Peer2Peer Finance News January 2018 by Alternative Credit Investor

THE SURPRISE BREXIT BOOST

>> 6

EU split could benefit P2P property lenders BUSINESS AS USUAL?

>> 16

How the sector’s business lenders are staying ahead

Lending Works’ Nick Harding on building scale while maintaining your principles >> 10

ISSUE 16 | JANUARY 2018

Industry on the brink of a billion-pound IFISA boom THE INNOVATIVE Finance ISA (IFISA) market is set for a billionpound boom in 2018. Estimates from the biggest peer-to-peer lenders, who were absent from the first tax year of the wrapper, suggest subscriptions could break the billion-pound barrier as ISA season approaches. The IFISA launched in April 2016 but the big industry names such as Zopa, RateSetter and Funding Circle were absent as they spent much of the 2016-2017 tax year awaiting full authorisation from the Financial Conduct Authority (FCA) before they could offer the tax-free product. HMRC data showed that just £17m was put into 2,000 IFISA accounts in the last tax year. While these figures have been disputed by the industry, they still offer a sense of how low uptake has been compared to other types of ISAs. However, inflows are

set to soar in 2018 as the better-known brands with bigger loan books such as Zopa and Funding Circle have started rolling out their products, with RateSetter planning to launch its IFISA in February. RateSetter expects £500m to be channelled into its IFISA during 2018, while Funding Circle is anticipating “hundreds of millions”.

“Based on the conversations we have had with investors, we expect the IFISA to be popular and anticipate that hundreds of millions of pounds will initially be raised and lent to small businesses through the platform, with this eventually growing to billions in the longer term,” a spokesperson for Funding Circle told Peer2Peer Finance News.

“A huge proportion of our investor base has told us through surveys that they would like to put all of the money they invest with us through the IFISA. “The biggest inflows are likely to come after we allow investors to transfer money from existing cash or share ISAs which we will introduce once we have opened up the Funding Circle IFISA >> 4 to new investors.”

EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer Emily Perryman Reporter emily@p2pfinancenews.co.uk Danielle Levy Reporter PRODUCTION Karen Whitaker Art Director Zac Thorne Logo design COMMERCIAL Amy St Louis Director of Sales and Marketing amy@p2pfinancenews.co.uk 07399 414 336

As we enter 2018, it’s the perfect time to look back on how the industry has evolved and how much more it can achieve. Last year saw platforms reach dizzying new heights of loan origination (£2bn and £3bn milestones anyone?), secure a flurry of new partnerships and achieve growing awareness thanks to the Innovative Finance ISA (IFISA) and bumper advertising campaigns. Armed with all this success, 2018 can only get better for peer-to-peer lending. As our front page story shows, the IFISA could attract £1bn of funds this year – putting P2P firmly on the map among the retail investor community. Industry onlookers have speculated about the sector coming of age for years, and in many ways it has – but 2018 will be the year when it achieves serious scale.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by The Manson Group ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

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NEWS

cont. from page 1 Others who were in the market last year are also expecting a boost, with Abundance anticipating a 100 per cent year-on-year increase to between £40m and £50m. The potential of the product for better-known brands was demonstrated when Lending Works had to close its offering temporarily last February after hitting £1.5m of inflows within 24 hours of the product launching. Lending Works chief executive Nick Harding said the platform expects to lend £100m during 2018, £60m of which will be funded through its IFISA. P2P analysts are expecting a bigger “watershed moment” for the IFISA this

year as the better-known brands enter the market. “The IFISA landscape looks much better now than it did last year,” said Jordan Stodart, co-founder of P2P research firm Orca. “There are approximately 20 P2P platforms with IFISAs launched on the market, in comparison with two at the same time in 2016. “What’s more, two of the largest platforms in the UK have launched their respective ISAs, with other big players slated for ISA launches soon.” He suggested the authorisation delays were a factor in the low numbers of subscriptions, rather than the product being unpopular. “It’s encouraging to see the UK regulator work

through the long list of P2P platforms who have been queued awaiting full authorisation,” Stodart said. “Delays to authorisation caused delays to IFISAs entering the market, which was met with criticism from the media. However, it’s critical that platforms are authorised under robust testing and measures.” Neil Faulkner, chief executive of P2P analysis firm 4th Way, says the market dominance of the ‘big three’ firms provides an indication of how popular their IFISAs could be this year. “The three biggest P2P lending platforms make up around two thirds of the market,” he said. “All three will soon be

offering IFISAs and this will dramatically increase the amount of IFISA lending. “Until now, the platforms that already offer IFISAs have collectively been matching just a few hundred million per year in loans. The big three have done new lending this year totalling over £2bn. “Thousands of new lending accounts are being opened every month at the big three lenders and other platforms, and many more of these will be IFISAs next year.” However, he predicted that rather than new money, much of the IFISA funds will be existing investors shifting their money from ordinary P2P lending accounts into IFISAs.

P2PGI’s Champ defends initial strategy PSC EAGLEWOOD Europe chief executive Simon Champ has insisted he has no regrets over the initial strategy of P2P Global Investments (P2PGI). The investment trust – initially managed by MW Eaglewood before a merger with Pollen Street Capital last year – launched in 2014 and was the first investment trust focused on the peerto-peer lending sector, initially placing money with platforms such as Zopa and Funding Circle. But poor returns and an ever-increasing discount to net asset value (NAV)

prompted a review followed by a management merger to create PSC Eaglewood last September. The investment trust unveiled a new strategy in November, which included an expansion into non-P2P assets with a higher risk-adjusted return, as well as plans to accelerate share buybacks. But Champ says he has no regrets about the initial focus on P2P and insists it is still an investable asset. “The new breed of platforms that were around in 2014 were doing something

genuinely different,” Champ explains. “The lending space has evolved and the opportunity set has evolved. “It just no longer became appropriate simply to be a dedicated originator for P2P platforms.” He said merging with Pollen Street created a broader skillset for the fund but insisted there was still value in the P2P market. “We will continue to work with the strongest platforms who have a good balanced understanding of what investors want,” he added.

“Sometimes platforms are more focused on the borrower than the lender. “We are really proud and happy to work with some of the best and strongest platforms alongside some other originators you or I may not call P2P platforms.” Following the strategy update, P2PGI said it now expects to provide a dividend of at least 15p per quarter by the end of the second quarter of 2018, which analysts say reflects an annualised yield of 7.8 per cent.

NEWS

BORROWER SPOTLIGHT: PLANKS CLOTHING

WHEN Planks Clothing wanted to purchase stock ahead of the next ski season, they felt that mainstream lenders were unable to provide the finance they needed for their fast-growing but seasonal business. Instead, the ski clothing manufacturer and retailer turned to business lending platform Crowd2Fund, which provided them with a £100,000 loan through its new venture debt product. The funding enabled Planks to procure stock for the next ski season in good time, with followon revenues from the new lines allowing the company to pay back the loan. This is helping the business achieve its long-term aim of expanding into new territories and product lines. Planks was attracted to Crowd2Fund’s ease of use and flexibility, neither of which it felt was provided by traditional lenders. “Crowd2Fund fills a gap in the market that the banking sector is currently unable to meet by providing debt, or short-term financing to small businesses,” said Planks founder Jim Adlington, a former professional skier. “For businesses like Planks that have an annual working capital cycle this provides a great, flexible solution to short-term financing needs.” Chris Hancock, chief executive and founder of Crowd2Fund, explained that he saw a gap in the market for providing debt finance to newer businesses that are growing so quickly that they re-invest all their revenues. “By taking additional time to perform greater due diligence, we get a deeper understanding of how the business can afford to maintain a loan and repay our investors,” he said. “For Planks, the flexibility of the loan was perfect because it enabled them to produce an extra £100,000 of product that was already presold to wholesale clients. “The risk of not being able to sell the product was relatively low, which enabled us to offer what we saw as a low-risk loan.”

Higher interest rates will not stall P2P momentum THE POTENTIAL for interest rates to move higher in 2018 is unlikely to dent appetite for peer-to-peer loans, according to Neil Faulkner, founder of P2P analyst 4th Way. His assertion follows the Bank of England’s decision to raise interest rates by 0.25 per cent to 0.5 per cent in November – marking the first interest rate hike in a decade. At the time, Bank of England Governor Mark Carney pointed to the possibility of another two rate rises over the next three years to control inflation. Over the past few years, low interest rates have encouraged income-seeking investors to consider P2P loans, thanks to the inflation-beating returns they offer. While a higher base rate should feed through to savings accounts rates, Faulkner said interest rates would need to be significantly higher to damage the relative attractions of P2P. “I think there would need to be a substantial increase [in the base rate] before we notice a slowing or exit from P2P lending back to savings,” he said. So far, the November interest rate hike has not had a material impact on P2P loan interest rates. “That suggests lenders have not benefited from higher rates in new loans on aggregate,” said Faulkner. “Drilling down to the individual platform level, personal loans, residential property loans and SME loans platforms do not appear to have been paying higher rates to lenders.” Inflation rose to an annual rate of 3.1 per cent in November, its highest level in nearly six years, bolstering the case for more interest rate hikes this year.

NEWS

Brexit could benefit P2P property lenders UNCERTAINTY created by the Brexit negotiations could ultimately create opportunities for specialist peer-to-peer property lenders to grow their market share in 2018. Senior figures from property P2P platforms have expressed concerns about the instability created by the UK’s plans to leave the EU. Nevertheless, they said this could allow specialist lenders to take on more business, as banks continue to withdraw from parts of the market. “This level of uncertainty means some high street lenders are moving away from providing funding to this space, creating a great opportunity for

businesses like ourselves and challenger banks,” said Philip Gould, head of credit at Proplend, which specialises in commercial mortgage loans. His sentiments are echoed by Michael Lynn, chief executive of Relendex, which provides P2P loans that are secured against commercial and residential properties. “I think there are plenty of opportunities because the banks have been constrained for some time and continue to be – more so with ring-fencing approaching on 1 January 2019,” he said. The separation of investment and retail banking divisions is likely to mean that capital

adequacy requirements go up, resulting in reduced lending activity from high street banks, Lynn added. Significant falls in the values of high-end residential property have already caused mainstream lenders to become “weary”, said Mario Berti, chief executive of Octopus Property. While this creates opportunities for alternative

lenders, he emphasised the importance of risk management. “We will be closely monitoring residential and commercial markets in terms of prices and volumes,” he explained. “We will be looking carefully at the progress of Brexit negotiations, monitoring sentiment whilst we manage our risk.”

Seedrs braced for P2P platform crowdfunding boom SEEDRS expects to see increased crowdfunding activity from peer-to-peer lending platforms this year. In 2017, the equity crowdfunding platform delivered a raft of successful campaigns for P2P lenders, including £2.4m raised for Landbay and £1.7m for Assetz Capital. This method of raising money contrasts to P2P lenders’ own business activities of debt financing, but Seedrs suspects this crowdfunding trend will continue. “For any P2P platform

it is a no brainer to consider doing an equity crowdfunding round, assuming equity finance is the right route to be going down,” said Tom Horbye, senior campaign development associate at Seedrs. “This is because they have that two-sided marketplace. “If you have customers and investors who are using your platform and looking at debt options, there is no reason they would not want to look at equity investment and

invest in the business they are actively using.” Horbye noted that equity crowdfunding is likely to be more appropriate than debt financing for highgrowth businesses in the P2P space, which are often looking for a capital injection to scale up their operations. Assetz Capital opted to raise money via equity crowdfunding because the firm did not wish to take on too much debt during the early stages of growth. “Debt is appropriate, in part, for us but we don’t

wish to overleverage,” explained its chief executive Stuart Law. “It is the same ethos as our customers; we don’t lend to people who are over-leveraged.” John Goodall, chief executive of Landbay, echoes this view. He added that Landbay was drawn to Seedrs’ nominee structure when it launched its first crowdfunding campaign on the platform in 2014. This helped Landbay to raise its profile and expand its network.

SPONSORED CONTENT

A positive impact

Rachel Mountain, head of marketing and communications at Lendahand Ethex, explains how ethical investing is open to everyone

USTAINABILITY was once a term reserved for recycling, eating organic foods and driving fewer miles. However, a global movement has brought the consequence of economic development to the population’s attention, and the impact of activity is being scrutinised against the UN’s sustainable development goals. As consumers, we are increasingly aware of how our choices threaten the future of the planet and this is influencing the products we turn to. It is therefore not surprising that the most recent data from HMRC shows that uptake of the Innovative Finance ISA (IFISA) hit £17m in the last financial year. With an ever-increasing number of peer-to-peer lenders receiving ISA authorisation, this figure is only going to rise in 2018. Adding to the increasing variety of opportunities available for the positive investor, ethical ISAs enable investors to benefit from tax-free returns while safe in the knowledge that their money is being invested ethically, supporting projects that actively support initiatives such as the sustainable development goals.

Research from Ethex has shown that 90 per cent of the population are interested in making their money do good and 50 per cent are interested in positive investment. However, many people are still unaware of some of the ‘socially good’ investment opportunities or how accessible these options can be to retail investors. This October, Energise Africa, a partner initiative between Ethex and Lendahand, launched its ethical ISA that offers UK investors an opportunity to invest in solar companies, installing life-changing solar systems in homes in Africa, tax free. (Please note that Lendahand Ethex recommends that you take your own tax advice on any investments made via Lendahand Ethex). Currently 600 million people in Sub-Saharan Africa do not have access to electricity, which dramatically limits their life chances and opportunities. The solar businesses that are funded through Energise Africa help to provide affordable, clean energy to tens of thousands of families as well as schools, businesses and health clinics. The gap between demand for investment products

that make a positive impact and the products on offer is closing. However, there is still more work to be done by the investment industry to educate consumers that they have the power to apply their own values to investment choices, and to put these products on offer. The Energise Africa model makes it easier for eligible retail investors to browse available projects and see clear social and environmental benefits with the potential of financial return. Their ISA is an

make an impact with their personal finance. With a £50 minimum investment and choice of projects to invest in, the flexibility of this product means it may be easier for retail investors to access. There’s no reason why it shouldn’t be easier for more people to invest ethically. IFISAs, such as the one offered by Lendahand Ethex as part of Energise Africa, are an example of how small investments from a large number of people can make a difference to lives worldwide.

example of how innovation in financial products can take full advantage of tax benefits being offered through the government’s IFISA scheme, which allows tax-free returns for investments up to a £20,000 allowance per tax year. Since its launch, Energise Africa has seen all its bond offers close early, having reached full funding. The high demand for these products is a testament to people’s appetite to

Capital is at risk and returns are not guaranteed. Investing on Lendahand. co.uk involves risk, including the loss of all of your capital, illiquidity (the inability to sell assets quickly or without substantial loss in value), and it should be done only as part of a diversified portfolio. Investments are not protected under the Financial Services Compensation Scheme (FSCS). Please read the full risk warning on Lendahand.co.uk before deciding to invest.

JOINT VENTURE

Going for growth

Chris Hancock, founder and chief executive of Crowd2Fund, delves into the benefits of supporting early-stage businesses

STABLISHING – and growing – a small business can be fraught with challenges, especially when it comes to obtaining finance. A relatively short track record and irregular revenue streams can be a hurdle for the most promising of enterprises when they go to their high street bank for a loan. This is where Crowd2Fund steps in, providing creditworthy, early-stage firms with the essential access to finance they need to spur their growth. Through its revenue loan product, the business lending platform provides flexible finance for businesses with varying monthly revenues, so that they are not committed to a fixed monthly repayment. “I think it’s common sense, really,” says Chris Hancock, founder and chief executive of Crowd2Fund. “Coming from a family of small business owners, monthly working capital is often a problem. “Furthermore, with technology and financial innovation, we can simplify the reporting process for them. By using payment partners and new systems we can also reduce management overheads.” Crowd2Fund’s revenue

loan product is aimed at small- and medium-sized companies that are looking to grow but have inconsistent monthly revenue, such as a seasonal business. They need to have been profitable for six months and the minimum monthly payment is accrued interest plus 10 per cent. Terms are flexible, depending on how quickly the business pays off the loan.

enjoy impressive returns of up to 15 per cent without putting their money into high-risk ventures. “These aren’t necessarily high-risk loans, they’re simply businesses that need more flexibility and are paying for that through higher APR,” adds Hancock. Crowd2Fund also offers a venture debt product, suitable for high-growth companies that are not yet cashflow positive. Encroaching on a space usually dominated by equity crowdfunding, the venture debt loan enables fastgrowing start-ups to scale up without giving away a stake in their business. “These businesses wouldn’t be able to access credit from the “It’s a more expensive mainstream credit market, product, but it delivers but with the enhanced due value,” explains Hancock. diligence that we conduct “It’s about a modern credit on the businesses, we can assessment approach that clearly see that they are works in partnership with credit-worthy businesses,” the crowd and the general says Hancock. public, opening up a “We take the growth channel for businesses that factor into consideration a cannot access credit easily.” lot more than traditional The product has proved credit modelling does.” popular and now makes This is a higher-risk up almost a third of product, designed for Crowd2Fund’s loanbook. more sophisticated It has great benefits for investors, offering returns investors too, who can of up to 15 per cent.

It’s really “ important that

these businesses get the support and funding they need

”

Hancock envisages Crowd2Fund’s borrowers using a mix of the revenue loan and venture debt products, providing even greater flexibility for growing businesses. “I think there’s going to be a big focus on venture finance and finance for earlier-stage businesses next year, as it’s those businesses that are solving our productivity problems,” he says. “So it’s really important that these businesses get the support and funding they need.” Providing this support and funding to early-stage businesses is pivotal to Crowd2Fund’s ethos, with a view to benefitting the wider UK economy. It means investors can be similarly assured that their money is going to good use. “I think we do pretty well in supporting earlystage businesses in the UK, but we can always do better,” Hancock asserts. “With the risks to the economy such as Brexit, it’s important to make sure that there’s a big push for setting up new companies, creating jobs and generating productivity.”

PROFILE

Fair trade

Nick Harding, chief executive and co-founder of Lending Works, tells Andrew Saunders how he will achieve £1bn of lending while sticking by his principles

T’S ONLY JUST January and last year’s festive season is barely behind us, but the chief executive and co-founder of Lending Works, Nick Harding, knows what he wants for Christmas 2018 all the same. “Next year [2018] we’ll write £100m of loans,” he declares. “That’s 100 per cent yearon-year growth which is what we’ve had since launch in 2014. It hasn’t slowed even though the base has got bigger.” In fact that’s what he’d like every Christmas, an annual doubling which would see Lending Works join the exclusive £1bn lender club by 2022. A pretty ambitious goal for a business that lent a mere £5m in its first 12 months of operation, only four years ago. “We’re more confident in the 2018 numbers than we ever have been in previous years, and hopefully I’ll be sitting here in 2019 and saying the same thing,” he says. He’s taking it a year at a time however – Santa

might stop being so generous if he suspected he was being taken for granted after all. “The forecast does taper a bit at the end – getting from £500m to £1bn in one year is a big ask. But if we get to £750m we’ll be fairly happy with that.” Harding intends to get there by providing a matchless customer experience, and being able to prove it to the organisations he partners with. “I want to become the most recommended investment and loan company in the UK,” he asserts. “Our NPS scores are already off the charts, similar to Apple’s.” It’s this kind of big thinking that has helped to make Lending Works the UK’s third-largest consumer peer-to-peer lender, albeit a fair way behind the number one and two, Zopa and Ratesetter, which have both broken the £2bn barrier (admittedly with a few more years of lending under their belts). He has the vision to

match his ambitions for scale, too. “I want to pioneer fair financial services,” he says. “Making financial services fair not only means that we can sleep at night and be proud of what we do, it also makes very good business sense. “Because on the internet everyone has a voice, so those who are mistreating their customers, overpricing, mis-selling or whatever, get caught out. Fairness will make us a winner.” Lending Works’ growth, impressive as it may be, has not been without its occasional glitches however – notably last February when it struggled to

meet demand for its new Innovative Finance ISA. It broke a self-imposed £1m investment limit within 24 hours of launch having been deluged with investors, and was forced to close the ISA to new money for a week. Hardly the ideal launch for a flagship new product. It’s a situation that highlights one of the structural problems with P2P lending, that of the perpetual mismatch between investors looking for a return and borrowers wishing to take out a loan. There are always, it seems, too many of one and not enough of the other – and in the case of Lending Works (and many other platforms) there are

PROFILE

the political landscape as it is we would be “ With crazy to be anything other than prudent” usually more investors than borrowers. It’s a problem that Harding is acutely aware of. “We probably put 90 per cent of our time and energy into borrower acquisition, and the other 10 per cent into finding lenders,” he reveals. “That roughly shows you how much of a challenge each of those is.” Communication with lenders is exclusively through Lending Works’ own website, whereas the search for borrowers spreads far and wide, thanks largely to the

growing popularity of Lending Works’ API. “Borrowers we communicate with about 75 per cent through the API, and that will grow,” he says. “We have a great proposition and we have made it more available through API than many others. We make it easier and easier for partners to sign up – we have about 50 partners hitting the API and that number will grow significantly in 2018.” Its partners already cover a lot of ground, from fintech darling

Revolut at one end to old-school high street retailer Asda at the other. How will Harding and his 35-strong team of handpicked ‘black belts’ find enough lenders to keep the 2022 target in sight? “We already operate in the price comparison market, the traditional loan broker market, and the white label market – like our Revolut partnership,” he replies. “But we have another channel coming for 2018, which we will be pouring six-figure sums into. So we will start

acquiring partners in another vertical.” He won’t be drawn on any details of this development but it’s clearly set to be a big step in the quest for new borrowers. Nor will it be the last. “After that there is probably one other channel we will explore over the next two to three years,” he adds. “Then we will have most of the areas of consumer finance covered.” There are some things that they won’t be doing however – one is following the example of Zopa and

PROFILE

financial services fair not only means that we “canMaking sleep at night and be proud of what we do, it also makes very good business sense”

applying for a banking licence. “There’s no chance of that, we have no interest in it,” Harding says. “I think the only reason Zopa is doing it is because they want to do revolving credit. We believe there is plenty of opportunity for at least the next five years without revolving credit, so why on earth would we complicate things?” Another is moving into business lending. “The chances are that we will only lend money to consumers for at least the next five years,” he states. “Not businesses – it’s the race horse with blinkers approach, we know exactly what we want to achieve and we are very focussed on doing that. If you try to do too many things you end up not doing any of them well.” Computer science graduate Harding began his career at RBS in 2005, where he became a relationship manager

tasked with signing up tech firms as the bank’s customers. At RBS he also met Richard Priestman, who is now Lending Works’ chairman. Co-founder Matt Powell is a close friend from university who was previously an accountant for EY. Talking to all those entrepreneurs when he was at RBS must have rubbed off, because after a stint working at an investment firm he came up with the idea of Lending Works. Inspired by the Fair Trade movement, he wanted to bring the same ethos to financial services. “I think Fair Trade is brilliant – the idea of a farmer somewhere in the world and a buyer in a London coffee shop, with the money going direct from one to the other with as few people in between getting their sticky fingers on it.” He was lucky enough,

he says, that his success at the investment firm meant he could afford to take a gamble on starting a business. With his banking skills, Powell’s accountancy expertise and Priestman’s long experience of high-level corporate governance, they were a dream team. “I knew plenty of angel investors – we put the feelers out and people kept saying yes,” he says. “We had to do it.” Lending Works opened its virtual doors in January 2014. The biggest lesson from those early days, he says, was that finding would-be borrowers wasn’t hard, but finding ones they actually wanted to lend to, was. “We thought we would stick ourselves on the comparison sites and it would all be fine,” he explains. “Well that didn’t work! We were just saying no all the time.” Having witnessed the

Great Crash while at RBS - surely one of the most spectacular view points from which to see it all happen – you might expect Harding to have something of the zeal of the reformed banker. But he is pragmatic about the relationship between traditional banks and the P2P sector. “I am not one of those evangelists who harps on about how P2P lending is going to take over banking, because it’s not,” he comments. “P2P and banking were always going to meet in the middle, and that’s what is happening.” But if banks are not the enemy, he does have some large traditional institutions very firmly in his sights. “My aspiration is to take £1bn of balances from BNP Paribas Personal Finance – which has brands called Creation and LaSer – and Hitachi Finance. I would

PROFILE

Lending Works co-founders Matt Powell (left) and Nick Harding (right) love to be able to say we are doing that, and the reason is because they are doing a bad job for their customers.” Between them those two loan providers have around £5bn in loan balances and £500m in net revenues, he says, but provide a poor customer experience and have very little brand resonance. “They have significant presence but if you asked anyone in the street, other than the fact that

Hitachi also makes TVs, most people would never have heard of them.” It’s another audacious goal to add to the pile, but what if things go wrong? The economic climate is looking distinctly chilly at present, due to Brexit, fears over consumer debt levels and worries that the next big recession could be on the way. Some lenders have pulled back from riskier loans in preparation for

stormier times ahead – will Lending Works follow suit? “We have always been prudent and never written loans in areas that are too risky, so we have nothing to pull back from,” he affirms. “My view on consumer credit is that you can spend five seconds on Google and scare yourself very quickly. I don’t think there is a recession coming tomorrow, but we are writing five-year loans

today and there is a good chance that there will be one by [the end of those loan terms]. With the political landscape as it is we would be crazy to be anything other than prudent.” Prudent decision making combined with audacious goals. It sounds like an oxymoron but could well prove to be the recipe for success – for Lending Works and others – in these uncertain times.

JOINT VENTURE

High touch meets high tech

Phil Reynolds, managing director at Newable Lending, explains how high-touch mentoring and high-tech loan management is expected to help the peer-to-peer business lender fill a gap in what is believed to be an underserved market

AIRNESS IS pivotal to Newable Lending’s ethos when it comes to lending – and it’s not afraid to nail its colours to the mast. The peer-topeer business lender is a member of Responsible Finance, a trade body working to increase access to fair finance. “The organisation’s focus is on serving disadvantaged communities and providing support to people, which for us comes in the form of mentoring which we include in our loans,” explains Phil Reynolds, managing director at Newable Lending. “I believe business borrowers didn’t have the smoothest journey in the past, so our mission is to combine the hightouch mentoring element with high-tech loan management.” Newable Lending was founded in 1982 originally as Greater London Enterprise, but rebranded in 2016 to reflect its ambitious plans for national growth. The company has four main pillars – lending, private investing, advice and property – providing specialist products and services for businesses

looking to start, scale and internationalise. Harnessing its long track record and highly experienced team, Newable Lending has recently launched a P2P lending platform to help businesses looking for finance. Potential borrowers must have been trading for at least two years and have a property that is not their home to put up as security, with interest rates ranging between four per cent and 8.5 per cent per annum. Investors could receive returns ranging between 2.75 per cent and 6.25 per cent per annum*, with a minimum investment of £10,000. “The local element is extremely important to us,” Reynolds explains. “From a P2P investor’s perspective, it’s about supporting local businesses, and from the business’s perspective it’s a way to access a competitively priced loan with very transparent fees, accompanied by mentoring support.” It is this “high-touch” mentoring support that helps Newable Lending stand apart from other alternative lenders. Borrowers can arrange a

Skype or phone call with one of the business mentors and access a vast range of useful content online. Adding to Newable Lending’s “high-touch” support is its business exchange – a physical space on Epsom High Street, Surrey, where businesses looking for funding can speak to mentors face to face. That’s the “high-touch” side, so what about the “high-tech” side? Newable Lending has developed an in-house technology solution that can take the stress out of debt finance for its customers. “On the investor side, funds are deposited into e-money accounts and administered in an automated way, and from a borrower perspective, the whole application journey can be completely online,” explains Reynolds. Newable Lending has also endeavoured to make the process easier for introducers, by developing a dedicated portal where commercial finance brokers can manage their customers’ loan accounts. Looking ahead, the platform is aiming to lend out more than £500m over

the next three to five years, by tapping into what it sees as an underserved segment of the business finance market. “I think there’s been less focus on secured lending in the £500,000 to £3m bracket and a lack of funding options for these businesses,” says Reynolds. “There will always be elements of the market that will be underserved, but by offering support as well as funding, we’re helping to open it up in a slightly different way.” Your capital at risk if you invest. Investments are illiquid (meaning the inability to sell assets quickly or without substantial loss in value). Newable Lending for Growth Limited is not covered by the Financial Services Compensation Scheme (FSCS). *Projected return is an estimate of what investors could earn after fees but before bad debt and taxes. Newable Lending for Growth Limited is an Appointed Representative of Resolution Compliance Limited. Resolution Compliance Limited is authorised and regulated by the Financial Conduct Authority (FRN 574048).

BUSINESS LENDING

Getting down to business Business lending is now the largest segment of peer-to-peer finance in the UK, but fierce competition for good-quality borrowers means the platforms have their work cut out. Marc Shoffman delves into the industry’s plans to stay ahead of the pack

HE UK IS OFTEN referred to as a national of entrepreneurs, or as Napoleon reportedly said, a nation of shopkeepers. He meant this in a derogatory way, but the term has caught on. Since the financial crash of 2008 many of those socalled shopkeepers have seen the doors closed for funding. Successive governments have tried to tackle this with the Enterprise Finance Guarantee Scheme (where the government guarantees 75 per cent of a business loan) Funding for Lending (which let banks access cheap finance so they could then lend to small firms) and the British Business Bank, which is an umbrella body for several state-supported schemes investing in enterprises. A private sector alternative has also emerged in the aftermath of the financial crash: peer-to-peer lenders. Some of the biggest

P2P business lenders, such as Funding Circle, ThinCats, Folk2Folk and MarketInvoice, had cumulatively lent out £4.4bn in total by the end of the third quarter. This is up from £2.5bn of cumulative lending by the end of the third quarter of 2016 and has boomed from just £661,954 first recorded in the third quarter of 2014. P2P business lending volume in 2016 was equivalent to just over 15 per cent of all bank lending to small businesses, according to the latest UK Alternative Finance Industry Report by the Cambridge Centre for Alternative Finance. This is up from 11.7 per cent in 2015 and just 0.9 per cent in 2012. This is by no means a homogenous group, with P2P lenders providing everything from pure business loans to flexible working capital solutions. Many of these firms, including Funding Circle and MarketInvoice, have

support from institutions such as the British Business Bank. Data from trade body the Federation of Small Businesses (FSB) shows P2P is becoming an increasingly viable solution, with its own research showing one in five applicants approached a P2P or crowdfunding platform in the third quarter of 2017 compared with one in 25 two years ago. Brokers say firms value the speed and flexibility of P2P lenders in

comparison to banks. “Many P2P lenders are able to react quite quickly in providing finance as they operate under different credit policies to high street lenders,” Norman Chambers, managing director of the National Association of Commercial Finance Brokers (NACFB), says. “From a credit perspective they have different viewpoints that sometimes aren’t quite as strict as banks. “One common difference is that P2P

Many P2P lenders are able to “react quite quickly in providing finance as they operate under different credit policies to high street lenders

”

BUSINESS LENDING

technology is often more advanced than traditional banks and they are currently filling a void that some high street lenders haven’t been able to come back to since the 2008 crisis.” A past criticism of P2P has been that they are just getting the borrowers that the bank rejects, which may be too risky or not creditworthy. But this accusation is passionately rebuffed by P2P platforms. “Rejected is too strong a word,” Angus Dent, chief executive of ArchOver, explains. “Often the banks will provide smaller facilities than the business wants or needs, or facilities that simply don’t suit the business. “Whether companies that opt for a P2P loan are creditworthy is a separate question. From what we see, the banks often try to fit all businesses in to a similar credit model without the flexibility, nimbleness or perhaps the desire to really understand the potential borrower’s needs, and to provide a loan that fits those needs. “Unless you understand the business you’re going to lend to, you’ll always turn that business down at credit. It follows like night follows day. We work closely with an organisation to

of most businesses is that the only “ The mindset source of finance is their bank ”

understand its business model and then monitor the business and its assets every month - a level of scrutiny you wouldn’t necessarily find with a traditional bank.” Jordan Sanderson, business loans lead at MarketInvoice, says rather than the borrower being wrong for the bank, it is often the lender that isn’t appropriate.

“Business borrowers that turn to P2P for finance aren’t always the ones rejected by the banks,” he says. “We know of many examples where a business would likely have been approved by a bank, but the lack of funding flexibility, such as an annual review of overdraft limits and general hassle of having

to go into a bank branch, has driven them to pursue other options. Separately, ‘creditworthy’ could also mean a number of things. “Our risk models, which amalgamate various data points, enable us to get comfortable with different profiles that more traditional lenders, with a black-and-white approach, may not be able to do.”

BUSINESS LENDING

or some platforms, P2P is too loose a term. Ravi Anand, managing director of ESF Capital, parent company of ThinCats, says the word P2P is misleading. “Some of our lending is institutional and some is crowd,” he explains. “P2P is a misused term. You can use it in consumer lending and small lending but when you are lending between £1m and £2m you have to take a lot of due diligence. “Our credit team’s criteria is different to the

banks. I’m not saying the banks are wrong, they may just not have the appetite to lend. A lot is due to the size of the firm.” Size is an important factor in the P2P space, and it is often both the size of the business and the loan that dictates whether a small- and medium-sized enterprise (SME) considers this sector. This is something Conrad Ford, chief executive of business finance aggregator Funding Options,

has noticed. Firms such as Funding Options provide a range of alternative sources of finance for borrowers. It is also part of the Bank Referral Scheme that mandates lenders to refer rejected borrowers to aggregators where they can see other finance options such as P2P. “P2P is very strongly associated with large unsecured loans,” Ford explains. “Generally speaking, the major banks won’t do unsecured lending

above £50,000. “What that means is you can get some large and creditworthy businesses that go beyond the bank threshold. Funding Circle is a particularly good player here.” He says another issue is that many borrowers are disconnected with their bank. “SMEs are quite angry about how they are treated and looked down on by banks,” Ford adds. “P2P speaks their language.” However, this does not mean that getting borrowers is easy for a P2P platform. Ford says one of the biggest hurdles for lenders is origination, which he claims only Funding Circle has managed to overcome. As well as having firstto-market advantage, Funding Circle has recently invested in a £12m broadcast, tube and billboard marketing campaign. This has helped its loanbook grow to more than £3bn. Other platforms admit that general awareness and loan origination are issues but have opted to build their brand through partnerships rather than TV campaigns. ESF Capital’s Anand says partnerships through intermediaries, brokers

BUSINESS LENDING

and lawyers build trust. ThinCats appointed a series of origination managers across UK regions such as Scotland, the Midlands and the south west of England last year to build relationships with local advisers and brokers. This is an approach shared by Growth Street, which offers a flexible finance product called Growthline that lets companies access capital when they need it. It focuses its network on London, Manchester, Birmingham and the Midlands where it believes there is the biggest funding gap and most prospects for growth. It has partnerships with NACFB brokers and offers commission to introducers. It also sources leads through direct marketing, as well as finance aggregator app Bud. “The mindset of most businesses is that the only source of finance is their bank,” Greg Carter, founder of Growth Street, explains. “We find the best way is working with the trusted partners of that business such as brokers and accountants and make them aware that it exists.” P2P isn’t the only alternative lender as there are plenty of established specialist finance

providers for SMEs. Chambers says this creates a challenge for NACFB brokers when comparing P2P. “One of the concerns is they are portrayed as a lender to everybody,” he says. “One of the challenges is comparing why they can lend to all sorts of causes whereas there are specialist funders who have specific expertise. “A traditional funder may actually look at the type of product a business needs rather than a P2P lender just approving a loan request.” There is also further competition from banks entering the direct lending space, such as the Esme Loans venture from NatWest. Archover’s Dent insists there is space for everyone. “Even after a few days’ travelling, on my return to the office enough new business had come up in three working days to keep us busy through the next two months, and that’s assuming that the pipeline wasn’t already full to bursting, which it is,” he says. However, one area that commentators including Ford and Anand highlighted as saturated was invoice financing as there are a lot of specialist

funders and banks working in this area. This may explain MarketInvoice’s recent move into business loans, although the platform insists invoice finance remains its core offering. “We are positioned as a business finance company and our platform is how we deliver our business solutions,” Sanderson says. “Our offering has always stood out for its ease of use, speed of funding decisions, and a worldclass customer service team. Underpinning all of this is our motivation to enable business owners to focus on their companies.” All of this lender interest is backed up by institutional support both from funds and the government in the form of the British Business Bank. The Autumn Budget also unveiled a £20bn action plan to fund start-ups. The support for SME borrowing contrasts to the personal loans market where there are fears of a consumer debt bubble, so could small firms get caught up in a business loans crash? Both the FSB and the NACFB warn that Brexit and the withdrawal of European Investment Bank funding may tighten the credit market. But Ford points

out that the lending environment is nowhere near bubble territory. Bank of England data shows loan approvals to SMEs were up just 0.5 per cent annually in October, compared to a peak of around 15 per cent almost a decade ago just before the financial crash. There is a long way to go to get back to the precrash SME borrowing levels, but another criticism levelled at P2P is that platforms have not been through an economic cycle. Funding Circle put this to the test last November by seeing how a loan portfolio would perform under Prudential Regulation Authority-style stress testing in an experiment independently verified by financial consultancy True North Partners. The platform simulated how two example portfolios paying 6.7 per cent and 6.8 per cent respectively would perform in a severe recession similar to 2007/08, and found they would still return around five per cent. For now it seems P2P lenders are a vital part of keeping the door open to finance to help this nation of shopkeepers grow, whether Napoleon likes it or not.

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Making the most of your money

Angus Dent, chief executive of peer-to-peer business lender ArchOver, explains how P2P is attracting the next generation of investors and savers

S INFLATION grows ahead of expectations, far too many savers are seeing the value of their hardearned cash decline. Recent research from the Financial Conduct Authority (FCA) found that just under a third (30 per cent) of UK adults would not be able to cope if their mortgage repayments increased by £50 a month. With the recent 0.25 per cent rate rise, it won’t be long before these households feel the

squeeze. To add insult to injury, the rate rise is not being passed on to savers, and the chances of interest rates catching up with inflation any time soon are extremely slim. There’s no room to breathe in the current system. UK households can’t build a proper financial buffer with their low interest rates, and it’s even harder to achieve a decent return on investment. ArchOver’s ‘Next Gen: Investors and

Savers’ report, which explores the investing and saving behaviour of UK adults, illustrates that the response to these challenges has been mixed to say the least. We’re told that millennials are stuck in a financial rut, trapped by high property prices and low wage growth. In reality, however, it appears that a larger proportion of millennials are putting their money to work than older generations, getting higher returns on their

investments and being bolder with their portfolio options. The rise of a subscriptionservice mentality means the ‘digital native’ generation is pushing the boundaries, more willing to make short-term, highyield investments. Caution and safety Despite this growing willingness to consider new investment options, the overwhelming reaction to change across all generations thus far has

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economic environment, savers and investors “ In a challenging need to broaden their options”

been to bury our heads (and money) in the sand and hope for a sunnier day. In total, two-thirds (67 per cent) of UK adults see themselves as savers. This is a group that is using savings accounts and pension funds to sit on their cash. It’s human nature to be careful in a crisis and they like the security these options provide. Well over half of savers associate the word 'savings' with 'security'. The danger for these savers, though, is that they risk seeing their nest egg dwindle away over time as inflation and low interest rates eat away at their money. They are being led down the primrose path by deceptively ‘safe’ banking options. On the other hand, the remaining third (33 per cent) of UK adults see themselves as investors, using riskier avenues like stocks, shares and property to grow their investments. They’re bolder than their counterparts, but still more than half associate the increased risk with

uncertainty and caution. As a result, the majority will only put their cash in traditional investments that they’ve used before, or that a friend would recommend to them. The legacy of economic instability from the global financial crisis in 2008, alongside political uncertainty in the form of Brexit and Trump, is making investors wary. Until they can get greater clarity, even the UK’s most adventurous investors are playing it cool. Diversifying your portfolio Both of these camps could make a change. There are other ways to balance security and risk in order to maximise returns without putting their capital in too much danger. In a challenging economic environment, savers and investors need to broaden their options and embrace alternative forms of finance. At the same time, the peer-to-peer lending sector has been steadily maturing over the last

five years. P2P is leading the charge in alternative financing options for UK adults stuck in a financial rut. Rather than committing their money to the banks and hoping for the best, P2P lets people put their money into investment options they believe in and can trust to grow, helping them to boost their returns at an acceptable level of risk. As investors and savers look to break out of the cycle of low returns, P2P is set to be a key part of the next generation of investment in the UK. The rise of P2P For example, UK savers and investors are showing a willingness to embrace P2P lending. When thinking about their money, six in 10 (64 per cent) respondents would be willing to lend to family or friends if they gave their word they’d pay the money back. This rises to 68 per cent for savers and sinks to 54 per cent for investors.

UK savers and investors are also willing to back British businesses. Six in 10 (63 per cent) would be willing to lend to a business. Over a quarter (26 per cent) would lend to a business that could use their assets as security. A quarter (25 per cent) would lend to an established business that has been operating for a few years and 11 per cent would lend to a start-up business. However, while the number of investors willing to lend to a business rises to 90 per cent, the number of savers is just 50 per cent. When it comes to P2P, investors are leading the way. Over half (54 per cent) claimed they would put money into the new Innovative Finance ISA (IFISA) if they had the disposable income available, since it offers a higher return on their savings (63 per cent), higher levels of interest payments per year (42 per cent) and because they have more confidence in the P2P sector now certain platforms have been approved by the FCA (31 per cent).

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Understanding a new sector Yet more than a third of investors (39 per cent) are still nervous about the risk of losing their money. Over a third (37 per cent) are still concerned that they don’t fully understand the sector and just under a third (31 per cent) still don’t see P2P as a fully regulated sector. Ultimately, P2P is still likely to attract those with less need for security, as continued uncertainty around the maturity of the sector has yet to wash away. In contrast to investors, just over a third (36 per cent) of UK savers would put their savings into an IFISA if they had the disposable income available. This is despite

61 per cent of savers recognising that they would achieve a higher return on their money and 42 per cent acknowledging that it would offer higher levels of interest payments per year. However, the majority (57 per cent) are held back by the fact they still don’t understand the IFISA and 48 per cent are nervous about the risk of losing their money. Further education and assurance is needed to shake UK savers from their stasis and encourage them to embrace new saving vehicles. P2P lending may have been seen as an uncertain option for a decade. Now, as investors continue to experience rock-bottom

BENEFITS OF AN IFISA

Source: ArchOver

interest rates, and City watchdogs approve new forms of alternative finance, P2P is coming of age as an alternative asset class. Institutional investors are now being attracted to the sector, with high-profile fund managers like Neil Woodford and Artemis investing in RateSetter. However, this is only the beginning. No wonder it is one of the fastest growing markets in the UK. P2P and the future of investing As the country continues to recover from the aftershocks of 2008, people’s propensity for risk doesn’t have to change, but the contents of their portfolios should. The financial crisis

has sparked a decade of change and we’ll see highreturn, high-security P2P options leading the way to higher returns as part of a diverse portfolio. P2P has already benefitted many areas. It has advanced day-to-day business lending, provided new routes to finance, and supported innovation among British businesses. The list goes on. But the full extent of its potential for savers and investors has not been realised. Not quite yet. For many, P2P is still seen as a new concept and there has been a desire to cling onto traditional relationships with bank managers, but times are changing. P2P lenders are now established businesses,

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“ P2P is coming of age as an alternative asset class” many of them operating for at least eight or nine years. With new P2P business models in place, savers and investors can have confidence in the security of their funds at a time when rates of interest remain extremely low. What’s more, despite our research pointing to a millennial boom in alternative investing, Gen X is the most strongly represented group on the ArchOver platform.

There may be a gap between what people say they do with their money and what they actually do – but what we can say for certain is that P2P is not constrained to one generation. Millennials and Gen X are both showing interest in the benefits it can bring and are starting to broaden their portfolios. Our research shows how the UK population is behaving now, but it also points the way

forward. The good news is the need for security naturally decreases when individuals and businesses recognise that they are not operating in their normal climate. It is time to educate investors and savers on how new investment options could help them make the most of their money. About the research ArchOver commissioned independent research firm 3Gem to survey

2,000 UK adults about their attitudes towards risk and investment in the current climate. The research explored whether economic uncertainty, political decisions, interest rates, inflation changes and housing market conditions are driving a new appetite for investment. It also considered the various behaviours and attitudes of investors and savers towards the alternative finance market.

OPEN BANKING

Levelling the playing field

Open Banking rules come into force this month with the potential to overhaul banking as we know it. Andrew Saunders investigates what the changes mean for peer-to-peer lenders

T MAY NOT YET be well known in the wider world of the consumer and small businesses, but for those in the financial services and fintech communities, Open Banking is one of the hottest of hot topics. With big customerfacing regulatory changes coming into force this month, it’s no wonder, as there really isn’t much time left to get to grips

with the idea before it becomes reality. But what exactly is there to get to grips with: what is Open Banking? How will it work and what impact is it likely to have on banks, peer-topeer platforms and other lenders? Is it just another government competition wheeze that will end up in the long grass like so many others before it? Or is it really going to be a

step change, the doorway to a bank-anywhere world offering a choice of hightech services and speed of execution that today’s put-upon bank customers can only dream of? As is so often the case, the answers you get to these questions depend very much on who you talk to. Nick Harding, co-founder and chief executive of the UKs third-largest consumer

P2P platform Lending Works (profiled on page 10), is an unabashed enthusiast. “We love Open Banking,” he asserts. “It has the potential to totally level the playing field between all participants in the market. We think we will be ahead of the curve in terms of adoption – I’m not saying that we will be the best but we will be better than the vast majority.”

OPEN BANKING

already have the customers and the trusted “ Banks brands, so partnerships will be enabled” Lending Works is in the process, he admits, of signing up a tech partner to help deliver its Open Banking ambitions. What is it about the potential that is getting him so excited? “We think we will get to 90 per cent automation of the borrower acquisition process within the next 24 months,” he says. “We’re currently at around 50 per cent to 60 per cent.” That will transform the customer experience that Lending Works can offer, he says, giving it an even bigger advantage over traditional high street loan providers and helping the business realise its ambitious 100 per cent annual growth targets. “If you can say to a customer, ‘you’re approved for that loan, the money will be with you in one minute’, that’s a heck of a lot better than ‘wait 24 hours and someone will give you call’,” he adds. Driven by a series of regulatory changes set in train by the Competition and Markets Authority in the UK and the wider EU authorities, Open Banking is intended to encourage competition in the financial services sector through improved data

sharing. At its heart, as the name suggests, is the principle of openness (not a quality that banks are currently renowned for). It will allow approved third parties – including fintechs and alternative lenders - to have secure access to consumers’ bank account transaction details, surely the gold standard of data in an increasingly datadriven economy. “Open Banking allows you to connect your bank account directly to fintechs,” says Jeremy Light, head of payment services at Accenture. “It will completely transform banking in five to 10 years. “Historically banking has been about bringing customers into the banking environment – the branch or the bank’s own website. Open Banking is about going outside that environment so that you can bank however and wherever you want.” It’s a change, he says, that mirrors the trend for openness that has already taken root in many other sectors, thanks largely to the increasing use of APIs to sell products on platforms other than the

provider's own. “Take Expedia for example,” he states. “You can buy a BA flight without ever having to go to the BA website itself. Or PayPal – you don’t log onto PayPal to go shopping, you go to Amazon or wherever. PayPal is just there when you need to pay – and it’s a hugely successful business.” anks and financial services businesses are late to the party, he adds, partly because of the regulatory environment and partly because of significant customer concerns over security. A recent survey by Accenture found that 69 per cent of a sample of 2,000 UK consumers would not trust third parties with their bank account information – although Generation

Z’ers (those born after 1996) were almost three times as likely to adopt Open Banking payment methods than Baby Boomers (33 per cent compared to 13 per cent). This is despite all data being shared on an anonymous basis, once the account holder has given permission. Those figures suggest that persuading punters to take part in the Open Banking revolution might be an uphill struggle, but the lessons from the past are that such scepticism can be fairly readily overcome if the new products and services that arise are sufficiently compelling. No-one now gives much thought to using their credit cards to buy products or services online, but back in the

OPEN BANKING

“ It will completely transform banking in five to 10 years” early days of e-commerce there were plenty of dire warnings that the practice was too risky to ever catch on. The largest P2P players are giving Open Banking a generally warm welcome. Zopa’s chief product officer Andrew Lawson told the audience at LendIt Europe back in October that “Open Banking is a really exciting opportunity for 2018”, citing potential improvements in customer validation, fraud checking and loan pricing as some of the main benefits. Meanwhile, a Funding Circle spokesperson tells Peer2Peer Finance News that having vision of borrowers’ bank transaction data would help the company refine its marketing strategies, obviate the need for borrowers to manually submit bank statements for approval and spot potential delinquencies more quickly. And Ratesetter’s co-founder and chief operating officer Peter Behrens says: “Open Banking can unlock how financial products are

distributed. It could lead to a big change in the next three years.” It will also encourage investment and activity from those beyond the financial services and fintech sectors – with open data sharing there is little to stop the likes of Amazon and Facebook getting in on the lending act should they wish to. But the P2P sector is a broad church and not everyone in it is singing from the same hymn book when it comes to Open Banking. For platforms with smaller customer bases, larger individual loan values and fewer processes that are amenable to automation, the upside is less obvious. “Our model relies on human service and I don’t want to dilute or outsource that,” says Giles Cross, chief marketing officer at Folk2Folk, a West Country-headquartered lender specialising in loans to local businesses secured against property. As well as an online platform, it has bricks and mortar offices for those who prefer a faceto-face experience.

And while he concedes that it has the potential to improve credit checking and simplify payments, for the time being it is not high on his ‘to do’ list. “Has the customer asked for it? Will Open Banking help me create a best-loved brand in UK finance? I don’t think so. It’s not a focus for me until customers start to ask for it.” While there are plenty of opportunities presented by Open Banking, what about the threats? On the face of it the high street banks face the largest risk, as third parties could use the data to improve their offering and attract the banks’ customers. That ultimately leads to the prospect of established banks becoming infrastructure businesses, the financial equivalent of broadband services, maintaining back end access to common systems which facilitate products and services offered by other providers. “Look at what happened to the telcos when they were deregulated. They are now utilities, they provide the infrastructure and security layer,”

says Caroline Plumb, a successful London-based entrepreneur whose current business, Fluidly, is a fintech start-up aiming to use Open Banking data to offer intelligent cashflow management services to small- and medium-sized enterprises. To counter this risk, banks have innovation teams whose task it is to identify promising fintech providers and partner with them, she says, HSBC-owned retail bank First Direct’s partnership with Bud being a good example. This involves 2,000 customers trialling a new app that enables them to link accounts from all their different banks, as well as offering money management tips. The big question will be how far and how fast these products become mainstream, says Plumb. “Banks are quite risk averse and slow,” she asserts. “Their innovation teams are good at delivering the proof of concept, the challenge is getting those proofs of concept into the wider business. How many are really scaling?” But some industry-

OPEN BANKING

watchers think that this time, the banks are on to it, too. “I have a sense that the banks have embraced Open Banking, it’s an idea whose time has come and they are ready for it,” says Tom Bull, director at accountancy firm EY. “Fintechs are innovative and quick, but they can struggle to get to a customer base. Banks already have the customers and the trusted brands, so partnerships will be enabled. “Remember that it was the competition regulator that implemented this remedy, and banks have become very good at responding to changes in regulation.” So at the very least, Open Banking ought to result in faster, better processes for P2P platforms and borrowers, and consequently more consistent returns for investors. Will it go further, and usher in the fintech revolution that its supporters promise? That depends not only on persuading bank customers that it’s safe to allow access to their transaction records, but also that the products and services on offer from third parties are good enough to make it worth taking the risk.

WHAT IS OPEN BANKING? Open Banking is an initiative led in the UK by the Competition and Markets Authority (CMA), born out of the same desire to increase diversity and competition in the UK banking sector that has led to the rise of challenger banks and P2P lenders. It mirrors an EU-wide initiative driven by the second payments services directive, PSD2, whose staged rulings are already underway. The new laws will compel all EU banks to grant access to account transaction data to external providers such as fintechs and alternative lenders. Data will only be shared with approved third parties, and only subject to explicit permission from individual account holders. Access to bank transaction data should allow those third parties to improve the quality of their lending decisions and processes, as well as – in theory at least – permitting a wide range of new products and services to emerge, and make them easier to access for consumers. The vision is that banking will become a more modular and mobile affair, with the bank providing the account infrastructure to which customers can ‘bolt on’ services from a range of third-party providers. The CMA’s delivery body - the snappily titled Open Banking Implementation Entity – provides the technical standards for the APIs that will be used to deliver Open Banking data sharing. Some data – such as cashpoint locations – has already been released. The next major milestone comes on 13 January 2018, when the UK’s nine major banks must open up their APIs to permit access to transaction data and alerts when an account is about to go overdrawn, for example. The impact of similar APIs in other industries has been dramatic – Uber would not exist if it weren’t for the Google Maps API, nor would CityMapper without APIs from city transport authorities like TfL. So Open Banking has the potential to be the biggest shake-up in retail banking for a generation. But as adoption is dependent on individual account holders granting access rights to specific third parties, it is likely to be held up by lack of awareness amongst bank customers as well as security concerns over sharing such sensitive data.

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