The UK alternative banking sector is growing with new businesses entering and competing into this field. The FCA, appreciating the huge benefit for the consumer, is lowering the barriers to entry without jeopardising the credibility status. This was also unveiled in PROFILE’s recent event which aimed to bring together industry experts and authorities in exchanging ideas and case studies.
FCA’s regulatory approach published in a paper issued last April recognised the developing Peer-to-Peer lending and crowdfunding trend as an important one, referring to the firms as “investment-based crowdfunding platforms”, “loan-based crowdfunding” and “peer-to-business lending platforms” depending on the type of service provided. It also sets the framework of operations in terms of reporting, CRM operations, security and flexible IT systems.
P2P Lending & Crowdfunding
The UK is the undisputable leader in the P2P sector with new, combined and diversified types of crowdfunding platforms being launched or having the potential thereof. These are facts presented by Peer-to-Peer Finance Association and Altfi but also the experience of PROFILE Software deriving from the number of enquiries being placed for a robust, flexible and easy to use crowdfunding system.
In addition, the UK alternative banking sector is also gaining ground with more than 20 banks having applied for authorisation to the FCA. Of course, some of the applications are from existing banks wanting to diversify their offering or established international banks entering the UK marketplace for the first time. However, it is really encouraging for the industry that several new “challenger” banks are also making their appearance with those authorised moving forward to operational mode.
The P2P and Crowdfunding trend
Crowdfunding, usually, refers to two different kinds of business models:
- The donation based crowdfunding which allows people to microfinance ideas, artists, etc., in return of a symbolic or sentimental reward
- The equity raising or lending platform labelled as equity crowdfunding or investment-based loan crowdfunding, which is open to investors looking for financial rewards or other types of returns i.e. products.
Peer-to-Peer Lending platforms (or debt-crowdfunding platforms) differentiate themselves by focusing purely on linking companies or individuals with other businesses and people who are willing to lend them money at a certain rate of interest while the Lending platforms gain – of course – a small commission.
The transactions are performed online based on a software system that among others manages lenders and borrowers requests, the loans applications together with the collections and collaterals, the various risk profiles, taking care of the cash flow between counterparties and calculating all the fees and charges leaving a small percentage of manual intervention to the platform’s back-office operators thus reducing the possibility of costly human errors. This, by default, requires a technological platform that would safeguard the enterprise’s interest, the lender and the borrower throughout the lifecycle of their transactions. It seems that in the UK, compared to the rest of Europe, these types of transactions are becoming more regulated and monitored. For this, the system that would be deployed, should offer a banking-like environment giving the flexibility to manage online requests, adhere to risk management techniques and manage the credit worthiness of the applicants, among others.
The background and the future
Alternative Finance (p2p)
This alternative type of finance began its course back in 2005 in the UK with one of the leading – now- companies in p2p (i.e. Zopa) whilst in the US has started a year later (i.e. Prosper) with the notion being more focused on crowdfunding. However, over the past couple of years Switzerland, Germany and other countries across the world are also experiencing a rise with new businesses being established for charities and business loans funding. Indicatively, the sector now worth over 2bn GBP only in the UK, according to Altfi.
On top of that, the UK alternative banking has gained significant momentum over the past year. This new way of banking involves smaller, lighter banking schemes aiming at offering more flexible and focused services to the consumer.
Since the state authorities’ regulatory approach is becoming less strict but still monitored to meet consumers’ banking and finance requirements, the sector benefits from a more personalised client-centric approach. This smaller banking scheme opportunity was the result of the need for a less complex banking environment as it existed prior to the financial crisis.
To successfully and securely realize such changes, organizations require flexible and fast-to-market software platforms suited to rapidly changing business needs that can accommodate both the internal structure, as well as, the regulatory and environmental guidelines.
In a nutshell, recent research and fora indicate that client-centric approach would need to be followed throughout. In addition, the following conclusions have been drawn as sector requirements:
For the Banking environment:
- Banks need to be small enough to avoid any costly mistakes and become more flexible to meet customers’ requirements
- Different types of banking services should be separated to offer independence, i.e. retail and wholesale
- Diversification of offering and ease of establishment create a safer and more competitive environment to the benefit of the end customer
- Organisations are expected to invest back into society and in the green economy while reducing speculation and increasing innovative investment approaches.
For the Investment Management sector:
- Ethical investments should be enhanced and supported
- Transparency and accountability become a must for all operations with responsibility falling on senior Board Members
- Clear and improved reward systems for long-term investments, are increasingly supported
All these trends and requirements were also presented at the event organised by PROFILE and Tusmor, in which the regulators, the newcomers and the supporting organisations converged in:
- A “consumer-focused” approach. To achieve these both companies and authorities need to work in partnership. Market competition drives providers to innovate and operate more efficiently, offering a wider range of options with consumers becoming more involved and engaged in their banking services“. “Barriers to entry” need to be lower, and consumers need to become more aware of the services available. This will lead to a client-centric environment with organisations offering the best available service.
- Technology can create a competitive advantage. Selecting the right technology can provide the much needed security, transparency, risk assessment and flexibility while proper management ensures financial viability.
- Become more agile. Having gone through three financial crises banking organisations (existing and “challenger” banks) start appreciating the effectiveness of flexible mechanisms in place with scalable technology that add value to the operational excellence they need for a faster turnaround.
By Herbert Leonelli, Business Development Manager, PROFILE Software UK