Remember the days when each business had a bank manager?
This fine pillar of local society assessed your loans on a personal basis and applied a real-life algorithm of risk assessment, historical activities and downright trust to decide whether to approve funding or not.
It may feel like we have come a long way since this but, interestingly, our digital landscape has created the new bank manager; the public. The retraction in bank loans to SMEs due to the financial crisis has lead to the recent explosion of crowdfunding. Used to fund the bizarre to the genius, crowdfunding (and more specifically P2P lending) is an alternative lending route where investors pledge money towards ideas and businesses in return for a reward (equity in the case of P2P), and it deserves mainstream status.
Free beer for the rest of your life? It’s a reality and it’s the reward for investing $1000 in Northbound Smokehouse & Brewpub in Minneapolis. This group of business partners used crowdfunding to prove the desire for their new eatery and in-house brewery in the local town; and it’s a pretty strong business case. Raising $220 000 through just 46 donators, it’s a classic story of “by the people, for the people” and it’s a solid example of why crowdfunding is here to stay.
Closer to home, Morph, the cheeky animated plasticine hero from the creators of Wallace and Gromit, announced its return to the (YouTube) screen recently after raising over £110 000 in just over a week. Having been out of action for over 10 years with an expected diminishing fan base, it’s probably fair to say that the average bank manager algorithm would turn this down before you could say smart.
To what extent is crowdfunding a problem for our traditional bank manager? And what, if any, pressure does this bring to our big banks?
A healthy return is attracting investors away from banks: Britain oldest Crowdfuding platform Zopa, advertises a competitive average net return of 4.9% for their investors. With FundingCircle, investors can expect this to rise up to 14% if they are willing to accept a higher level of risk. Could banks miss out on key investors looking for high return opportunities as they increasingly attracted to crowdfunding platforms?
Managed, low risks are not getting in the way: Currently, the biggest warnings come from the lack of cover through the Financial Services Compensation Scheme protection, leaving returns without a guarantee. With most funding platforms boasting a default rate of less than 1%, and two of the biggest platforms, Zopa and Ratesetter, running a protection fund to cover losses, it would be wrong to say that the risks are too risky for most.
From Crowdfunding platform to bank status; the threat of the unknown. Although it is not yet clear exactly what threat is posed from Crowdfunding platforms on banks, recently a P2P lending platform has announced it will be applying for bank status. Having raised over £1m for UK businesses, Bank To The Future is seeking this application in order to use its platform as a basis to offer an extended range of products alongside the “online meeting place” for investors and borrowers. If banks don’t fight back, I project this could become the norm and depending on the products offered, our bank manager could be left with a P2P shaped hole in their customers.
It’s not over till the fat lady sings; should and could banks resist this movement?
It could be argued that the level of threat faced by banks is minimal - lending to SMEs could be seen as high risk, non-profitable and therefore not a priority for the bi&g players otherwise wrapped up in the retail digital challenge, or regulation overload. But what chunk of the bank balance would have to be missing before they paid attention? One large bank is bucking the trend and exploring an alternative; In June 2014, crowdfunding platform Fundingcircle announced a large partnership with bank Santander. This partnership, allegedly, will allow Santander to refer small business clients to the Crowdfunding platform immediately. Although the costs and rewards of this for Santander remain unclear at the moment, it could be the start of a trend as other banks explore partnering options.
But how big is the jump between “partnership” and “acquisition”? My money is on pretty small, and I predict, actually expect, we will see acquisitions of P2P lending platforms from other large banks on the horizon very soon. I wonder if our Bank Manager is secretly thinking “Keep your friends close but your enemies closer”?