Alternative finance feels pressure of uncertainty

By Jonathan Segal, partner, Fox Williams

July 14, 2020

Driven by new technologies, the alternative finance sector has evolved rapidly in recent years. It includes some of the most disruptive organisations the finance sector has seen, and has not always avoided controversy. In particular, peer-to-peer lending and crowdfunding have become common terms, giving both individuals and SMEs more choice in their borrowing and investment requirements.

Yet as the economic effects of the pandemic make themselves felt, many of these disruptive businesses will suffer. Consumers and businesses who cannot afford their debts due to decreased incomes and job losses could have a massive impact. Revenue streams will dry up overnight and investors are unlikely to invest further amid so much uncertainty. So what risks do organisations face, and what can they do to stay afloat?

Do not take your eye off the ball
Alternative finance organisations are feeling pressure from every angle. With decreasing income, many may have already furloughed staff, or cut jobs and pay. There is a danger that one casualty of this pressure will be regulatory compliance – whether through reducing spending on professional advice, or having less staff time available for compliance duties.

Either of these would be a mistake. Regulators will currently have heightened sensitivities to the regulatory standards organisations are supposed to follow, such as anti-money-laundering and know your customer requirements. At the consumer end of the market, regulators will also be vigilant for platforms’ behaviour towards vulnerable customers.

Alternative finance platforms must remember that the cost of following regulations is always, in the long run, less than the cost of not following them. Equally, businesses must be seen to support customers in these trying times. For instance, contacting debtors to reach resolutions or offer help at the earliest stage possible will offer a far more favourable outcome than rafts of consumers failing to pay on time.

Build your finances
Assuming lenders are confident in their compliance, the next major challenge will be securing their finances. Consumer lenders are most likely to struggle during the crisis, while businesses-to-business lenders will feel the knock-on-effects further down the line. Regardless of timing, if the financial stresses are more than they can bear, there are potential avenues to explore.
If the business urgently needs capital, selling off debt portfolios is an option. This will inevitably be at a discount, but it may free up vital equity capital to allow the business to survive. Another option is to invite further investment from existing investors. A last resort may be a sale to another alternative finance platform or financial institution. In any of these scenarios, businesses need to make sure they have kept all their data rooms up-to-date, so that they can pass any due diligence audit.

Lenders might also seek government aid directly. Firms may be eligible under the Future Fund, which has been earmarked for high growth companies across the UK. Eligible businesses are UK registered and have raised at least £250,000 in equity investment from third party investors in the last five years. Struggling online finance businesses that meet these criteria could explore this option.

Learning from history

The ashes of the 2008 financial crisis gave birth to today’s disruptors in the alternative finance sector. These businesses must now adapt or risk failure as we head into potentially an even larger crisis. Arguably the spirit of disruption will live on, and we may see the acceleration of more forward-thinking ideas and technology in the coming months and years.

For instance, open banking is likely to thrive in this environment, as lockdown drives more people to use alternative services. There will be opportunities for enterprising alternative finance lenders to branch out into new services. Regardless of how they approach the crisis, the priority needs to be keeping regulatory compliance in check, to ensure there are no nasty surprises further down the line – whether in the form of regulatory fines, or acquisition deals falling through that could affect the future of the entire organisation.



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