There is a growing trend afoot to revolutionise banking and investing by using technology to simplify the links between those who want to lend money and those who need it.
Technology is disrupting this sector like it has done to so many others including advertising your home (Rightmove / Zoopla), calling a taxi (Uber) and selling your second hand items (ebay). Many of these new technological players have been well funded, extremely well marketed, are focused specifically on a niche subsector (making their brands synonymous with the very service they provide) and most important of all have no or very little friction from a user point of view, making them easy to use.
This is the approach that many of the new entrants to the UK lending market are taking; whilst at the same time keeping one eye on compliance. Manchester based Zuto and Carfinance247 are great examples of this trend. Their approach is disrupting the UK car finance market by changing the point at which car finance is obtained. They believe that organising the funding prior to finding the vehicle ensures their customers are in the best position to obtain a great deal on their dream car.
The trend for new business models to disrupt market places is well established, particularly around broking models with Fluent Money Group being a good example. Fluent’s focus on technology and customer journey make it one of the major disruptors in internet and aggregator based financial services sector; focusing on specialist consumer lending in second secured loans, re-mortgages and equity release products.
Kevin Hindley CEO of Fluent Money Group says, “Having run businesses in the industry for nearly 20 years, we knew that when we set Fluent up in 2008 our business model needed to be based around a market leading technology platform that would disrupt the market with a first class customer journey. Our business is a B to B to C model. We set out to be the very best operator in the internet/aggregator part of the market and more recently in the mortgage broker market. Technology has played a key part in the exponential growth of our business.”
The obvious answer would be that we are attracted by the high growth rates achieved by some of the companies in the sector. While true it is really much more than this, it is the underlying changing market dynamics across the sector and the ability of these disrupting business models, enabled by technology, to continue to win market share despite the return of the traditional credit supply.
This market has developed by the coming together of a number of critical global trends. Trends such as a lack of innovation from traditional lenders, underlying customer dissatisfaction and trust issues with the banks, the availability of secure/scalable technology and the low returns from interest rates that both individuals and institutions are achieving.
Challenger banks have been in the market for a number of years now using perhaps more refined credit scoring techniques, however we believe the next wave will be technology led. These banks will use AI and predictive analytics to speed up their credit decisions and automate their processes offering real time decision making. Their use of cloud based technology platforms will make scaling these businesses a lot easier.
In addition to this there are a whole range of individual subsector trends that are fuelling the specific alternative finance categories, the changing habits of consumer purchases and the flexibility required by certain businesses around funding working capital.
Scalability – Technology platforms with automated processes and offering outstanding customer journey experiences are at the heart of what we look for. The ability to accelerate growth without an equivalent percentage increase in FTE’s is key to the success of our businesses.
Security – This is critical. Significant platform improvements, or rebuilds, are super expensive but not as expensive as creating user friction or losing customer data due to systems being compromised by hackers. According to IBM the average cost of a security breach per company across the globe has reached $3.8m – this has the potential to be much higher in the alternative finance market.
Brand versus the Commodity Business – As the market becomes more mature we enter into the commodity race / the race to the bottom. When assessing a business we need to understand how are businesses unique? What is the level of repeat business if any? How strong is the Brand? Does the business have standalone or alternative funding capacity? Are margins stable or increasing?
Credit risk – Does the business assess or even take credit risk? Risks around the balance sheet are critical when assessing alternative finance providers. Some providers use SPV structures which have little or no recourse to the business itself, many act as a marketplace / online broker by, ‘clipping the ticket’ when matching the user and the lender on each transaction. The important point around assessing a broker is the extent to which they have the ability to assess the credit risk as well as their track record of ensuring defaults remain low.
Compliance – One area that we know is very much in focus for disruptive UK lending platforms is compliance. Fines / liabilities are large for non-compliant platforms, all parts of the lending food chain from aggregators, mortgage broker networks to lending institutions are rightly focused on ensuring any partner has compliance as a key area of focus. Compliance complexity is only likely to increase now that consumer credit regulation lies under the FCA rather than the OFT.
Andy Marsh of Beech Tree Private Equity says, “The UK lending sector has had and will continue to have a significant impact on the UK economy. In the UK we are in a very privileged position as we have one of the most sophisticated financial services markets in the world carrying with it market leading compliance techniques as well as huge funding pockets to tap. I am sure UK companies will continue their leadership in this sector and build these innovative alternative finance platforms.”