David von Dadelszen Director & Head of Operations, UK Bond Network
According to the FCA, 114 peer-to-peer companies have sought authorisation since it took over regulation of the sector, while 178 have interim permission to operate. The proliferation of market participants has seen newer entrants seeking niches in attempt to distinguish themselves from the competition. Interestingly these differences have become very blurred, as has fundamentally what comprises an alternative finance company at all.
Since the foundation of the alternative finance sector, the recurring motif has been that the high street banks – Lloyds, Barclays, HSBC and Santander – are dinosaurs. Having formed the cornerstone of the retail and commercial finance industry for centuries, their relative stiffness was (and still is, although to a slightly lesser extent) an easy target for the marketing teams of the new, slicker and often cheaper alternative platforms. Most other market participants however, not just peer-to-peer lenders, will also lay some claim to being alternative (or ‘different’).
Peer-to-peer and alternative balance sheet lenders
Balance sheet lenders source borrowers in the same way as peer-to-peer platforms, but carry the credit risk themselves. ezbob and iwoca (who, incidentally, we recently transacted with) are two names that spring to mind. These businesses tend to be funded by fixed rate credit facilities agreed with investors in advance, putting capital onto their balance sheet which they can then lend-on at a higher rate, making a return from the spread. These businesses place a heavy reliance on technology to bring on and assess new businesses, reducing costs and delivery times.
Specialist lending funds
Specialist lending funds similarly invest in SME debt and, although transaction sizes tend to be larger, these funds are also balance sheet lenders. Investors put up the capital which the investment manager then lends; the commitments are just met predominantly with equity instead of debt (referring to unleveraged vehicles here, for the sake of argument).
A number of challenger banks, including names such as Metro Bank and Aldermore, are aiming to loosen the stranglehold of the ‘Big 5’ banks and foster competition. They are also balance sheet lenders, paying a fixed or floating return to their investors, i.e. ‘depositors’, and again lend the funds on seeking to make a return from the spread. Now, the narrative is almost identical here between alternative balance sheet lenders and challenger banks: the core difference is the transaction size and the levels of customer service. The product set of the challengers is much wider than specialist AltFi lenders, but many alternative platforms are incorporating their tech-led approach into an ever-broadening service offering.
The big picture
The fragmentation of the finance industry is apparent, as is the lack of clear lines in the sand as to what really differentiates an alternative finance company from more traditional competitors. At the crux of it, the introduction of new technology to a stagnant retail and commercial finance sector (often by former big-bank talent) created a number of game-changing efficiencies. Now, competition is rife and all market participants, whether mainstream banks or peer-to-peer lending platforms, are jostling for position.
The assessment of the current lending market in the UK, that there are ‘the banks’ and there is ‘AltFi’, is far too simplistic. The real scenario is this: the credit market in the UK is diverse, deep, competitive, and incredibly fragmented.