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DOES THE ALTERNATIVE FINANCE BOOM REALLY HERALD THE END OF BANKS?

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Alternative finance is booming, up 148% in the UK alone across all platforms and over two thirds of British SMEs say that they would consider raising finance in this way, according a recent survey by UK Bond Network.

This growth is predicted to snowball in 2015 across both sides of the Atlantic. In the UK it’s expected to grow to £4.4bn according to a report by Nesta and the US is expecting triple digit growth across different platforms. At the end of December the first crowdfunded company floated on a British stock exchange, showing how alternative finance is embracing existing financial models, potentially making it even more useful for investors and users alike.

The alternative finance sector’s surge is prompting leading commentators to suggest that it’s opening up a much more democratic finance system that could finally shake the hegemony of major banks. Is this pure hyperbole or is there substance to these predictions?

How could altfi change the finance system?

Bruce Davis, one of Zopa’s co-founders, believes that the rise of alternative finance platforms gives investors the chance to “make the markets they deserve” by taking back control of their money and investing in projects that not only give them a good return but also align with their ethical concerns.

As an example, he transferred his personal pensions from traditional funds to renewable energy debentures held within a self-invested personal pension (SIPP).

Acting under the pseudonym Jonathan McMillan, an investment banker and macro-economist posits that online alternative finance providers will not just supplement traditional finance, but replace it. This is because digital funding methods like peer-to-peer lending and crowdfunding don’t require an intermediary bank, redefining the idea of balance-sheet solvency.

With increased liquidity, scale and safeguards they argue that alternative finance could replace banking, being the financial revolution for the digital era that banking was to the industrial revolution.

Given alternative finance’s stratospheric growth and the UK government’s stated goal of making it easier for SMEs to access, although it’s a shift that’s difficult to imagine, it’s far from impossible. Just look at the revolutions in communication that have taken place over the last 20 years – why should finance be any different?

Are we on the edge of a financial revolution?

Are we on the edge of a financial revolution?

The challenge of regulation

Neither investors nor the alternative platforms themselves enjoy the same level of protection which is currently offered to banks and their customers. In the UK, savers with under £85,000 in their bank, building society or credit union account are automatically protected by the FSCS.

In contrast, there is not official protection for alternative finance investors. However, many platforms are already taking steps to ensure their customer’s investments are as safe as possible. On peer-to-business lending and crowdfunding sites pre-campaign creditworthiness checks are standard.

Peer-to-peer lending firm Zopa introduced its Safeguard Fund to reimburse investors in case of defaults, while it is industry standard to keep investors money in protected bank accounts. Many peer-to-business platforms also require businesses to secure their loans against assets.

However, this doesn’t equate to the same level of protection enjoyed by savings accounts and defined benefit pension schemes. But at the same time, according to Adam Tavener, who is involved with the Alternative Business Funding (ABF) scheme, the government needs to ensure that regulation doesn’t kill the innovation that drives the altfi sector, saying: “The regulatory conversation around alternative funding should be a rather different one than traditional financial service product regulation.”

If the government and alternative finance providers could work together to get it right, it could provide a strong catalyst for economic growth as well as challenging the main banks.

The investor’s choice

Interest rates are still at rock bottom, while fees, four figure minimum investments and uncertainty over performance can all daunt prospective stock market investors. Alternative finance can offer an accessible alternative, with many peer-to-peer or crowdfunding options allowing investments of under £100.

While Nesta’s Understanding Alternative Finance 2014 report shows that 42% of consumers aren’t aware of alternative finance and that even among those who are aware, only 14% have used it, overall the report highlights the potential for more uptake among investors. Among those who were unaware, better returns and guarantees were the most important factors that would encourage investment.

For those already aware, better returns, greater transparency and more guidance on using the platforms are the most likely elements to boost use, suggesting that platforms themselves could do much to inform and educate potential customers, so challenging banks as the default savings choice.

Interestingly, the same survey showed that a small but significant minority, between 10 and 18% of respondents, would consider peer-to-peer or alternative platforms for currency exchange, insurance or mortgages, indicating another way that they could disrupt the banks’ dominance.

A viable alternative for businesses

Despite government encouragement, bank lending to UK businesses shrank by 1.5% during the third quarter of 2014. When this is set against the growth of alternative finance for businesses, which surged past the £1 billion point for the first time during 2014, predictions that the sector will seriously challenge mainstream banking don’t sound so far-fetched.

With a majority of SMEs considering alternative finance, the main factors aren’t just availability of credit. According to UK Bond Network’s survey, lower costs and speed are the two main motivators and this is where the business model of online alternative platforms puts them above banks.

This opportunity is echoed by Nesta’s findings, where altfi providers were seen to be more flexible and quicker than banks. They fared less well when it came to understanding the specific needs of SMEs, suggesting that there might be opportunity for more development in peer-to-business specialist platforms.

As the sector matures and as platforms grow and can spend more on marketing and awareness, alternative finance could certainly challenge traditional banking on some major areas including SME finance and investing.

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ECB launches small climate-change unit to lead Lagarde’s green push

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ECB launches small climate-change unit to lead Lagarde's green push 1

FRANKFURT (Reuters) – The European Central Bank is setting up a small team dedicated to climate change to spearhead its efforts to help the transition to a greener economy in the euro zone, ECB President Christine Lagarde said on Monday.

Lagarde has made the environment a priority since taking the helm at the ECB, taking a number of steps to include climate considerations in the central bank’s work as the euro zone’s banking watchdog and main financial institution.

She is now creating a team of around 10 ECB employees, reporting directly to her, to set the central bank’s agenda on climate-related topics.

“The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves,” Lagarde said in a speech.

She said that climate change belonged in the ECB’s remit as it could affect inflation and obstruct the flow of credit to the economy.

The ECB said earlier on Monday it would invest some of its own funds, which total 20.8 billion euros ($25.3 billion) and include capital paid in by euro zone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlement.

More significantly, ECB policymakers are also debating what role climate considerations should play in the institution’s multi-trillion euro bond-buying programme.

So far the ECB has bought corporate bonds based on their outstanding amounts but Lagarde has said the bank might have to consider a more active approach to correct the market’s failure to price in climate risk.

“Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet,” Lagarde said.

(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Emelia Sithole-Matarise)

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What to expect in 2021: Top trends shaping the future of transportation

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What to expect in 2021: Top trends shaping the future of transportation 2

By Lee Jones, Director of Sales – Grocery, QSR and Selected Accounts for Northern Europe at Ingenico, a Worldline brand

The pandemic has reinforced the need for businesses to undergo digital transformation, which is pivotal in the digital economy. In 2020, we saw the shift to online and cashless payments accelerated as a result of increased social distancing and nationwide restrictions.

The biggest challenge on all businesses into 2021 will be how they continue to adapt and react to the ever changing new normal we are all experiencing. In this context, what should we expect this year and beyond, in terms of developments across key sectors, including transport, parking and electric vehicle (EV) charging?

Mobility as a service (MaaS) and the future of transportation

Social distancing and lockdown measures have brought about a real change in public habits when it comes to transportation. In the last three months alone, we have seen commuter journeys across the globe reduce by at least 70%, while longer-distance travel has fallen by up to 90%. With it, cash withdrawals for payment has drastically reduced by 60%.

Technological advancements, alongside open payments, have unlocked new possibilities across multiple industries and will continue to have a strong impact. Furthermore, travellers are expecting more as part of their basic service. Tap and pay is one of the biggest evolutions in consumer payments. Bringing ease and simplicity to everyday tasks, consumers have welcomed this development to the transport journey. In-app payments are also on the rise, offering customers the ability to plan ahead and remain assured that they have everything they need, in one place, for every leg of their journey. Many local transport networks now have their own apps with integrated timetables, payments, and ticket download capabilities. These capabilities are being enabled by smaller more portable terminals for transport staff, and self-scanning ticketing devices are streamlining the process even further.

Lee Jones

Lee Jones

Ultimately, the end goal for many transport providers is MaaS – providing an easy and frictionless all-encompassing transport system that guides consumers through the whole journey, no matter what mode of travel they choose. Additionally, payment will remain the key orchestrator that will drive further developments in the transportation and MaaS ecosystems in 2021. What remains critical is balancing the need for a fast and convenient payment with safety and data privacy in order to deliver superior customer experiences.

The EV charging market and the accelerating pace of change  

The EV charging market is moving quickly and represents a large opportunity for payments in the future. EVs are gradually becoming more popular, with registrations for EVs overtaking those of their diesel counterparts for the first time in European history this year. What’s more, forecasts indicate that by 2030, there will be almost 42 million public charging points deployed worldwide, as compared with 520,000 registered in 2019.

Our experience and expertise in this industry have enabled us to better understand but also address the challenges and complexities of fuel and EV payments. The current alternating current (AC) based chargers are set to be replaced by their direct charging (DC) counterparts, but merchants must still be able to guarantee payment for the charging provider. Power always needs to be converted from AC to DC when charging an electric vehicle, the technical difference between AC charging and DC charging is whether the power gets converted outside or inside the vehicle.

By offering innovative payment solutions to this market segment, we enable service operators to incorporate payments smoothly into their omnichannel customer experience that also allows businesses to easily develop acceptance and provide a unique omnichannel strategy for EV charging payments. From proximity to online payments, it will support businesses by offering a unique hardware solution optimized for PSD2 and SCA. It will manage both near field communication (NFC) cards and payments from cards/smartphones, as well as a single interface to manage all payments, after sales support and receipt with both ePortal and eReceipts.

Cashless options for parking payments

The ‘new normal’ is now partly defined by a shift in consumer preference for cashless, contactless and mobile or embedded payments. These are now the preferred payment choices when it comes to completing the check-in and check-out process. They are a time-saver and a more seamless way to pay.

Drivers are more self-reliant and empowered than ever before, having adopted technologies that work to make their life increasingly efficient. COVID-19 has given rise to both ePayment and omnichannel solutions gaining in popularity. This has been due to ticketless access control based on license plate recognition or the tap-in/tap-out experience, as well as embedded payments or mobile solutions for street parking.

These smart solutions help consider parking services more broadly as a part of overall mobility or shopping experience. Therefore, operators must rapidly adapt and scale new operational practices; accept electronic payment, update new contactless limits, introduce additional payments means, refund the user or even to reflect changing customer expectations to keep pace.

2021: the journey ahead

This year,  we expect to see an even greater shift towards a cashless society across these key sectors, making the buying experience quicker and more convenient overall.

As a result, merchants and operators must make the consumer experience their top priority as trends shift towards simplicity and convenience, ensuring online and mobile payments processes are as secure as possible.

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Opportunities and challenges facing financial services firms in 2021

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Opportunities and challenges facing financial services firms in 2021 3

By Paul McCreadie, Partner at ECI Partners, the leading growth-focused mid-market private equity firm

Despite 2020 being an enormously disruptive year for businesses, our latest Growth Index research reveals that almost three quarters (74%) of mid-market financial services companies remained resilient throughout the pandemic.

This is positive news, especially when taking into account the economic disruption that financial services firms have had to go through since the crisis began. No doubt 2021 will also hold its own challenges – as well as opportunities – for firms in this sector.

Challenges outlook

Unsurprisingly, the biggest short-term concern for financial firms for the year ahead involved changing pandemic guidance, with 42% citing this as a top concern. With the UK currently experiencing a third lockdown many financial services businesses will have already had to adapt to rapidly changing guidance, even since being surveyed.

Businesses will also be considering the need to invest in working from home operations, and there may be uncertainty over re-opening offices on a permanent basis.  According to the research 30% of financial services firms are planning to adopt remote working on a permanent basis, so decisions need to be made now about whether they invest more in enabling staff to do this, or in their current office premises.

Due to Brexit, UK financial services firms are no longer able to passport their services into Europe, which may cause problems, particularly in the next 12 months as the Brexit deal is ironed out and the agreement is put into practice. Despite this, Brexit was only cited by 24% of financial firms as a short-term concern. While it’s comforting to see that UK financial firms aren’t hugely concerned about Brexit at this juncture, it is going to be vital for the ongoing success of the industry that the UK is able to get straightforward access to Europe and operate there without issue, otherwise we may see these concern levels rise.

Looking ahead to longer-term concerns for financial services businesses, the top concern was global economic downturn, of which 40% of firms cited this as a worry when looking beyond 2021.

Investing and adopting tech

Traditionally, the financial services sector has been slow to adopt digital transformation. Issues with legacy systems, coupled with often large amounts of data and a reluctance to undertake potentially risky change processes, have meant many firms are behind the curve when it comes to technology adoption. It’s therefore promising to see that so much has changed over the last year, with 45% of financial services firms having invested in AI and machine learning technology – making it the top sector to have invested in this space over the last 12 months.

One business that exemplifies the benefits of investing in machine learning is Avantia, the technology-enabled insurance provider behind HomeProtect. The business has undergone a large tech transformation in the last few years, investing in an underlying machine learning platform and an in-house data science team, which provides them with capabilities to return a quote to over 98% of applicants in under one second. This tech investment has allowed them to become more scalable, provide a more stable platform, improve customer service and consequently, grow significantly.

This demonstrates how this kind of tech can help businesses to leverage tech in order to offer a better customer experience, and retain and grow market share through winning new customers. This resilience should combat some of the concerns that firms will face in the next year.

Additionally, half (51%) of financial services firms have invested in cybersecurity tech over the last year, which allows them to protect the platforms on which they operate and ensure ongoing provision of solutions to their customers.

International resilience

Clearly, there is a benefit of international revenues and profits on business resilience. In practice, this meant that businesses that weren’t internationally diversified in 2020 struggled more during the pandemic. In fact, the businesses considered to be the least resilient through the 2020 crisis were three times more likely to only operate domestically.

Perhaps an attribute towards financial services firms’ resilience in 2020, therefore, was the fact that 53% already had a presence in Europe throughout 2020 and 38% had a presence in North America. This internationalisation gave them an advantage that allowed them to weather the many storms of 2020.

Looking at how to capitalise on this throughout the rest of 2021, half (51%) of are planning overseas growth in Europe over the next 12 months, and 43% in North America. Further plans to expand internationally is not only a good sign for growth, but should further increase resilience within the sector.

Conclusion

While there are many concerns, the fact that financial services businesses are investing in technology like AI and machine learning, as well as still planning to grow internationally, means that they are providing themselves with the best chances of dealing with any upcoming challenges effectively.

In order to maintain their growth and resilience throughout the next 12 months, it’s imperative that they continue to put their customers first, invest in technology and remain on the front foot of digital change.

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