it. A more targeted approach is required, an approach that will do more than increase asset prices, an approach that might get industry and economies growing and growing faster.

Yesterday the European Central Bank (ECB) announced a larger than expected two year program of QE in the expectation that this will avoid continued deflation in the Eurozone. While QE is likely to be successful in this limited aim, it is possible that despite QE the UK will suffer a period of deflation, the lessons from the UK and the US suggest it will do little else.

QE in the UK and the USA, and arguably already in the Eurozone, has increased asset prices. Maybe it has even created an asset price bubble, if it has then as night follows day, bust will follow bubble. What QE has failed to do in any meaningful way is to:

  1. get capital into businesses, particularly smaller and medium sized businesses – the engines of all economies,
  2. increase the buying power of consumers, there is some evidence that wages are growing again now, but generally wages have not increased these last several years,
  3. increase productivity, which by some measures has fallen, this may be linked to 1 above, and is the largest single problem facing the UK economy today.

There are many restrictions on government, national and / or EU, passing money direct to companies and direct to their citizens. However as part of the program to avoid deflation greater emphasis should be given to this. If commercial banks won’t lend to any but government and the largest corporations, and the evidence of the last few years is that they won’t or have forgotten how to, then government sponsored development banks, programs for state aid and AltFi businesses should be given more of this money to do so and stimulate industry. Giving more money to consumers is relatively easy, reduce personal taxes. In consumer lead economies its nonsense to take money away from those who drive effective demand.

Of course there’ll be cries that this approach is unfair; the Germans may well be better at state aid than the Greeks for example. And taxes are for national government not EU, so there will be a disparate approach. There’s also a question of how to make sure there’s value for money from the investments made. Then again there’s little value from QE, beyond possibly a small amount of inflation.