ALTFI EUROPE SUMMIT: Alternative finance providers outmanoeuvring banks
By Michael Lynn CEO, Relendex Limited

The great and good as well as the smaller players of the alternative finance community were gathered for the AltFi Europe Summit in London last Thursday. The vast space was abuzz with talk of challenger banks, mobile banking, Peer to Peer platforms and FinTech activity. It was in fact the sound of new players eating the High Street banks’ lunch.

The peer-to-peer (P2P) industry has seen tremendous growth in the past year that even big players like Goldman Sachs are launching online platforms and RBS has announced that it is setting up an SME lending platform. The dividing lines between conventional banking and the alternative players were beginning to blur. Not all platforms are looking to become a bank however Zopa, the personal loan (and oldest) P2P platform, has announced its intention to become a bank in the near future.

So where are high street banks losing out on to alternative finance providers?

Regulation and capital requirements (Basel III)

Following the credit crisis of 2008, Basel III was published which required banks to maintain proper leverage rations and meet certain minimum capital requirements. It saw the minimum Common Equity Tier 1 capital rise up to 4.5% which would restrict a bank’s lending activity. Bank capital requirements had also significantly reduced their profitability.

Slow response time

The amount of red tape that an individual would have to go through in order to borrow from a bank can see the entire process take 3-6 months. On the other hand peer-to-peer platforms are much more nimble allowing faster completion times. Relendex for example typically has loans live for up to 3 weeks, with many loans closing much sooner.

Banks also use the same process regardless of loan size. So whether an individual is looking to borrow £500,000 or £3,000,000, they are subject to the same amount of paperwork. Thanks to the wonders of technology, online lending platforms have the benefit of being ‘open’ 24/7.

Alternative finance platforms also benefit investors

Platforms offer great value to their investors resulting from - better models and underwriting, which in turn led to higher acceptance rates, better marketing and lower customer acquisition costs, more loans and more data. Funding Circle’s CEO Samir Desai CBE said that “In terms of return on equity, European banks achieved about 8% whereas platforms are achieving huge returns- Rightmove at 2,410% and Funding Circle over 1,000%.”

With banks being reticent to lend, it makes a strong argument for non-bank providers to the real economy.