Asset Finance  through peer Lending

The European alternative finance space is growing at a phenomenal rate. The FT has reported on the Cambridge publication that has analysed the industry. The report highlights that the industry grew 144% last year to over Euro 3 billion and could be 7 billion this year. The report, from the University of Cambridge Judge Business School and professional services firm EY shows how a previously niche market has grown exponentially over the past few years with the UK dominating that growth.

So what will the industry look like in the coming years?

In our opinion the industry is taking different routes; in some cases there is a distinct move away from control over the investments made by lenders. What we mean here is that increasingly we are seeing platforms look to have tools that allow investment at a set rate with little transparency about where that money is being lent. It is certainly easier to manage inflows this way by matching loans after the event, the advantage being that origination of loans doesn’t necessarily have to align directly with cash inflows like the traditional model.

While we are not criticising this model (and in some shape or form it does have a place even on Ablrate) we feel that more tools should be available for investors, not less, but in balanced way. If, as an industry, we are going to just have individuals send us money and then we decide where it all goes, what are we offering that is different from a deposit with a bank? My problem with the banks is not that they make money, they are businesses after all, but the fair distribution of rewards.

It is a simplistic view of a complex transaction, but in essence your bank is leveraging your money to make loans and provide services and the returns you are offered do not correlate with the money they are making from those deposits, but imagine if you could see exactly what happened to your funds and were able to know how much the bank was making from your deposit? I know that this would be almost impossible to track, but let’s say it wasn't, how would this affect which bank you dealt with?

If you knew the bank were making 10% on your money and giving you 1%, how would that influence where you placed your funds (especially if your friend was getting 5% from another bank making the same transaction as your cash). This, really, is the essence of peer lending, there is a transparency on fees and rewards and in most cases (certainly on Ablrate) the lenders get the lion’s share of the return.

If the peer lending market goes too far down the route where lenders are given fixed rates with little or no information as to how that money is lent, how can you know if you are getting a fair return in the transaction? Are we not just moving towards being deposit takers and become a quasi-bank?

I don’t profess to know all the answers and when you look at some of those companies running such business models you will see they are, on the face of it, hugely successful at accumulating funds on account, I just feel we are losing something that makes our sector special.

For our part we believe that our role as a platform should be to give more information and tools to lenders and borrowers to manage their positions, that transparency should be the main watchword. The flip side is inclusion, allowing those who do not have the time nor the inclination to manage an active portfolio, to participate in the revolution. Our new platform will, hopefully, provide a balance for both types of investor while sticking to the core principals of the industry that were born out of the banks' failure to provide for the needs of investors in a positive transparent manner.

The industry is growing very fast yes, institutions are piling into the sector giving it the legitimacy it needs to grow even faster, I just hope that this does not stifle innovation and return us to the situation where the growth is what we concentrate on not the innovation.

After all we are called the 'Alternative Finance Industry' how long can we be 'alternative' if we just end up looking like a bank or building society?

Regards
David