finance
monthly
Personal Finance. Money. Investing.
Contribute
Newsletter
Corporate

Gen Z (age 4-24) represent a fundamental break with every generation in human history – they've never lived in a non-digital world. Their attitudes are different to older generations, giving us a sneak peek into the future of human behaviours. Motie Bring, General Manager for Global eCommerce at Worldpay Merchant Solutions,

Gen Z’s stature, spending power and influence will grow as they enter the workforce and their predecessors head into retirement. As the generation whose behaviours will reshape commerce over decades to come, their importance to global retailers cannot be ignored.

Organisations need to implement both immediate and long-term strategies that ensure they’re being heard, with attention to three key areas.

Be Personal and Authentic

Rapid urbanisation, population growth, and the rise of mobile and online commerce has fundamentally changed society’s notion of individuality. Shoppers have swapped in-store experiences for the speed and convenience of shopping online. But, more recently, we are seeing Gen Z consumers placing a renewed focus on the individual and rekindling the one-to-one roots of commerce. For this demographic, one size doesn’t fit all: Gen Z are looking for personal experiences that fit their values and lifestyle and keep them excited.

Fused with the data that makes personalisation possible, technology is powering the possibility of one-to-one customer experiences in the digital age. Mass consumer culture doesn’t sit well with a generation that is immersed in individual expression. Retailers are moving away from talking to segments to focusing on people.

According to findings from the newly released Worldpay from FIS 2020 Global Payments Report, 60 percent of Gen Z believe that it is important for brands to value their opinion. 35 percent feel their favourite brand understands them as an individual.

Gen Z have a healthy sense of skepticism and so it is critical for brands to be authentic. Learning how to navigate the world in the era of “fake news” and having their digital lives saturated with messages of questionable quality and authenticity makes Gen Z discerning critics. They recoil from brands that fail to adhere to their values.

According to findings from the newly released Worldpay from FIS 2020 Global Payments Report, 60 percent of Gen Z believe that it is important for brands to value their opinion.

Provide a Mobile Friendly Experience

Brands seeking to earn the favour of Gen Z will need to cater to their payment preferences. Like the generation itself, Gen Z’s payment preferences are more digital, more social and more mobile-focused than any other generation.

Gen Z uses digital services and mobile wallets more frequently than their predecessors. Over half use digital wallets at least once a month, three quarters use a digital payment app from financial service providers and others, while 79 percent use peer-to-peer (P2P) payment apps at least once a month. Digital access in the United Kingdom is very high: internet penetration in the country is one of the highest in the world at 95 percent of the population, according to the Worldpay from FIS 2020 Global Payments Report.

Accepting a range of smartphone-based digital wallets is vital to serve a generation that has largely bypassed using plastic cards as a payment method. Tailoring the right mix of digital wallet acceptance is key. Although globally recognised brands have proportionally large share, digital wallets are resisting homogenization with local and regional alternatives thriving around the world.

Innovate for a Hyper-Connected Generation

Gen Z isn’t instinctively drawn to the same banking, payment and investment tools as their parents’ generation. They want financial products and services that deliver practicality and convenience. Gen Z consumers are also savvier on what companies can deliver, and increasingly expect the same level of experience regardless of whether they are shopping on Amazon, ordering a pizza, or liaising with their financial service provider.

[ymal]

From peer-to-peer services that are increasingly being accepted for business-to-consumer transactions, to direct debits; from checking to satisfy recurring payment arrangements, to purely digital banking services: Gen Z is ready and eager to engage with cutting edge financial services and payment innovations.

Alternative financing options that emphasise shorter flexibility—such as “buy now pay later” services find themselves fitting with generational need. According to the Worldpay from FIS 2020 Global Payments Report, these trends are on the rise in the United Kingdom: these payments are expected to grow 39 percent annually and are on course to double their global market share by 2023.

Establishing meaningful connections with Gen Z is a long-term approach, but one that requires focused attention. Merchants seeking success must explore how they can formulate and implement strategies with appropriate care, yet with the urgency that Gen Z increasingly expects.

About the Data

Figures quoted are taken from data published in Worldpay from FIS 2020 Global Payments Report unless otherwise stated or referenced. For research methodology, please refer to page 128 of the report.

There are no right or wrong choices, but there are some that are more helpful than others. Take the time to figure out exactly what you want your investor to be like, take the necessary steps to prepare, and then approach your goals with intent and purpose that go beyond the pursuit of financial backing.

To discuss the two main avenues of securing investment for an SME, we’ve taken a look at the operations of Buxeros Capital, a public and private social impact investment fund, and used its methods of securing investment for up and coming start-ups in the emerging markets landscape as an example of good practice in finding the right investor for you.

  1. Private Equity Funds

Private equity funds are investment firms that operate outside of the public stock exchange and arrange transaction-based investments on behalf of investors and private firms looking for investment. They are the gateway to securing longer-term more cash heavy individual investors that are willing to take a risk with your business and deliver cash on the back of a promise that they will see returns within a certain time frame.

Buxeros is a both public and private equity fund that does this, however in order to approach a more niche investment sphere, it secures funding for small to medium enterprises that specifically aim to have a positive impact on local economies within emerging markets. The Buxeros team, like other private equity firms you might find, includes private equity veterans, seasoned entrepreneurs and strong partners in each region across the globe. One of its largest partners is Ramphastos Investments, an investment firm owned by Marcel Boekhoorn. This means that combined with its partners, Buxeros has the professional expertise, contacts and know-how you will need to not only secure investment but secure the right investment.

[ymal]

One recent investment deal that Buxeros struck was with Profort, a business that provides orthopaedic care for people who need prosthetics or other low-cost limb treatment in Colombia and neighbouring developing countries. The firm is set to launch its first branch in Tunja this year and has secured the funds necessary to expand into other decentralised areas that will need and benefit from their services. Without an investment fund to help Profort reach the correct local contacts and without the specificity of Buxeros’ client remit to have a positive impact on local economies, this may have not been possible, which goes to emphasize how necessary it is to find investors that make sense and can help you with more than just the money.

 

  1. Government Backing

Buxeros Capital was established in 2016 and has since operated in conjunction with the Dutch Good Growth Fund (DGGF), a government backed project form the Ministry of Foreign Affairs which aims to match each investment Buxeros secures for small to medium enterprises in emerging markets.

Numerous governments around the world have similar initiatives and have capital dedicated to investment, particularly in emerging markets and developing countries. In this case, the DGGF provides half of the investment funds Buxeros’ aims to secure for its client. However, it won’t always be necessary for a government backed investment project to be conjoined with a private equity fund in order to secure the government’s investment, so have a dig and find out what your local government offers and how you can make the most of this.

A firm that has truly benefitted from the backing of the DGGF, alongside Buxeros’ input, is Blue 21, a Dutch enterprise focused on the research and development of floating architecture and urban development, particularly in areas affected by rising tides and where living on the waters is central to the locality’s lifestyle. By working alongside the Dutch government, and with the local authorities being corporately invested in the venture, the combination of expertise, cooperation and unified drive holds great promise for success and in this case has provided great confidence in delivering results that have positively affected Dutch localities on the waters.

Blue 21's floating homes

Having a combination of government backing and a private equity firm like Buxeros behind their venture has been incredibly useful, not just because they have the funds to move forward, but because they are now within arm’s reach of new opportunities and the prospect of expanding into more developing nations and making a difference in more and more places that need their help.

Karina Czapiewska, expert developer at Blue 21, put it like this: “The products that Blue21 develops are very complex; a floating building, district, town or even a city. Therefore, each product that is being developed cannot exist without a location, which in turn must consider the local context, local rules and regulations and often even the lack of context, rules or regulations that still need to be created along the way.

“To arrange this, a strong collaboration with the local authorities is needed. These collaborations start at a very early stage and it can often take a long time before anything is developed at all. Buxeros has a large network and plenty of experience in several parts of the world, and they have proven to be crucial in finding the right contacts, the right network and the right funding.”

"Each product that is being developed cannot exist without a location, which in turn must consider the local context, local rules and regulations and often even the lack of context, rules or regulations that still need to be created along the way."

Conclusion

In terms of expertise, cashflow, international rapports, know-how, contacts and support (all of the things you will need to grow and expand your business), finding the right combination of government help, whether it’s financial or not, and investor backing, whether it’s through a peer to peer arrangement or a private equity fund, will be ideal for your plans.

Securing investment is difficult and can take months if not years at a time, but if you have something you know will work, then find the people who will and more so, want to back you financially because they believe in it and because they too wish to see it succeed.

For Buxeros, the approach to securing investment for SMEs in emerging markets has meant that the firms looking to be funded got more bang for their buck. They set out to secure the necessary funds they needed to expand but walked away with the addition of investment partners that can connect them to the right people, government help and support from local authorities, as well as a partner that is 100% intent on seeing the positive impact of their venture succeed.

Corné Melissen (Director of Buxeros Capital)

According to Roberts Lasovskis at investment platform TWINO, the year ahead is an opportunity to get onboard with the changes happening all around us, embrace regulation, and create solutions that focus on the customers.

Lendy’s collapse in May and FundingSecure in October put a combined £240m of savers’ money at risk, while Funding Circle’s new withdrawal processes have raised investor concern among even the most well-established lenders. But there is light at the end of the tunnel, and the industry can be optimistic for 2020, providing last year’s lessons are learnt.

Firstly, there is one particular aspect of the two peer-to-peer collapses last year that has attracted much of the criticism from both media and investors. Both Lendy and FundingSecure came advertised as ‘approved by the FCA’, yet in collapse, both displayed structural faults and warning signs that should perhaps have been noticed earlier. Managing credit risk is an expensive learning process, but should be taken very seriously, and using as many data sources and as much testing as possible. Inevitably, these high-profile failures will cause a tightening of regulation across the industry. That is a good thing.

The sector should not just tolerate and survive regulation; it must embrace it. Higher levels of scrutiny from administrators lead to better industry structures and more robust business models that generate greater trust from consumers. This is an inevitable step for a maturing industry, and now is the time for peer-to-peer to ensure its regulations are fit for purpose, and that investor money is not put at unnecessary risk.

Higher levels of scrutiny from administrators lead to better industry structures and more robust business models that generate greater trust from consumers.

As well as building consumer trust and engagement in the sector, increased regulation encourages the development of better products. When regulation works well, companies are forced to innovate and adapt to meet the new challenges, eliminating the number of shortcuts or ‘easy options’ that are taken when developing a product for consumers. Ultimately, this creates safer and more sustainable returns for investors.

Beyond regulatory intervention, it is paramount that in 2020 the peer-to-peer industry prioritises transparency - with investors, borrowers and other industry partners. Transparency and clear communication are key to rebuilding trust in the sector, and even in specific products. Take Funding Circle as an example. It is undoubtedly one of the most successful businesses in the sector, and yet has been suffering a recent crisis in trust, which has been largely caused by customers not fully understanding what procedural changes are going to mean for their money.

The changes in question are not necessarily the full problem. The model is no less safe and the business is no less high-profile. Nor do investors automatically object to the idea of a delay before they can access their money (look at fixed-term savings accounts for example). As with all peer to peer lending platforms, it is simply a question of understanding risk - customers misinterpreted the changes as a sign that their money was under threat and understandably rushed to protect it.

[ymal]

As with all communication, and this goes for most industries, the customer must always come first. Fintech itself exploded as a sector in the wake of the 2008 financial crash, as a reaction to bad practices in the financial services industry. New businesses and solutions were developed to fix the shortcomings in finance and financial services, and to pivot them back to a consumer-focus. Many are predicting an economic downturn in the next year or couple of years, following a decade of growth. Fintech businesses emerged from the last downturn by creating solutions that focused on their customers, and should do so again.

Peer-to-peer is a prime example of how fintech puts customers first, directly connecting those investors who want to see their money grow faster with those seeking convenient loans. For all the perceived problems in the P2P sector, the fundamental market for the products have not changed. By remembering where it came from, and the problems it set out to solve, the sector can still thrive in 2020, even if the predicted economic downturn materialises. To avoid the pitfalls other providers have fallen into, peer-to-peer must embrace regulation, communicate with transparency and focus on leveraging their expertise to provide trustworthy customer-centric solutions.

This news comes after a string of regulatory changes in the consumer finance industry introduced by the Financial Conduct Authority, who took over from the Office of Fair Trading in 2014.

Peer-to-peer lending involves lenders acting as ‘middlemen’ between people looking for short term loans and investors looking to earn a return on an investment – often with returns as high as 12% or 15% depending on the amount of risk that they take on.

The peer-to-peer lending industry is estimated to be worth £2 billion in the UK, but has seen the casualty of some big names go into administration in recent years too.

The existing peer to peer lenders will form a separate industry body, replacing the existing regulator that was in force since 2011. The new group will be part of a wider fintech group that will represent companies in their industry.

Why is the existing trade body being replaced?

Following the news that the existing P2P trade body is to be replaced, Innovate Finance said that this was because the P2PFA had ‘achieved its objective of providing adequate protections for consumers.’

It also follows the recent news of additional peer-to-peer lending criteria being implemented in December 2019.

The new group of lenders are the leading members of the 36H Group, as well as a part of Innovate Finance. They have approximately 250 members in total, and also represent other fintech firms such as Dozens, Moneyfarm and Atom Bank.

What are the new FCA regulations?

The regulations for the peer to peer section created by the Financial Conduct Authority (FCA) mean that casual investors are now banned from being able to put any more than 10 percent of their assets into the sector.

The new FCA regulations also require peer-to-peer lending platforms to thoroughly assess the level of knowledge and expertise of investors before they make a P2P investment.

Some argue that this could potentially pose problems for lending platforms, who may decide to close completely if they will be losing huge investment.

[ymal]

How do peer-to-peer lending platforms work?

Peer to peer lenders receive money from investors and then distribute the cash to borrowers in exchange for a return on their investment.

The lender acts as broker or middleman between a high street borrower and an investor and returns range from 5% to 15% per annum, depending on the level of risk. For those looking to invest in good credit customers, the return is often lower because the chance of repayment is high. If you invest with bad credit customers, the risks of default are potentially higher, but the rewards may deliver a return of up to 15% per annum.

In terms of regulation, the peer-to-peer lending platforms are monitored by the Financial Conduct Authority, but they are not a part of the Financial Services Compensation Scheme.

This means that if a borrower defaults on payment (and this is expected of at least 20% of customers), investors are not necessarily compensated.

Most lending platforms will have their own compensation scheme in place including procedures, separate funds and a customer services team to collect on bad debt.

Below Finance Monthly hears from Steve Moss, Founder and CEO at P2P lending specialists Sourced Capital, on the ins and outs of the FCA regulations, the overall plans behind the new rules and what investors can expect when applying for financing.

These stricter onboarding measures now require potential investors to answer a number of questions focused around investment, to ensure they possess the required knowledge to make educated decisions when investing, thus improving the sector for investors from a quality control standpoint and ensuring they receive a greater level of security and protection, a positive for P2P lending industry as a whole.

At our firm we place investor welfare at the heart of their business model and see these regulatory changes as the first step towards a more transparent, investor-friendly sector. We've recently invested in a new platform that provides a simpler and easier user experience for customers in anticipation of these industry changes, so that while standards progress, the ease at which someone can invest remains the same.

The platform means that customers can transfer their ISAs online and use it to invest in property instantly with e-wallet control on their integrated dashboard. Investors can also invest with their SIPP or SSAS pension, or regularly with cash.  The company also uses regtech processes such as an anti-money laundering check (AMC) and know your customer (KYC) identification checks. The AMC and KYC checks are in place to verify the identity of individuals carrying out financial transactions and screen them against global watchlists.

[ymal]

But while Sourced Capital has worked hard to keep the process as straight forward as possible, these latest changes have still left some investors a little deterred, so what should you expect when tackling these newly introduced questions?

The areas covered to ensure investor knowledge are quite robust and include but are not limited to topics such as: -


While this may sound daunting, the process is designed to really boost the level of investor knowledge and this will be gauged through questions such as:

When Underwriting a Loan for a New Project Sourced Capital will:

❌ Do no Due Diligence at all as Lenders Will Do Their Own Research

✅ Sourced Capital Carries out Due Diligence Internally and Remotely. Though Lenders Are Advised to Carry Out Their Own Research on Every Investment They Make.

How should you manage the risk of your investments?

❌ Put all my money into Peer to Peer Lending

✅ Build a diversified investment portfolio covering many different investment classes after seeking independent financial advice

I Have Invested with Sourced Capital and Received Great Returns, This Means:

❌ I Will Continue to Always Receive Great Returns, My Capital is Not at Risk.

✅ Past Performance of Investments is Not an Indication of Future Performance. Each Investment I Make Should be Considered Individually

These stricter onboarding measures now require potential investors to answer a number of questions focused around investment, to ensure they possess the required knowledge to make educated decisions when investing, thus improving the sector for investors from a quality control standpoint and ensuring they receive a greater level of security and protection.

But are these measures enough?

They are at the very least, a step in the right direction.

The Peer 2 Peer sector has received some stick over the years and as you’ll find with all business areas, there are certain less scrupulous types that sometimes drive this, whilst some of us have been working hard to raise the bar. These latest regulatory changes by the FCA are a positive step in the right direction in terms of improving standards and investor welfare across the board, and the extensive knowledge now required will ensure that investors are far more educated than previously and not only does this help them in terms of the decisions they will make, but it helps improve the quality of the sector as a whole.

Of course, there is always more that can be done and until this is introduced at the top level, it’s the responsibility of us as sector professionals to drive positive change. For example, all our investors get a first charge against the property invested in, which gives a greater level of protection and lowers risk but is something that not all platforms do.

We always recommend that investors only opt for FCA approved companies which again reduces risk, while we also only loan at maximum loan to value of 70%. We also offer all investors the chance to view a project and to learn directly from us which again, is something that other platforms don’t offer, but for us, it provides greater transparency and trust while helping improve knowledge on a particular investment.

Stocks and shares are becoming less favoured as a way to make money, with the uncertainty of Brexit taking its toll on the financial market and a predicted trade war between the US and China leaving people concerned about where their money is best off. And, with the BBC reporting that the FTSE 100 recently suffered its worst day in over three-and-a-half years, it's no surprise that the prospect of an economic downturn is worrying those who have invested in stocks and shares.

Many people are choosing to take their profits and look for alternative forms of investment that aren't as affected by the economic climate, such as peer-to-peer (P2P) lending. This form of investing is flourishing, with the current value of the UK market standing at £6.1 billion (AltFi). P2P lending could be a viable alternative to stocks and shares if you're looking for a new way to invest your money and here’s why.

  1. P2P is more resilient to economic changes
    All stocks and shares will fluctuate in value, but the level of risk will be determined by the size, age, and location of the firm you're investing in. This means that neither the share price nor the dividend is guaranteed. As a result of this market unpredictability, it also means that speculating on the right time to purchase shares can be tricky and costly.

In comparison, P2P returns are typically stable, which means you're likely to get a set rate of return on your investment, so you know what to expect.

  1. P2P lending platforms offer monetary protection
    With stocks and shares, you're investing in a firm that could experience unpredictable events such as a drastic drop in profit, so companies and the stock market won't offer you protection when you choose to invest in this way.

One of the main advantages of P2P lending is that many of the platforms have protection in place for your investment. Although there is no cover afforded by the FSCS, firms invariably take other steps to mitigate risk. For example, at Lending Works, borrowers are checked for creditworthiness before they can place a request for a loan, while we also have the Lending Works Shield that is designed to protect you from losses on your loans.

P2P platforms will also have measures in place in case their company fails altogether, which could include having a back-up service provider who will manage any outstanding loan agreements and ensure repayments are made to investors.

On top of this, the entire P2P market is regulated by the Financial Conduct Authority (FCA). Aside from ensuring best practice across the sector, the regulator is also bringing in some additional measures to protect P2P investors, including a limit on how much you can put into P2P, as well as ensuring you have experience with investing before you register with lending platforms.

  1. P2P can allow you early access to your money
    When you invest in shares, you will receive a dividend at the end of the firm's financial year, which is the profit you've made on the share throughout the year. But, to access the full value of your shares, you'll need to sell them, so a good chunk of your money could be locked up in these for years if you choose not to. It's also worth noting that, if you are looking to sell your shares, there will be a dealing fee for doing so. Plus, accessing your money when the share price is lower than when you bought it will mean you lose money on your investment.

Although people will borrow your money for a fixed period through P2P lending, there's still a chance for you to gain early access to your money. If you have to exit your agreement early, some P2P lending platforms will make this possible without you having to lose out. To do this, they'll usually match your loan with another lender who wants to invest at the same time as you want to exit. The other lender will then take your loans and you'll get repaid for them. However, be aware that not all P2P platforms will allow you to do this, so be sure to check your agreement with them.

Stocks and shares are easily impacted by the economy, so why not try investing your money somewhere less risky? Peer-to-peer lending is not only less affected by the economy, but it also offers better protection and flexibility for your money.

QuickQuid, the UK's largest remaining payday lender has revealed that it will close down, with US-based owners, Enova, stating that regulatory uncertainty being the key reason for their decision. Whilst the UK payday lending market has taken advantage of the most vulnerable consumers for too long, a question mark looms over the lending industry in the UK.

FairMoney.com have unveiled that 10.5 million Britons are in the worst financial position ever, with 53% stating that they have a weekly disposable income of less than £0. With the continual failings of the peer-to-peer market, and the long overdue closing of payday lenders in the UK, Britons need access to fair finance. Businesses such as FairMoney.com provide valuable consumer services by providing comparisons for a variety of loan sizes, with the most accommodation interest rates.

Dr Roger Gewolb, Executive Chairman and Founder of FairMoney.com, has commented on the closure of QuickQuid and provides financial advice for those 10.5 million Britons experiencing their worst financial position: “Both the payday loan industry and the relatively new 10 year old peer-to-peer lending industry are vital for consumers, especially that segment of the population that cannot easily obtain credit.

“The excesses and exploitation of the payday loans industry were finally curbed by legislation in Jan 2015, in part due to FairMoney.com and the Campaign for Fair Finance’s efforts, and the rates now charged and lenders’ terms are now fairer, even though this has caused some 70% of the industry to go out of business.

“In the same way, we want the P2P lending industry to survive and prosper, and have no more of these dreadful, drastic, dramatic failures, for the people who cannot readily get money from the banks and also for investor/depositors with extra cash who can get a higher interest rate than what is available from the banks, all as originally intended. I would not be surprised if a major P2P platform collapsed before Christmas, highlighting the risks that investors and consumers could be undertaking. Proper regulation and supervision by the Bank of England will ensure no more failures and that the industry can be properly realigned, hopefully without a huge chunk of it disappearing as with payday.”

They deem it to be a “high risk” product and have recommended limiting P2P lending to 'sophisticated investors’ only. Below, Finance Monthly hears from Frazer Fearnhead, CEO at The House Crowd, on why we shouldn’t’ be restricting P2P lending.

This is likely off the back of the recent collapse of mini bonds provider London Capital & Finance, which persuaded customers to invest in bonds (with a ‘fixed’ 8% interest rate) that weren’t ISA eligible. Sadly, some 14,000 people have lost most of the £214 million they had collectively invested. This has, understandably, increased regulatory scrutiny of similar products marketed to retail investors.

Nonetheless, the FCA is lumping all P2P lending companies in with London Capital & Finance, which is patently unfair. The company marketed a product as an ISA, but wasn’t one at all – it was a mini bonds investment – so we’re not even talking about comparable products here. Plus, it obviously wasn’t acting in a regulated fashion and, as a result, it’s a knee-jerk reaction to lump the whole P2P industry together with it.

Democratising investment options

Peer to peer lending, including products such as IFISAs, allow everyday people to access the sorts of returns that only high-net-worth and experienced investors historically had access to. Restricting this offering (or warning people away from it unnecessarily) would deal a big blow to the P2P lending industry and defeat its key objectives – for borrowers, to democratise access to finance and for investors, support the ability to lend in return for a better rate of interest.

Why should investments with higher interest rates be reserved only for experienced investors or those who already have significant capital? It’s precisely the savers who are working to build up a nest egg for their futures who should have such opportunities, especially since lending is much easier to understand than more complex investments. If they’re only left with options like cash ISAs (which won’t necessary beat rising inflation), they won’t be able to do it.

Why should investments with higher interest rates be reserved only for experienced investors or those who already have significant capital?

The FCA said that “anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.” Of course, this is still true – all investments should be carefully considered before they’re undertaken. But that doesn’t mean that we should completely rule out one of the most accessible investments available on the market today.

P2P is a diverse landscape

Another issue is that, at the moment, it seems the FCA can’t (or won’t) distinguish between different types of P2P loans with different levels of security. It’s true that many providers offer unsecured loans, but there are others that do offer more security. Lending can be secured against an asset which helps to mitigate the risk of the borrower defaulting, as a legal charge over the asset can force its sale and regain investor capital. Other lenders also operate a ‘provision fund’ as an additional security measure.

The FCA has previously warned of introducing ‘appropriateness tests’ in order to restrict who P2P lenders can market their products to, but the problem with this lies in conflating products that are in fact very different from each other. Not all P2P lending products are the same – levels of security do vary by provider, but if the right due diligence is conducted and processes are put in place to mitigate risk, they can offer consistency and reliability. Similarly, we should not look to compare, for example, a stocks and shares ISA with an IFISA. They are fundamentally different – and, arguably, the IFISA can be a safer option.

Ultimately, there are risks involved in all investments, but the answer isn’t in scaremongering. Appropriate education and transparency is what we need to get people investing their money wisely in a variety of options, and we would like to see the FCA do more to support this.

Matt Robinson, Commercial Director at Ping Finance, believes that now is the right time for SMEs to borrow, and here takes Finance Monthly through the reason why.

Low Interest Rates

In the UK, interest rates are still incredibly low. Despite a 0.25% increase back in August 2018, bringing the interest rate up to 0.75%, the UK interest rate is still way below the average that it has been in the past, and this is only a good thing for those borrowing.

At one time, during the Thatcher leadership, interest rates rose to a staggering 17% to combat inflation. Interest rates continued to rise into the late 1980s due to the pressure of increasing house prices. The election of Tony Blair in 1997 gave the control of setting the base interest rate to an independent Bank of England. Interest rates then began to steadily decline, hitting 3.75% in 2003, before increasing again up to 5.5% in 2007. Since then, interest rates have dropped drastically due to the impact of the global financial crisis, falling all the way to 0.5% in March 2009, and then a further drop to 0.25% in 2016.

After the recent rise to 0.75% in August, Mark Carney, governor of the Bank of England, said there would be ‘gradual and limited’ interest rate rises in the future. With Brexit uncertainty on the horizon, predictions for the next couple of years are speculative at best. Therefore, there has never been a better time for the likes of SMEs to borrow. Even with the slight increase, we are currently experiencing one of the lowest interest rates in the UK’s history, and with the likelihood of increases on the way in the next couple of years, borrowing right now is a smart move.

There Have Never Been More Options

Nowadays, SMEs have the luxury of being able to be as picky as ever when it comes to their financing options. The alternative finance market has exploded since banks began to withdraw following the recession; traditional loans are no longer the only option for small businesses looking to borrow.

Crowdfunding, for example, can be an effective way to raise capital by allowing people to make small investments in a project or business. Online lenders can be contacted via online applications, and funds can be transferred into accounts in as little at 24 hours.

Peer-to-peer lending creates a form of borrowing and lending between individuals without a traditional financial institution being involved and can turn out to be a cheaper alternative to borrowing from a bank or building society.

Financial technology, asset-based lending, invoice finance and challenger banks are some other alternatives to traditional high street bank lending. These alternative lenders use algorithms and data manipulation to streamline the loan approval process from weeks down to days at most. With so many viable financial services available, there has never been a better time for SMEs to take advantage of all these different options.

Competition Between Lenders

In a similar vain to there being so many different financial options, there is also heavy competition between lenders. With so many lenders vying for your business, they are doing everything possible to make their services seem more appealing to potential clients. Lower interest rates in conjunction with reduced fees or no fees are just some of what’s being offered by many lenders in a bid to secure your business.

From the perspective of an SME, you have the power to shop around and discover the best deal for you. With so many lenders competing to provide the most enticing offers, SMEs can take advantage of this and get a better deal than they would if they had to go with the first offer they were quoted.

More Business Support

It has never been easier to start a business than right now. There is a lot more guidance and knowledge out there to help people bring their ideas and ambitions to life, and most of it can be accessed for free online.

One of the biggest barriers to starting a business has always been start-up cash, and whilst that is still the case, it’s not as much of a problem as it used to be. Online platforms not only create a global marketplace for SMEs, but it’s easier than ever to contact investors and lenders and start generating cash flow to get your business off the ground.

Obtaining funding is not the only barrier to starting a business; general business support is crucial for SMEs to become successful and be able to pay back their loans. Networking, paid mentorship, free courses, government led schemes, books and the wealth of information on the internet can all be utilised by SMEs to help grow a successful business.

Post-Crash Borrowing

Since the market crash in 2008, there has been a shift in attitudes when it comes to lending. There is a greater focus on lenders to look after borrowers, stamping out shady practices and creating a better environment for those who want to borrow. As 2008 becomes a distant memory, lenders’ appetites for risk has increased, and SMEs can take advantage of this current culture of encouraged lending.

 

 

Richard Litchfield, Head of Operations at peer-to-peer lending platform Lending Works, talks you through the details.  

Still keeping your cash locked away in a savings account? Recent figures have shown that over 99% of saving accounts aren’t keeping pace with inflation — meaning that those looking to maintain or grow their wealth may need to look to investing instead (Mirror).

While the risks of investment can be daunting for some, there are low-risk opportunities out there. Peer-to-peer (or P2P) lending is a relatively low-risk investment which can offer much better rates than the interest on the average savings account (our current rate is 6.5% over five years). Not only can P2P be lucrative, but it can also be much less hassle than complex investments like stocks or shares, so it’s an excellent choice for those who are looking to start a portfolio. And, with the FTSE 100 hitting a six-month low after the IMF slashed global growth forecasts back in October (Guardian), the stock market is rapidly beginning to look like a less appealing option.

Here, I’ll explain the basics of peer-to-peer lending, along with a few tips for getting started and maximising your profits.

How does peer-to-peer work?

Peer-to-peer lending is a new sort of platform which matches up investors with borrowers looking for a personal loan, all of whom been vetted in advance for creditworthiness. This platform essentially takes the middleman out of the lending process (the role which would traditionally be played by a bank or building society), meaning that both investors and borrowers benefit from better rates. Investors can kickstart their P2P portfolio with Lending Works from as little as £10, and can choose how long they want to invest their money for.

Some platforms also allow you to select your own borrowers, or you can let the platform handle this on your behalf. More experienced investors might prefer the control that this offers, while others just like to sit back and let the P2P platform handle the finer details.

What sort of returns could I make?

Returns are linked to the length of your investment term: the longer you invest for, the higher the returns will be. Currently, we offer investors 5% per annum over 3 years, but this figure rises to 6.5% p/a over a 5-year term. While long terms are best for profits, you may want to choose a shorter term if you want more flexibility or need to see returns more quickly.

What are the risks? Is there any protection?

Of course, there’s no form of investment which can ever completely guarantee you’ll make a profit, nor is there any investment strategy which doesn’t involve some form of risk. But, because peer-to-peer lending diversifies your investment across lots of different loans, your losses are balanced by your profits if a borrower defaults on their repayments.

In addition to diversification, there are also other protections in place for investors. Some platforms have a reserve financial fund, which helps to cover any losses caused by borrowers defaulting. Peer-to-peer lenders are also regulated by the Financial Conduct Authority, which means that they must consider how to safeguard investor’s money in line with official regulations.

How can I maximise my profits?

If you want to see competitive returns, then there’s one rule to bear in mind: invest for the longest possible period you can afford. While many P2P lenders will allow you to withdraw your money earlier for a fee, it’s always better to leave it for as long as possible, as you could potentially see much higher returns this way.

I’d also recommend re-investing your earnings straight back into more loans: after all, there’s little point leaving your profits to sit in a savings account, as they won’t keep pace with inflation. Many platforms allow you to automate this process to make it even easier.

If you’d like to learn more about peer-to-peer lending, take a look at the government website to find more information, including details on how any earnings you make will be taxed.

In recent years a new way of investing has emerged, Peer to Peer (P2P) lending, and although this sector is growing fast, many people have yet to properly understand what it has to offer, how to participate and what risks are involved. This week Finance Monthly has heard from Relendex, a P2P commercial real estate lending platform on the myths surrounding P2P lending.

The first important thing to grasp is that Peer to Peer lending is a new way of investing and not an asset class in and of itself. It provides the opportunity to access investment returns that are not necessarily available elsewhere. The whole point of the structure is to bring together a number of people to meet a funding requirement via an online platform. The operating costs of the platforms are typically much lower than other types of Investment Company, this often provides a better deal for lenders and borrowers.

Though P2P is perceived in some quarters as “new”, the UK’s oldest P2P lender started business in 2005 and has now lent in excess of £2 billion. The Financial Conduct Authority (FCA) took over regulation of the sector in 2014 and most serious players are fully regulated through a rigorous process developed by the FCA to make sure that these businesses are regulated just as robustly as any other financial services business, in order to protect the interests of their customers. Since 2012, the UK Government has been supporting the P2P sector by lending large sums of public money through various platforms.

There are an increasing number of players in this market and they tend to focus on different types of proposition. It is important to remember that P2P platforms are as different as chalk and cheese. Some are fully-authorised by the FCA, reliable and professionally run with a good track record and reporting. Others are not. Platforms cover a wide range of asset classes. The most common areas are those lending to small to medium sized businesses (SME Lending) (mostly unsecured), consumer lending (unsecured) and property lending (usually secured). As we’ve said, P2P is an enabling structure not an asset class so it’s really important to understand where your money is being deployed. You will also find that some P2P platforms allow you to choose an individual opportunity and others will invest your money across a range.

Kroger Feedback Survey to win $5000

One of the fastest growing parts of the market is property lending, which grew by 88% from 2015-16. This part of the market has grown significantly as it seems the High Street banks, are unable to meet the demand from developers to deliver new and refurbished homes at a rate the current housing crisis demands.

Relendex was one of the first P2P lenders to enter this market and it allow individuals to select which projects they are attracted to and they choose how much money they want to invest – from as little as £1000. All of their loans are secured by a First Charge over property and they have returned an average of just over 8.5% per annum and although they will lend up to 65% of the value of a particular property, the average since they started business is actually below 60%.

As the established bricks and mortar banks pull out of many areas of lending, especially the making of development loans to SME house builders, Michael Lynn, Relendex's CEO, confidently predicts that if the UK is to have any chance of building the homes it desperately needs, the P2P sector must step into the financing gap. It seems that the future is bright for P2P financing with the prospect of continued dramatic growth over the next decade.

So a few tips on what to consider when looking at getting involved in P2P:

With more businesses looking to finance the next chapter in their expansion and meeting dead ends, is it time to consider a different method.  Whilst traditional lending can help, more and more business are using Peer-to-Peer lending to ensure that when they need to take the next step of their growth they can do so without the constraints that can come with conventional lending.

This month, Finance Monthly had the privilege of speaking with Angus Dent, CEO and Jerry Gilbert, Commercial Director at strongly growing peer-to-peer (P2P) business lending platform ArchOver. Founded by Angus, together with COO Ian Anderson, in 2014, to date the company has facilitated over £60million in total lending and is fully FCA-authorised. Angus is responsible for developing the overall policy and strategy of the business and ensuring its delivery by the management team. On a day-to-day basis, he is also engaged with borrowers, high-value lenders and strategic partners. Jerry joined ArchOver in September 2017, to provide strategy and structure around ArchOver’s growing commercial activities.

Here they tell us about the optimistic atmosphere surrounding the company at the moment and the significant appetite for the way ArchOver lends.

 

Typically, what do companies use the finance raised through ArchOver for?

Angus: Our borrowers use the finance raised through our platform for a wide variety of things – no two businesses are alike, after all. They might need a cash injection to fund a bigger office, or to service a major new contract they’ve just won. Or they might be looking to refinance after finding that their existing facility isn’t willing to grow and change with them – we can help them to pay off their existing commitments and secure additional finance to fund their next stage of growth. For some companies, it’s used as day-to-day working capital, freeing up other funds for growth activities.

Jerry: The key point is that SMEs can’t achieve their full potential without the right financing.

For many of the companies that make it out of the start-up phase, financing can be hard to come by.

Many waste months or even years chasing down a single angel investor or debating back and forth with the big banks. SMEs’ great strength lies in their agility, and they need agile funding to match that. The P2P model makes the funding process shorter and simpler, and helps companies get on with the business of growing.

 

What are the risks of peer-to-peer lending?

Angus: It’s probably best to think about it in terms of the security provided rather than the risks involved. When you’re selecting a peer-to-peer investment or loan to make, you’d naturally want to know about that security that’s provided with it. At ArchOver, when we consider levels of security, we typically look at trade debtors and contracted recurring revenue, both of which are assets that offer good security, since both of them provide cash from which a loan can be repaid. In my opinion, when evaluating security, people would want to look at an asset that is designed to turn into cash - because this means that there’s a flow of cash, which will guarantee the repayment of their loan.

An asset such as property in contrast, is a very liquid asset and would not be as secure, since it could take years to sell a property and there’s not necessarily any cash that flows from it. It’s vital to evaluate how security fits with your objectives and with what you find acceptable.

Jerry: It’s also worth mentioning that ArchOver is quite unusual in looking at those two parts of the business. Many of our competitors in the peer-to-peer space and the traditional lending space will achieve their security from a personal guarantee which is in most instances attached to the company director’s property and has all sorts of connotations.

Angus: This should then make you question whether it provides any security at all - you’re lending to the business. Either the business can afford and service the loan or it can’t. What value does bringing additional assets into play have?

 

How do you evaluate the ability of a business to fulfil its repayment commitments?

Jerry: Evaluating a business’ ability to fulfil its repayment commitments is not a simple, one-off job. Here at ArchOver, the process covers the entire lifecycle of the borrower, from the moment they are in touch with our Commercial team, to when the loan is fully repaid.

Every prospective borrower must pass through our extensive Credit Analysis before their loan is made available to lenders on the ArchOver platform. The Credit team invests a considerable amount of time – on average four days – to fully review the potential borrower. Should the borrower be approved by the Team, the Credit Committee will review, and make the final decision. Once the loan has funded on the ArchOver platform, we monitor monthly both the asset value and the management accounts against forecast throughout the loan term. We also perform multiple on-site visits before and throughout the loan term. This allows us to get to know the business intimately – its challenges, its strengths and its weaknesses. We can continuously assess the borrower’s position, so we can identify and handle any new risks as (or preferably before) they arise within the borrower’s business. We believe we are the only P2P lender to conduct this kind of monthly monitoring.

Angus: We employ a traditional ‘Five C’ approach: Character, Capital, Capacity, Conditions and Collateral. Understanding a business is a complex, multi-dimensional challenge and we employ both quantitative and qualitative elements when reaching judgments. We have a detailed process we follow to deliver a number of key metrics so that our Credit Committee can take an authoritative decision on which companies should make it onto the platform.

 

Angus, how was the idea about ArchOver born?

Angus: Through our own experiences as entrepreneurs and directors, we realised how difficult it was to raise working capital in the range of £100,000 to £5 million. We also saw that those with cash were earning next to nothing in interest and that, for those potential investors, security was imperative. Our first thoughts of how to overcome these issues became the founding principles of ArchOver, and so we set out to support UK businesses and UK investors alike in a fair and innovative way.

 

What makes you different to other P2P lenders?

Jerry: In short, what makes us different is our human-touch. There is always someone available for you to speak to. Whether you are a borrower or a lender, we want to listen and engage with you so we can be as helpful as possible. Providing a personal service is at the heart of what we do.

More specifically, on the borrower side, we seek to facilitate lending in a way that is business-driven, business-focused and business-friendly.

Our loans are fixed amount, meaning there is no unpredictable facility fluctuation, and they are fixed-term and fixed-rate, allowing the borrower to plan ahead. Many of our borrowers have sought an ArchOver loan to help them exit an expensive and time-consuming invoice discounting facility, because we appreciate that a loan should be there to support a business, not to sap its resources. Similarly, we do not take personal guarantees, allowing directors to keep their business separate from their personal life.

Angus: On the lender side, we prioritise security without compromising interest rates. Our Credit Analysis is one of the most thorough in the sector, and we are the only platform to monthly monitor the business and security throughout the loan term. With the exception of our Research

In a time when interest rates are skimming along the bottom of the graph, we know how important it is to make your money work for you. ArchOver lenders can receive between 6 – 9%p.a., and on average earn a return of 7.3% p.a.

 

What are the company’s mission and values?

Jerry: Put simply, ArchOver exists to help businesses access the funding they need to grow, and to help investors make a secure, worthwhile return on their money.

We are committed to treating UK businesses and investors fairly. If a business has the assets to sustain borrowing, we want to give them the chance to get up and running quickly. We also believe that investors should be able to secure favourable returns without having to take on unnecessary risk.

We believe in transparency throughout the entire process. Our borrowers are never left in the dark (which is sadly a common occurrence with the banks) and our lenders have access to information sufficient to allow them to make an informed decision on which loans they want to invest in.

Last and most certainly not least, we are helpful, focused and flexible. We are here to help you achieve your business or investment goals.

 

Have your values changed over the past 4 years?

Angus: No. What has changed is the way in which we do things, not our ethos. We expanded our offering to lenders and borrowers by introducing our ‘Secured & Assigned’ model in January 2017, and have also introduced our ‘Bespoke’ model.

This means we can offer our funding solutions to a greater range of UK businesses, while maintaining security for lenders. For lenders, we are looking to introduce an IFISA early this year, alongside some other services. Watch this space!

About Finance Monthly

Universal Media logo
Finance Monthly is a comprehensive website tailored for individuals seeking insights into the world of consumer finance and money management. It offers news, commentary, and in-depth analysis on topics crucial to personal financial management and decision-making. Whether you're interested in budgeting, investing, or understanding market trends, Finance Monthly provides valuable information to help you navigate the financial aspects of everyday life.
© 2024 Finance Monthly - All Rights Reserved.
News Illustration

Get our free monthly FM email

Subscribe to Finance Monthly and Get the Latest Finance News, Opinion and Insight Direct to you every month.
chevron-right-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram