FEAR THE HAWKS
A rate hike will be problematic for some platforms CRYPTO CRAZY
Ditigal currencies are disrupting the P2P space
Zopa’s chief product officer Andrew Lawson on tech, tribes and talent >> 20
ISSUE 19 | APRIL 2018
New fintech fund could boost P2P sector
PEER-TO-PEER lenders could be set for fresh backing from City investors, thanks to a new fintech fund that is eyeing opportunities in the sector. At a time when investment trusts such as Victory Park Capital Specialty Lending have signalled a shift away from P2P opportunities, Augmentum Fintech’s investment adviser has hinted that P2P lenders could be included in the portfolio. Augmentum Fintech was launched by Augmentum Capital, a venture capital (VC) firm backed by Lord Rothschild’s RIT Capital Partners, last month. The VC firm already
had a 7.4 per cent holding in P2P giant Zopa worth £18.5m that has been transferred into the investment company portfolio and its founder
Tim Levene, who is acting as investment adviser to Augmentum Fintech, said that the firm is well geared to the P2P sector. “P2P is an area we
know well as we have backed businesses such as Zopa,” Levene told Peer2Peer Finance News. “There have been a lot of P2P firms or >> 4 TOP
HNW Lending eyes Collateral loanbook
ASSET-BACKED peerto-peer lender HNW Lending has thrown its hat in the ring as a potential buyer of the loanbook of its rival Collateral, which fell into administration in February. Collateral became unreachable in late
February when its website went down and it later transpired it had fallen into administration. A letter from the administrators Refresh Recovery said the existing loans had been ringfenced and would been wound down, which has led to
industry players such as BondMason and Ablrate expressing their interest in taking on the book. HNW Lending is the latest platform to have shown an interest and founder Ben Shaw told Peer2Peer Finance News he has made contact with
the administrators but is yet to receive a response. “At the moment there is no authorised company looking after those loans,” Shaw said. “If I were an investor I would be nervous about who is protecting my interests. >> 4
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ews of Collateral going into administra tion at the beginning of March must have struck fear through the heart of many a peer-to-peer lender. Would this be the vindication that the industry’s critics desired, that a P2P platform had gone under and investors would have their fingers burnt? While the full outcome of Collateral’s closure is yet to be revealed, it appears not. The appointed administrator has said that investors will still be repaid, subject to the borrower continuing to make payments of interest. Furthermore, the reason for Collateral’s closure appears to be related to regulatory permissions, rather than the contents of its loanbook. Obviously this is still stressful for any stakeholders and is a fervent reminder of the need for good practices across the sector, but it does not appear to be quite the scandal that doomsayers were waiting for. The P2P industry as a whole is very proud of its transparency and risk management processes, and rightly so – here’s hoping there will be no Collateral damage. SUZIE NEUWIRTH EDITOR-IN-CHIEF
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cont. from top of page 1 interpretations that we have been involved in, so we do see a lot of it. “I’d be lying if I said we aren’t looking at a few things. There are a number of interesting propositions in the lending space, we are trying to find businesses that are deemed to be niche propositions where the challenge is scale. “We are not necessarily just looking for P2P.” The Augmentum Fintech fund listed on the London Stock Exchange last month after raising £94m through a combined initial public offering and Seedrs fundraising. This was below the initial £100m target, but Levene said this was down to investors being unfamiliar with the asset class. Levene said the fund has institutional backing from RIT Capital Partners as well as Hargreave Hale and the South Yorkshire Pension Fund but said others would be interested
once the fund is bigger. “Institutions wanted a bigger fund north of £200m; that would have left too much capital,” he said. “A mistake of some investment trusts is to hold too much cash. We recognise how much capital we require to invest over the next 12 to 18 months. “If we have spare cash we can return it to share holders through special dividends or buybacks. “Our ambition is to grow our net asset value and raise more capital down the line.” The launch comes at an interesting time amid Brexit negotiations and uncertainty over London’s status as a global fintech
hub. The fund aims to invest in fast-growing or high-potential fintech firms primarily in the UK and Europe, and Levene insists London and the UK are still in “pole position” when it comes to fintech due to a supportive government, regulation and investment environment. He said the fund is seeking capital growth and to realise returns through exits rather than dividend yield. It is targeting 10 per cent growth per year and commits to return up to 50 per cent of gains on disposal. The company will also return cash that is not expected to be substantially deployed within 12 to 18 months.
Adrian Lowcock, invest ment director at Architas, said that Augmentum Fintech is helping investors reach a previously inaccessible sector. “Fintech is a growing sector and whilst London is a global leader in the space it is still in its early days,” Lowcock said. “For most investors this is likely to be one of the few ways to get access to fintech at an early stage. The advantage of using a trust is the expertise of the management team and the focus on stock selection – this is an area of the market where there will only be a few winners compared to the number of businesses that try.” However, Lowcock warned that the fund is “high risk” and suitable only for investors willing to take a long-term view. “Such sector-specific trusts should only amount to a small proportion of an overall portfolio,” he said.
“They need some body to look after those loans, make sure the interest is collected on time and chase repayments. “If you can take over a loanbook without adding too much to your costs then it is a win for everybody. Theoretically we get a bunch of investors that may want to invest in our loans and we get some loans that
hopefully there is some margin to be made on. “Investors get to know the loans are being serviced, we make some money and the Financial Conduct Authority sees the loanbook moved to an authorised provider.” Collateral started out with a similar business model to HNW Lending, providing asset-backed P2P loans secured on
items such as classic cars. But Collateral moved into property development loans at the end of last year. Shaw said Collateral, which has funded more than £50m of loans, takes property as an asset but would never expand into property loans. “If you are doing development you can lose your shirt easily,” he added. “Property is our biggest
asset but we don’t do development loans due to the risk. “I don’t want to lose anybody money, least of all myself, as I take the first loss.” He said HNW Lending has a wind-down plan in the case of the business going into administration and has an agreement with another party to take on its loans in such a scenario.
UK rate rise could spell trouble for some P2P platforms
PRESSURE is mounting on the Bank of England to raise interest rates, but the chief executive of peer-to-peer lender Blend Network says this could be a problem for platforms offering lower yields. The central bank held the base rate at 0.5 per cent last month but surprised the market with a 7-2 vote, while minutes from the
meeting hinted of tighter monetary policy in May. The nine policymakers had voted unanimously to hold rates at February’s meeting. Blend Network’s Yann Murciano told Peer2Peer Finance News that rising interest rates, which will boost cash savings rates, will put pressure on P2P platforms that offer investors lowsingle-digit returns.
“If you have a platform offering three or four per cent – for them it’s quite bad,” he said. “If you can get two per cent from a cash savings account, then why take the extra risk for only a little bit more?” Blend Network offers returns of around 12 per cent, which it says gives it a buffer against rate rises. Murciano says that high yield is what attracts investors to switch
from equity markets. February’s sharp fall in equities – which saw the FTSE 100 drop by 3.5 per cent in intraday trading – saw investors flock to Blend Network, according to Murciano. “When the market came off last month we saw a lot of people subscribe immediately because they wanted to get some yield,” he said. “Debt is much less volatile.”
Investors face tax quandary on defaulted property loans PEER-TO-PEER investors are being encouraged to seek tax advice or use their own judgement on defaulted loans that are secured by property rather than waiting on recoveries. Investors have taken to the P2P Independent Forum to raise concerns about several P2P property platforms where loans have defaulted but there is no sign of recovering the underlying security to honour repayments. HMRC guidance says investors can set the loss they suffer on a loan against the interest they receive on other P2P loans before the income is taxed. If a platform later recovers the funds and repays investors, the amount is treated as new income, leaving investors to decide whether to
claim on their tax bill or keep waiting. Stuart Law, chief executive of business and property lending platform Assetz Capital, warns the guidance says the relief can only be claimed if there is no reasonable prospect of the loan being repaid, which may be hard to prove. “We are not tax advisers but our understanding is investors can confirm their own view, but they have to be able to justify it,” Law said. “We don’t have specific views on definite losses
until we have finished the entre process. It is best for investors to seek tax advice so they can make a decision.” He said the platform has had investors question its recovery speed, but now provides more updates. “The trouble is plat forms sometimes can’t share what is going on in the background in order to protect proceedings,” he said. “We can often achieve an outcome in about six months but if you have a difficult borrower it could take a couple of years.
“Stepping in on a secured property loan and acting too quickly can destroy more value.” Neil Faulkner, cofounder of P2P analyst 4th Way, says if investors are not happy with the information on recoveries that is provided they will have to make their own judgement. “I am not a tax adviser, but I would suggest to lenders that they also could use their own judgement if a P2P lending provider is not very transparent about what is happening with bad debts,” he said. “If a lender wants to get a tax loss over with, they could set a limit of three years after the loan defaulted and, if there’s no movement on the debt, you might assume the loan is dead.”
Analysts dismiss calls for Funding Circle to float in the US
SUGGESTIONS that Funding Circle would be better off launching an initial public offering (IPO) in New York than in London have been dismissed by analysts as completely misguided. Investment professionals have told Peer2Peer Finance News that the uncertainty surrounding Brexit could hinder the success of the peer-to-peer lender’s planned flotation, which is unconfirmed but widely expected to take place this year. But John Cronin, financials analyst at investment bank Goodbody, said that Funding Circle is a UK company at its core, so it makes sense to list locally and capture maximum investor interest.
“Funding Circle is a high-profile business in the UK so I suspect the listing will attract a lot of interest, ensuring it gets a good valuation and high liquidity,” he said. “Given the lender’s growth aspirations, in time it could join the FTSE 100.” Neil Glover, business development director for IPOs at EY, added that in the US, a company needs to have a very high market capitalisation for analysts to want to track it and, in turn, boost investor sentiment. Furthermore, many UK companies are not suited to a US listing because the US market focuses on the company’s potential for high growth, rather than dividends.
“I don’t think a P2P lender would be big enough or have a sufficiently high growth rate to list in the US,” Glover said. “This could change in the future, but at the moment companies in the sector are not mature enough.” Another factor against listing in the US is that publicly-traded companies must comply with much heavier regulations than in the UK. James Clark, head of tech and life sciences at the London Stock Exchange, said: “The assumption that Brexit means a company should list in the US makes no sense. One of the biggest gripes for companies is that the US requires quarterly reporting,
whereas in the UK reporting is only required twice a year. It costs around $1.5bn (£1bn) to float in the US – it is a fraction of that in the UK.” Clark added that the US is more litigious, with shareholders often suing a company’s directors. This means directors’ insurance is very expensive. “London is a far more suitable listing environment,” he said. “Funding Circle will attract a lot of retail and institutional investors, particularly as there is strong appetite for fintech companies currently.” Funding Circle has so far declined to comment on its rumoured plans to go public this year, which were first reported on by Sky News.
Industry welcomes government fintech strategy INDUSTRY experts have welcomed the UK government’s first fintech strategy but warned that there is more to be done. Last month, Chancellor Philip Hammond (pictured) unveiled a slew of new measures aimed at maintaining the UK’s position as a global fintech hub. These included regional envoys, a cryptocurrency taskforce and ‘roboregulation’ that will build software to ensure fintech
start-ups can automatically follow regulations. “Brexit is the elephant in the room and we will need to see how the UK government plans on protecting its fintech sector while maintaining a bridge to the wider European market,” said Fabian Vandenreydt, executive chairman at European collaborative innovation fintech platform B-Hive. “The EU launched its own fintech action plan earlier [in March] and it
is essential that the UK is able to collaborate with its European counterparts.”
Rachel Kent, partner in Hogan Lovells’ financial institutions sector, warned that “the UK cannot rest on its laurels if it wants to retain its position as the global fintech capitol”. “We therefore welcome the government’s announcement of a new fintech strategy,” she added. “The regulation of crypto-assets and robo-advice are key issues to get right, not just domestically but internationally too.”
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BondMason set to unveil range of new bonds PEER-TO-PEER investor BondMason is planning to issue a series on bonds with one to three year maturities after raising £1.85m in equity funding, the company’s chief executive officer told Peer2Peer Finance News. Stephen Findlay (pictured) said that BondMason plans on offering bonds with one, two and three-year maturities backed by a set of “curated loans” that will be similar in creditworthiness, regardless of the maturity of the bond. “The key distinction [between the bonds] will be their length,” said Findlay. “In terms of their risk position, we
are very much taking a conservative approach.” BondMason only had one of its loan investments fail last year, according to Findlay, which indicates that the company invests in loans that have a high likelihood of repayment. BondMason is planning on issuing bonds on a quarterly basis at first, with the
potential of monthly issuance “depending on demand”, said Findlay. The company is still talking to advisors and analysts about the interest rates, though as with most bonds, longer maturities will offer higher returns. BondMason already offers returns of eight per cent and higher in its existing product line. “We’re targeting June for the bonds,” said Findlay. “The advisors and lawyers have been appointed.” BondMason announced last month that it had raised £1.85m in equity funding from private investors, as well as venture capital
firm Par Equity and investment managers Seneca Partners. As well as funding the new bond launches, BondMason plans to use the proceeds to improve its service by launching an Innovative Finance ISA, improve its platform interface and develop a pension service. Findlay said BondMason is in a strong position to provide pension investments because the company’s investment criteria automatically diversifies clients’ holdings, meaning their pension products will not run afoul of regulations that prevent pension investors from being able to access money early.
The best from the web
We round up the biggest stories from www.p2pfinancenews.co.uk over the past month • Peer-to-peer lending platform Collateral went into administration at the start of March, after it emerged that it was operating without the correct regulatory permissions. The administrator said that investors will still be repaid, subject to the borrower continuing to make payments of interest. • ‘Big three’ lender RateSetter launched its Innovative
Finance ISA and reported that 5,000 accounts were opened in the first month. • Alternative mortgage lender LendInvest has launched a second retail bond. The former P2P lender stopped accepting retail money onto its property investment platform last year but has opened up to individuals again through its listed bonds.
• EQUI, the cryptocurrency-backed P2P investment platform cofounded by entrepreneur Baroness Michelle Mone and her billionaire venture capitalist partner Doug Barrowman, launched its public initial coin offering. • P2P investment manager Goji is launching a white label offering for investment providers, so that they can create their own alternative asset products for customers.
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Making your suit last longer A good suit should last a lifetime...just as long as you take good care of it. Raja Daswani, head of Hong Kong-based bespoke tailor Raja Fashions, explains how to make a great suit last forever
ESS DRY cleaning, water-based stain removal, and an extra pair of trousers – these are just a few of the ways you can make your suit last longer, according to Raja Daswani, head of Hong Kong-based bespoke tailor Raja Fashions. Daswani creates thousands of bespoke suits each year for his international client base, and everyone asks him the same question – how can I look after my suit properly? “We like to sell two pairs of trousers with each jacket because this way the suit lasts longer,” says Daswani. “If you have one pair of trousers, you will eventually wear them out, while the jackets usually keep for longer. “As for the jackets, we recommend to not have too much dry-cleaning because people don’t understand that it makes a shorter life for the suit. With dry-cleaning, chemicals are used with the product, and ultimately chemicals ruin fabrics. The more you dry-clean, the more problematic it becomes.” Instead, Daswani recommends that small stains are treated with nothing more than water, or a waterbased spot removal solution for stubborn marks. Alterations are another matter – snags, tears and refittings can easily go wrong unless they are tackled by a professional, and Raja
Fashions prides itself on the aftercare which it offers to all clients. “We guarantee all of our products for at least two to three years,” says Daswani. “And all of our alterations are free.” This is particularly useful for female clients who may find that their measurements change after pregnancy, and for clients who have lost or gained weight over a relatively short period of time. However, Daswani cautions against dramatic shape changes. “When you gain and lose weight,
We guarantee all of our “products for at least two to three years”
we can alter the material and make the cut a little bit more tapered or a little wider,” he says. “But sometimes people lose 30-40lbs in a year or less, and this makes things more difficult. You may need to change the fabric to make a new pair of trousers, or to remove the stitching and cut the pattern again. The suit won’t look the same afterwards.” Over the past six decades, the tailors at Raja Fashions have seen it all – cigarette burns, frayed cuffs, missing buttons, split seams and dramatic rips. There is just one type of tear that can’t be easily mended. “Snags are the death knell for a good suit,” he says. “It’s very hard to repair something like that. You have to change the fabric to make a new pair of trousers or a jacket.” Raja Fashions offers tailored garments at highly competitive prices. Bespoke suits start at £350 for lightweight fabrics and £435 for 100 per cent wool. Raja Fashions’ premium suits go up to £2,500, but the same garment could cost £12,000 on Savile Row. Tailors from Raja Fashions are in the UK every six weeks to perform fittings across London, Scotland, Wales and Ireland. For more information, visit Raja Fashions’ website at www.raja-fashions.com or email firstname.lastname@example.org to book an appointment. Hong Kong main shop: 34-C Cameron Road, G/F, TST, Kln, Hong Kong.
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Why cryptocurrencies are set to disrupt P2P lending Richard Gill, compliance officer at business crowdfunding platform Crowd for Angels, explains why regulation of the cryptocurrency sector will benefit investors and peer-to-peer lenders alike
VER THE past few months the crowdfunding/peer-to-peer lending industry has seen yet another wave of disruption, with cryptocurrencies and blockchain technology becoming increasingly integrated within its operations. While the crypto industry has seen some bad press over the past few months, the multitude of benefits offered by these decentralised technologies means that, in our view. alternative currencies are here to stay. Cryptocurrencies as an investment remain largely unregulated but moves towards regulation suggest they could one day, in the not-too-distant future, become established as another retail-friendly asset class. Taking advantage of growth in the industry, a variety of crypto-backed P2P platforms are now being launched. These allow owners of cryptocurrency to use their holdings to borrow cash while retaining the right to their currency. They also offer investors/ lenders the ability to make
a high (but risky) return. Some crowdfunding/ P2P companies have also launched their own initial coin offerings (ICOs), a fundraising event which sees cash or cryptocurrency raised in exchange for digital tokens. However, one of the key issues for investment crowdfunding and P2P firms is the distinct lack of regulation within the crypto industry and uncertainties over how the financial authorities will ultimately react. In the UK, cryptocurrencies and digital tokens are currently not currently classed as an investment by the Financial Conduct Authority (FCA), so do not come under the regulatory regime. Given their increased popularity with investors, the FCA in September last year warned about the risks associated with investing in cryptocurrencies, noting in particular the potential for capital loss and fraud. The sharp rise in the value of several cryptocurrencies in 2018, combined with a significant rise in ICOs, saw a huge influx of retail
investors into the market. With a remit to protect consumers, the FCA clearly has its concerns, especially considering the sharp fall back in the value of many cryptocurrencies after their sudden rise. Other regulatory bodies around the world have also reacted to various degrees, with the Korean and Chinese authorities banning ICOs last year. In our opinion, it does seem that, ultimately, cryptocurrencies will eventually become regulated as per other investments (such as shares) and not go down the often-proposed route of self-regulation. There is already evidence of this, with Bank of England Governor Mark Carney saying in a recent speech that “the time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system”. We believe that regulation is both inevitable and welcome. While retail investors have mainly entered the market looking for huge potential crypto gains they need to be protected from fraud and
have trust in the assets they are putting their money into, as well as the financial intermediaries promoting them. Another way investors can take part in the crypto markets is via a unique offering from crowdfunding business Crowd for Angels. The FCA-regulated crowdfunding platform, which has been operating since 2014, has recently launched a Liquid Crypto Bond with attached ICO of its ANGEL tokens. Investors in the bond, which is eligible for inclusion in the tax-efficient Innovative Finance ISA, will receive four per cent interest per annum for five years, with capital returned at maturity. For every £1 invested, bond holders will also receive up to 99 free ANGEL tokens, a form of cryptocurrency which will be able to be traded on external exchanges. With the tokens being issued at no additional cost they provide the potential for capital gains and may be attractive for investors looking to make an initial venture into the cryptocurrency market.
Disrupting the disruptors
Cryptocurrencies are not only the hot topic de jour – they are also edging into the peer-to-peer lending space. Marc Shoffman investigates what this means for an industry still finding its feet in mainstream finance
RYPTOCURRENCIES AND peer-to-peer lending have one big theme in common: they look to bypass the intermediary. But does that make these two areas of fintech the best of bedfellow? Cryptocurrencies have become a dinner party conversation after one of the earliest forms, Bitcoin, saw its value hit record highs of nearly $20,000 (£14,221) at the end of 2017. The price has since dropped below $10,000, highlighting the volatility of cryptocurrencies, but aside from the currency, backers say much of the value is in the underlying blockchain technology. The blockchain allows transactions to be recorded online and transacted faster than with traditional banking networks. A digital currency controlled by
the people and faster payments unconnected to central banks does have a resemblance to P2P lending, and there are some platforms combining the two. Many are using initial coin offerings (ICO), a form of fundraising, to create a digital currency for use on a dedicated P2P platform to fund loans or pay fees. Borrowers are also able to post other digital currencies as collateral on some of the crypto-P2P platforms. This approach to P2P lending has been met with mixed success. Finland-based ETHLend launched at the end of last year and has already lent more than £2m. The platform lets investors fund business and personal loans worldwide using the Ethereum blockchain. It launched with an
ICO last November, creating LEND tokens that can be used on the website to pay transaction fees. Similarly, London-based Nebeus raised £4m in an ICO last year and has facilitated more than £7m of crypto-backed loans. And there are other P2P investment platforms following suit. Lingerie tycoon Baroness Michelle Mone has teamed up with her venture capitalist partner Doug Barrowman to launch an investment platform powered by its own dedicated cryptocurrency called EQUI. Investors will be able to use EQUItokens to acquire stakes in or lend to early-stage businesses through the platform, which launched a public ICO last month. And London-based Lendingblock is looking to raise £7m for an
The worldwide trend now appears to be moving towards recognising “ cryptocurrency as a legitimate and appropriately regulated asset class” LND token on a P2P platform that will let individuals lend in a range of digital currencies such as Bitcoin, Ethereum and Ripple. However, there is no guarantee of success with a crypto-P2P ICO. Sikoba, founded by Luxembourg-based financial consultant and researcher Aleksander Kampa, last year offered Ethereum tokens in return for a P2P IOU, extending lines of credit to users who know each other around the world.
But after failing to raise the minimum 5,500ETH needed, it has said it will refocus the project. Even if the platforms launch, there can still be hurdles ahead. The risks of crypto currencies were highlighted last May when the world’s first Bitcoin P2P lending platform BTCJam, backed by Funding Circle investor Ribbit Capital, announced it was closing after five years. It cited regulatory challenges and the
difficulties of introducing the technology in the poorer developing nations it was trying to help. But analysts insist BTCJam was just unlucky with its timing and the lack of coherent policy over cryptocurrencies. “With jurisdictions increasingly making their approach to crypto currency clearer, the worldwide trend now appears to be moving towards recognising cryptocurrency as a legitimate and appropriately regulated
asset class,” Marc Piano, of law firm Fox Williams, explains. “If this trend continues, the challenges, costs and uncertainty surrounding crypto-backed financial services will become more manageable and compliance will become easier. “This in turn may lead to the launch of a plethora of crypto-backed P2P platforms and the continued operation of existing platforms, although such existing platforms may need to adjust their business models to ensure full compliance with the new regulatory landscape.” For now there is little sign of the big P2P brands such as Zopa, RateSetter or Funding Circle showing much interest in cryptocurrency and many of the crypto-P2P platforms are set up solely for lending using the blockchain and dedicated specific currencies. One platform has bucked this trend though. P2P bonds provider Crowd for Angels is looking to raise up to £50m for a Liquid Crypto Bond that will pay investors
three per cent over five years. Investors will also receive cryptocurrency tokens through an ICO that can be traded on external exchanges or used to invest in further projects on the Crowd for Angels website. P2P investor BondMason has also seen the benefits of cryptocurrencies and its founder has backed the creation of a digital coin called ARC that can provide a digital currency for those living in areas with high inflation or under-developed banking systems. So what are these firms seeing that others in the sector are not? BondMason chief executive Stephen Findlay says crypto-P2P could have a role in developing countries where tradi tional or fiat money is less suitable, for reasons such as high inflation or a poor banking system, as long as the digital currency is stable. Crowd for Angels agrees with this approach. “Broadly, P2P lending using cryptocurrencies offers all the advantages of the blockchain, with potentially higher returns for investors,” a spokesperson explains. “Additionally, cryptocurrencies are independent of banks so they run on lower costs, which can be passed onto investors/borrowers in
the form of lower fees. “With much of the world’s population not having access to a bank account we also see huge potential for growth in crypto-backed P2P in those countries with poor banking infrastructure – crypto loans do not require a bank account. “Cryptocurrencies help to facilitate global lending, giving investors the opportunity to diversify around the world, with
‘earned money’, and P2P lending may be perceived as a safer investment than continued speculation,” Butler explains. “If a platform accepts cryptocurrencies then it saves itself the work of changing cryptocurrencies back into fiat currencies.” Many of the benefits are on the borrower side though, such as getting funds faster in cases where they may not usually be able to obtain finance.
P2P lending using “ cryptocurrencies offers all the
advantages of the blockchain, with potentially higher returns for investors
borrowers having access to a larger pool of lenders.” Other benefits include giving existing crypto investors an alternative form of income as well as a tradeable token, as Karen Butler of law firm Reed Smith explains. “One benefit of using cryptocurrencies is an increased universe of potential lenders; another is that those who have benefitted from speculation in cryptocurrencies may be more inclined to lend into a P2P platform as it’s not
But there are of course also risks due to the volatility of cryptocurrencies. “If a company needs £100,000 in order to buy a new factory and they want to use P2P funding, at the end of the process they will have £100,000 cash to buy the warehouse,” Thomas Hulme, solicitor at Mackrell Turner Garrett, explains. “If this was done using cryptocurrencies and the peers were funding the business by giving them cryptocurrencies, because
of the volatility of the price of cryptocurrencies and the fact that the price actually changes on a day to day basis, unlike the pound, the business receiving the funds may receive £110,000 or £90,000. “This poses a risk to the company obtaining the debt finance as if they choose to borrow £100,000, they may only be able to get £90,000. “This is a fundamental issue of cryptocurrencies that they are viewed as a currency, but they act more like a share or commodity.” With both crypto and P2P sectors plagued by their own critics, could the volatility of digital currencies harm the P2P space? Piano warns there are already “negative optics” associated with cryptocurrencies due to high-profile security incidents, regulatory intervention, civil action and instances of fraud, which could taint traditional P2P lending if crypto-P2P platforms become used more widely. “This negative associa tion certainly adds to the pressures of an industry which is seeking to distance itself from and offset recent negative publicity,” he warns. “However, as crypto currency continues to gain acceptance as a legitimate asset class, this
viewed as a currency, but they act more like a “Cryptocurrencies…areshare or commodity” will help reduce some of the negative optics which may currently surround cryptocurrency in general. “One of the striking features of cryptocurrency is its resilience, recovering from crashes of 60 per cent or more in some cases as well as increases in value which outperform most known asset classes. “While this volatility can be unattractive for some investors, it can be attractive for those with a high appetite for risk and who are looking to diversify their portfolio, which may already include traditional P2P loans.” Piano adds that while crypto-backed P2P lending may lead to further scepticism towards P2P lending in general, traditional P2P lenders that choose not to offer cryptobacked P2P lending services can emphasise their fiat-only offering, established history and regulatory compliance to separate themselves from crypto-backed P2P lenders.
The creation of a dedicated digital currency is just one side of the development of cryptoP2P, and one area that traditional lenders may flock to is the blockchain. “The use of blockchain technology can reduce friction in the credit process, leading to loans being granted faster and with lower fees than would otherwise be possible through traditional institutional or P2P lending channels,” Piano adds. This is a view backed by Iain Niblock, chief executive and co-founder of P2P analysis firm Orca Money, who says P2P is more likely to adopt the blockchain than the beans. “A technology-based industry such as P2P lending is likely to adopt blockchain technology before traditional financial services firms,” he says. “P2P lending can benefit from the growth of cryptocurrencies. “Both are alternatives
and both have captured an audience of retail investors. For those who have made significant gains from cryptocurrencies in 2017 there is an opportunity to invest some of the profits in more stable, predictable investments such as P2P.” It is not just P2P platforms, investors and borrowers that have shown an interest in cryptocurrencies. The Financial Conduct Authority has expressed concerns about ICOs and MPs have launched an inquiry into digital currencies and the blockchain. Piano suggests this review could be positive. “A bullish view is that, rather than jeopardising cryptobacked P2P platforms in the UK, this inquiry could provide muchneeded certainty and clarification,” he explains. “The UK parliament and government appears to be taking an open-
minded and balanced approach to its exploration of distributed ledgers and virtual currencies, which may result in thoughtful legislation and regulation together with a prudential approach to oversight, recognising that distributed ledger technology and virtual currencies may offer significant benefits not previously conceivable, while its risks can be mitigated if approached carefully.” He says the end result could be that virtual currencies are recognised and treated as a legitimate asset class which could lead to greater investment into and development of cryptobacked P2P platforms. Crypto-P2P is still a pretty new industry but with increased regulatory and political focus as well as some mainstream players acknowledging the benefits of the blockchain, its future may be resolved sooner than you think.
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Fixed-rate bonds just got a whole lot more attractive Daniel Smith, director at asset-backed bond provider Basset & Gold, explains why there is a light at the end of the tunnel for the nation’s savers
N FEBRUARY, Bank of England Governor Mark Carney put the nation on notice that the long baserate freeze is about to start thawing rapidly. The chances of a rate rise in May from the current 0.5 per cent are now higher than ever, according to many commentators and some are even pencilling in a further rate increase in August. The general feeling is that rising interest rates will have a real financial cost impact on borrowers. However rising interest rates should be better news for savers who have endured long years of low returns on their cash. The last Bank of England increase in November was the first for more than a decade and savers have suffered years of interest rates at historically low levels. The Bank of England’s policymakers will have
kept rates at a record low due to a fear about the risk of deflation, rather than being cautious about inflation. But is there light at the end of the tunnel for Britain’s ever-patient savers? Well there should be, but many savings accounts are already loss-leaders for banks and building societies and so they are less likely than mortgage lenders to pass on any rise in interest rates. Savers can’t be blamed for sitting on their hands, and their cash, as they’ve waited patiently to see if rates were genuinely heading northwards. Fixed-rate bond investors had to wrestle with the dilemma of how long to lock their cash away for when there might be higher rates on offer in the near future as rates rise. It is a tough challenge for savers but one that also got us thinking
about how we could help by combining competitive rates and minimise the risk of missing out on rate rises. Our solution is to introduce the Basset & Gold Interest Rate Shield across our three-year and five-year fixed-rate bond range. It is unique to the market and we believe it will be very welcome to savers. As with all investments, your capital is at risk. From 22 March, the interest rates of our Fixed Monthly Income Bonds, High-Yield Compounding Bond, and our Innovative Finance ISA have tracked any Bank of England interest rate increases, taking effect from the date of the bond issue. Whatever the Bank of England decides to do with the base rate, savers will benefit. And, of course, because they are fixed-rate bonds the rate will not fall if the Bank cuts rates.
Therefore, if the Bank of England rate increases by one per cent and then falls, savers will continue to get the benefit of the one per cent increase, as that was the highest increase since the bonds were issued. Investors can also celebrate by putting their money into three and five‑year fixed rate bonds that will immediately benefit from any rate rises that Mark and his team are keeping up their collective sleeves.
Risk Warning: This article sets out personal opinions. Capital invested in bonds is placed at risk and interest payments are not guaranteed. Investors should note that it could take the time it takes to liquidate an asset held as security in order to get money back at an acceptable price. There is no right to compensation in respect of poor investment performance.
Brave new world
What does the future look like for the world’s oldest peer-to-peer lender once it becomes a bank? Andrew Saunders speaks to Zopa’s chief product officer Andrew Lawson about technology, ‘tribes’, and the importance of P2P for the business…
OPA MAY be the world’s oldest peer-to-peer lender, but to the visitor in many ways it still feels like a start-up. The simple open plan office, the break-out groups deep in conversation huddled around their laptops, the founders and senior leadership sat not in swanky corner offices but at regular desks just like everyone else. There’s the distinct sense of purpose about the place that usually denotes a young business urgently seeking growth. That the entrepreneurial buzz remains strong after 13 years of relentless year-on year expansion is no accident, according to chief product officer Andrew Lawson. “This is a very purposedriven company and having that customerobsessed culture is what keeps that agility and entrepreneurial spirit alive,” he says. “It’s about being a
company with a track record but not too many of the disadvantages that can sometimes come with that.” Of course it is all on a rather grander scale than your average startup – it now employs over 300 ‘Zopians’ and since it opened its doors
a keen rivalry between the two big beasts of Brit P2P clearly exists. Right now, a good deal of Zopa’s energy and purpose is being directed at what will be the next – perhaps biggest ever – milestone in the company’s history, and one that might unlock
mission is around making “OurZopa the best place for people’s money” back in 2005, Zopa has lent more than £3bn to over 311,000 borrowers, making it not only the oldest P2P lender but also one of the largest. In the UK only Funding Circle has lent more – although it is a business rather than a consumer lender, so not a direct competitor,
another phase of even more impressive growth: launching a bank. The fact that Zopa has applied for a banking licence and is in the throes of development is no secret of course. Exactly how long the journey to approval may take is more hush hush, although Zopa’s jobs ads
for software developers indicate that a launch is likely to happen by the end of this year. The preparations are well under way, says Lawson, whose principal involvement in the bank has been on the build side. “What has surprised us a little there is that some of the things you would expect to be off the shelf just weren’t fit for purpose,” he explains. “For example – none of the off-the-shelf deposit products can tell you, at the end of the term, what your pot is going to be worth. It’s not a terribly complicated calculation but as a customer you have to go and do it yourself in Excel. We just didn’t think that worked for today’s customers.” So rather than buying in products such as a deposit account system, Lawson and his team have opted instead for a more DIY approach. “We went down a path of building
a lot for ourselves, probably more than we initially thought,” he says. “The build has been pretty big.” Fortunately, he has been able to call on the services of Zopa’s tech hub in Barcelona, opened last year in anticipation of an increasing need for developers, not only from the bank launch but also from the dayto-day P2P lending activity. “Some of the Barcelona people have been involved [in the bank],” Lawson affirms.
“Recruiting for tech talent in London is very competitive, because we compete with Facebook and Google rather than Barclays and Santander on this. Barcelona has been a great way for us to scale up the tech.” But why is Zopa is going to such lengths to launch a bank anyway? The appeal of the P2P sector to many of its existing punters depends precisely on its players not being banks, after all. Lawson – whose responsibilities cover
products, customer acquisition and experience, first line credit risk, pricing yield and data science – says that it is largely a response to customer demand, both from investors and borrowers. “When we talk to our investors, they come back and say that they would love to have a bit more security,” he reveals. “That means offering Financial Services Compensation Schemebacked deposit taking, so that’s one of the drivers.
“On the other side, while P2P works great for unsecured personal loans, borrowers are asking for products that P2P isn’t so naturally set for, like credit cards and longer-term debt. “So becoming a bank will allow us to provide a much wider remit for our customers.” Essentially, having government-guaranteed deposit accounts will provide investors with more security on their money whilst also allowing Zopa
to escape one of the fundamental limitations of the P2P model – the constant balancing act of matching funds taken with funds lent, and the fact that there is generally more of one than the other. (Only last year Zopa had to close its platform to new money for some time, due to an oversupply of investment and an undersupply of borrowers). “Our mission is around making Zopa the best place for people’s money,” states Lawson. “There are plenty of markets out there on the retail banking side that right now we are not addressing.” Not many other P2P platforms have either the wherewithal or inclination to follow Zopa down the banking licence route, but one industrywide development that does have the potential to impact the whole sector is Open Banking. While many other platforms are adopting a wait-and-see approach, Zopa has enthusiastically embraced the potential of Open Banking – which enables customers to grant third-party access to their bank account data. “At the moment we are using it to make the borrower journey easier,” he says. “For the majority of people in the UK today, taking an unsecured loan is
still a mix of online and offline processes – printing off documents and providing wet ink signatures. It doesn’t have to be like that.” One example, he explains, is when a would-be borrower needs to provide more information, such as a bank statement to verify their income. “Some people don’t know what a bank statement is, because banks have stopped sending them.
surprised and encouraged me is that, when we do need to verify something, half the people already choose to go down the Open Banking route. And that was only in the first month after going live. “So customer appetite is already very strong and we’re only just scratching the surface of what the benefits could be.” The benefits he is alluding to are the range of new products and services that can be built
We went down a path of “ building a lot for ourselves, probably more than we initially thought” They get an ATM slip instead but that’s not the same. It just created a customer problem.” Open Banking will help to address this. “Where the customer gives us permission, we can go in and grab the data we need,” he says. And despite fears that decades of ‘don’t share your bank details with anyone’ security messages might have made customers nervous about granting that permission, Lawson says that the early signs are promising. “One of the things that has
on the back of Open Banking APIs. “The next wave is the valueadded services that it will enable – insights or actions based,” he says. Many of us, he adds, have floats in our current accounts that are larger than we really need on one side, and expensive debts on the other. Running with less in your current account could mean quicker repayment of debts and an overall improvement in your financial outlook. “But no-one is giving you that complete picture,”
he asserts. “It’s a great opportunity, and we have already prototyped something that can provide useful insights and help you feel in control of your financial decisions rather than being sold products.” He’s careful to point out that Zopa is not about to start offering regulated financial advice, but rather “insights into the broader picture in a customer-friendly way that puts them in control”. ‘Customer obsession’ is a well-known Zopa mantra, and one of the more unusual ways in which it is applied is in the team structure within the business. Rather than the usual functional departments – marketing, tech, sales and so on – Zopa’s people are divided into crossfunctional ‘Tribes’, each focussed on a particular customer area like unsecured consumer loans, or P2P investment. “What we found when we had a functional model was that we had great data and analytics people and great tech people, for example, but they weren’t really understanding each other,” Lawson explains. “With the crossfunctional model each tribe has ownership of the customer and of solving problems for the customer. The innovation is much more effective.”
It’s all in the name of providing a faster and better customer experience. “We are competing for customers that banks want to lend to, so the only way we can do that is by providing better value and a better experience,” he says. With the new bank and Open Banking firmly on the agenda, will Zopa’s core business of P2P
lending have to take a back seat? Lawson thinks not. “P2P is a really good discipline for being a responsible lender; it means you have to put long-term customer returns above everything else. It relies on trust.” There is another advantage to P2P which doesn’t get talked about as much as it should, he says. “A traditional bank
or balance sheet lender looks at the averages across their loan book. It’s quite hard to spot stuff if you are only looking at averages – little things that might be anomalies but might also be signals of things to come. “We have 60,000 lenders – 60,000 different views on our loan book. That forces us to be much more in command of
what is going on at a de-averaged level. It’s almost like crowdsourced portfolio management – keeping that is a really important part of our business model.” So the world’s oldest P2P lender may be in the process of becoming one of its youngest banks, but according to Lawson, it is not about to lose sight of its roots.
“P2P is a really good discipline for being a responsible lender”
The business lifeline
The invoice finance market is booming, providing vital support to the small businesses that are the backbone of the UK economy. Kathryn Gaw investigates the role that peer-to-peer lenders can play in this growing sector
T’S NO secret that cashflow is an issue for many small businesses in the UK, which has led to the growth of a booming invoice finance market. According to trade body UK Finance, invoice finance hit £18.9bn in the third quarter of 2017 – a
year-on-year increase of 14 per cent. The rigid lending criteria of high street banks is not suitable for every small business, so more and more borrowers are turning to alternative finance providers – including peer-to-peer
lenders – to support their working capital needs. The best-known firm in this space is Peer-toPeer Finance Association (P2PFA) member MarketInvoice, which purely focused on invoice finance until it expanded into unsecured business
loans last November. And companies such as Lendflo, Investly and Populous have sprung up over the past few years, combining P2P investing with invoice finance. “In the UK there is a huge market for invoice finance,” says Michael
Vroobel, vice president at MarketInvoice. “It’s a huge industry, and it’s quite an established product so generally the amount of financing stays quite stable.” Clearly this is a lucrative sector with benefits for both borrowers and investors. Investors can benefit from high returns over a short period of time, with the added bonus of being able to support UK businesses. For business owners, invoice finance can provide a lifeline by smoothing out uneven cashflow. Recent data from MarketInvoice found that 62 per cent of small- and mediumsized enterprise (SME) invoices were paid late last year, and according to the Federation of Small Businesses (FSB), there were more than 5.7m privately-owned businesses in the UK at the start of 2017, with a combined turnover of £1.9trn. These figures suggest that more than £1trn-worth of invoice payments were delayed last year, leaving millions of SMEs in need of short-term funding. “The proportion of small firms seeking external finance that apply for asset-based or invoice finance has risen to around one in three this quarter – up from one in seven at this time
two years ago,” says the FSB’s national chairman Mike Cherry. “This growth is to be expected given the pernicious late payment culture in the UK. For the thousands of small firms that hand invoices to corporate clients only to be left waiting months for them to pay up, invoice finance is a critical lifeline for releasing working capital.” Clearly, the demand for invoice finance is high and growing, but this presents a challenge for
credit risk process in place to protect its investors and support its borrowers.” For KPMG’s Elsigood, this is not dissimilar to the approach that many alternative lenders take towards asset-based lending. “I would actually include invoice finance under the asset-based lending definition,” says Elsigood. “Asset-based lending is really using the assets in the balance sheet of a business to lend against. So, invoice finance
there is a huge market “In theforUKinvoice finance” would-be lenders: how do you mitigate the very real risks associated with this type of lending? “SMEs need to put themselves in the shoes of the credit function of the lender and think about what their concerns are going to be about this loan,” says Steve Elsigood, national lead on KPMG’s enterprise financing team. “These risks will range from delayed payments, to an over-reliance on invoice financing, which can go on to affect the long-term cashflow and viability of the business. It is therefore vital that any would-be invoice finance provider has a stringent
or invoice discounting is using the trade debtors as opposed to the plant, equipment and even stock that you might otherwise lend against. “But what has changed in asset-based lending is that the market has become increasingly convoluted and complicated. It’s no longer about four or five mainstream banks with invoice discounting arms – there are various independents, there are challenger banks, there are P2P lending platforms. “And I think that the key value that debt advisors can bring is a knowledge of that market and an
ability to consider the lenders in relation to the particular circumstances of each business and directing the SME that they’re dealing with to the funder that’s best suited to meet their requirements.” If this description is starting to sound a bit like the classic P2P model, it’s because it effectively is – except for one major difference: while the P2P sector is actively regulated by both the Financial Conduct Authority and trade bodies such as the P2PFA, the invoice finance sector is widely believed to be under-regulated. In an interview with Peer2Peer Finance News last year, MarketInvoice chief executive Anil Stocker said: “we think that over time, invoice finance should be regulated because it’s a massive market and there are a lot of traditional players who take advantage of the fact it’s not regulated to charge higher fees and put lots of onerous conditions on business users.” However, one year on, this issue still needs to be addressed. “I can’t speak to where the regulation is going to go,” says MarketInvoice’s Vroobel. “At the moment, MarketInvoice doesn’t fall under the standard regulations of P2P platforms but we do follow the P2PFA guidelines very closely.
or five mainstream banks with invoice “It’s no longer about four discounting arms” “There are regulations out there, depending on what you decide to do. For example, if we were to open up to retail investors we would fall under article 36H and we would need to apply for that license.” For the borrowers, any concerns about regulation or investor risk awareness are completely overshadowed by the benefits offered by invoice finance. “It’s less easy for someone to rock up at a bank and get an overdraft these days,” says Elsigood. “So, I think invoice discounting and asset lending will continue to be important to SMEs.” In fact, this growing demand from borrowers may be helping to shape the future of invoice financing. Industry experts say
that rates are becoming less important to SME borrowers, who are instead prioritising flexibility and long-term partnerships. “If you had asked me five years ago, I would have said that rates were the most important thing to borrowers, but I think a lot of businesses have matured more,” says Chirag Shah, founding partner of alternative business finance provider Nucleus Commercial Finance. “Especially with businesses turning over between £5m and £50m. These businesses are looking
at lenders and asking: are these lenders going to support our future growth? As I grow, can the lender grow with me? Can the lender be more flexible than what we currently have or what some of the cheaper providers are offering? What are other things the lenders can bring to our party? Historically, I think we are seeing the borrower/ lender relationship change to become more of a partnership.”
The opportunity for future partnerships has never been greater. MarketInvoice has recently teamed up with tech firms such as Xero and Veritas as a way of accelerating its approval processes and making finance available to more businesses. “Open Banking is really exciting, first as a comparison tool but
secondly the customer experience could be fantastic – you go to onboard clients and then they give you their details and you can underwrite them in minutes, not hours,” says Vroobel. “That would massively help customer experience across the industry. And as we scale up, that leads to different options of investors and cheaper
funds. With Open Banking, I think we will probably see more collaboration with banks and more partnerships throughout the industry.” Small- and mediumsized businesses are the backbone of the UK economy, accounting for 99.9 per cent of all private sector firms, according to FSB data as of the start of 2017. As such, the poten-
tial for the P2P invoice finance sector is enormous – firms such as Nucleus, Sancus and MarketInvoice have already surpassed their own funding goals by lending £700m, £200m and £2bn, respectively, to UK-based SMEs. The demand for invoice finance is not going away any time soon – and P2P lenders are a vital part of the solution.
relationship change to become “I think we are seeing themoreborrower/lender of a partnership”
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