Uber, the dragon and the banking sector.
Banks lend money. Taxis transport people from one pace to another. You may not think there is much similarity between the two. But both are based on a simple enough premise. Both have managed to build an uncontested and reliable status quo. Both are also facing a challenge to their dominance and both are resisting or (at best) slowly adapting to changing times.
As Albert Einstein said, ‘Everything should be made as simple as possible, but not simpler.’ But what is 21st century simple? In the world of people transport Uber has come up with an answer. It has tapped into the modern world and understood the psyche of the modern person and in the process shaken the status quo. But what about the banking sector and specifically bank lending? Over several hundred years of trade surely the banks have had time to develop a product that is as simple as can be? But is it 21st century simple and if not where does this leave the banking sector and traditional lending?
Everyone is familiar with the likes of Barclays, HSBC, Lloyds or Santander and this is because they are banking giants– a veritable banking cartel – who by the size of their market share dominate the lending landscape. They do not have to innovate or have to be overly accommodating or flexible. They have a set criteria and fixed requirements – boxes which their clients have to tick before they consider lending.
By virtue of their size they are volume business based on vanilla deal types which are underpinned by a methodological and transactional approach which has served them well for decades. The result of this approach is that they manage their risk well and so can lend at very attractive rates.
But the risks are changing as the 21st century business world develops. It is a pace of change that traditional bank risk appetite isn’t necessarily keeping up with. Sometimes all the risk modelling and financial sensitivity analysis in the world can’t answer the question; do I buy into this person, their business and their plan?
The question do I buy into this person, their business and their plan is more relevant than ever.
We are now entering the world of the dragon and it is in their den is where business now finds their finance. In the recent past this was a niche world inaccessible to the majority of businesses. But it is now evolving and entering the mainstream under the guise of peer to peer lending.
With low interest rates and lower yields many private investors and hedge funds are beginning to pour billions into peer to peer and independent lenders. You and I can sit in that comfy leather chair see the metaphoric whites of a person’s eyes and make a gut decision on them and so decide the fate of their dream – it is a power usually reserved for the super-rich…. or TV personalities.
But the attraction of being an arm chair dragon, the potential of higher returns for the investor and faster, more convenient loans for borrowers mean that this sector is set to grow and in the process begin the shape the lending landscape.
But let us bring some context to things. In the current market, peer-to-peer lending to SMEs still accounts for less than 1% of total lending. However the number of new entrants into the market is increasing and the amount of money lent is growing rapidly. It has caught the imagination of all wannabe dragons. But more importantly is has also attracted the attention of large funds with huge amounts of money to invest – enough money to ensure that the investment isn’t speculative and failure isn’t an option.
Peer to peer and Uber are here to stay- get on board or ride the last old black cab back to the last century.