The past couple of months have coughed up an uncommonly high number of strategic partnerships. Banks, software providers, accountancy houses, councils, institutions – and so on, and so forth – are all starting to work closely with choice providers in an effort to get a piece of all this alternative finance action.
Funding Circle and Assetz Capital – which only days ago announced referrals relationships with RBS – are amongst the most prolific in terms of buddying up. I liken what’s going on at the moment to rolling a car into a parts shop and going on a shopping spree. The bigger “spenders” emerge decked-out to the doors with brand new bells and whistles. Some emerge faster, others with a new paint job, one drives away more fuel efficient – all dependent on the mixture of parts acquired.
The AltFi-automobile may accessorize in many different ways.
Engine-specs are the most fundamental to the top speed of the vehicle, and likewise origination channels are the surest growth enabler for the platforms. We’ve already touched on the RBS tie-ups. The high street bank accounts for a third of the small business lending market. If even a fraction of the businesses that it works with (or that it for some reason cannot work with) end up taking out loans from the likes of Funding Circle and Assetz Capital then it’s going to make a real impact on their transactional volumes.
Funding Circle, for instance, almost certainly has the capacity to fund a greater number of deals. Shortages in borrower demand tends to act as the major restraint on lending volumes for the largest peer-to-peer platforms. There are more than enough institutional investors poised to pump money into quality P2P loans should the opportunity present itself (see Assetz’ recent deal with Victory Park Capital).
Indeed, when the platforms require a top up in fuel (/funding), institutional money is the most appropriate well to draw from. Retail money is rather slow moving by comparison, and cannot always be relied upon to satisfy borrower demand via an online marketplace. When the retail fuel runs dry, an institutional top-up is the most efficient method of keeping the engine running. It’s for this reason that you’ll many an early-stage P2P operator seeking to partner with a hedge fund or asset manager. Inevitably the smallest platforms find that they in fact have too little cash and too many borrowers – occasionally because they end up with a portion of the borrowers that the larger, more stringent platforms choose not to work with.
How about the design aspects? The exterior and interior – or, in simpler terms – the look and feel of an online platform. It’s perhaps the least important aspect of building a new-age finance provider, but it shouldn’t be overlooked in terms of its impact on securing and retaining users. Why else would ThinCats have recently commissioned rebuildingsociety to give the platform a digital makeover?
There are lots of white-labeling options out there for alternative finance entrepreneurs who are looking to spruce up (or build up from scratch) a site. To name a few: investedin, hubbub, Crowdhoster, CrowdEngine, Microexchanges and Katipult.
The handling of a platform – that is, how smoothly and effectively it caters to its customers – may also be improved by adding parts. In this instance, I turn first to the accountancy software shelf – upon which sit the likes of Sage, Xero and Kashflow. MarketInvoice is in fact integrated with all three of these innovative software systems. Indeed, the UK’s leading online invoice financier has indicated that the Xero integration allows businesses to be approved for funding via the platform in just 20 minutes flat. So decisions are being made automatically, at breakneck speeds, but the depth of information provided by the likes of Xero means that these decisions are more often than not intelligently executed – preventing the car from toppling over.
The further and faster a vehicle drives, the more the wear and tear on its tyres begins to tell. For a platform, one method of avoiding deteriorating systems is again to forge strategic partnerships. We recently covered Zopa’s tie up with data colocation and connectivity solutions provider C4L. The purpose of the tie-up was to safeguard its customers’ sensitive data by implementing a more secure failsafe mechanism. There are lots of other technology-based methods of managing internal data too. Salesforce, for instance, is one of the world’s top customer relationship management companies – and is surveying the alternative finance space with real interest, as evidenced by the fact that they will be a Supporter at the AltFi Europe Summit 2015 on February 23rd.
The gearbox still feels pretty clunky. Perusing the shop’s wares, we find yet another set of software-based solutions – the access platforms. Most of these parts have been specially shipped in from the US, owing to the advanced state of institutional involvement in the alternative finance space over there.
Orchard, Paynet, MonJa – all of these companies help to streamline the process of peer-to-peer investment. Orchard is perhaps the most advanced – allowing investors to deploy capital at scale in accordance with sophisticated allocation strategies, using advanced analytics (i.e. a Lending Club/Prosper returns index), and increased access to supply. The site – which has been pitched as a key catalyst to the growth of peer-to-peer lending – is also developing an independently operated secondary market for P2P loans. Access enhancers of this kind can really help a peer-to-peer platform to shift through the gears.
And don’t forget about the many aggregation hubs – which exist on both the investment and fundraising sides of the equation. They too may prove a valuable addition to the P2P or crowdfunding process. An aggregator can either showcase investment opportunities from a number of different providers within one, intuitive portal, or aid a greater number of fundraisers in navigating their way to the most suitable alternative funding source… or both! Hard to find a vehicular likeness for the aggregators … something to do with fog lights, perhaps?
Slowing down requires every bit as much thought and contingency as does speeding up. To help a platform decelerate with a little more oomph – aka. allow its investors to make a swift exit – another potential partner springs to mind. Asset Match is an online exchange for private company shareholdings. The auction-based site has the potential to bring some much-needed liquidity to the alternative finance space. ArchOver has already recognized that potential by partnering up with the exchange in order to provide a secondary market for loan parts originated through the platform.
And finally, safety measures. Most of the time the platforms come pre-equipped with a seatbelt mechanism of some kind, whether that be a provision fund, realizable security, heavy diversification, guarantees – or a mixture of the above. But partnerships wrought between alternative finance providers and mainstream corporations can provide that extra layer of protection.
The examples that spring to mind are a pair of early stage peer-to-peer lenders – ArchOver and Lending Works – which have both incorporated an element of insurance cover into their processes. ArchOver has partnered with Lloyd’s of London to insure all loans made via the platform, and Lending Works also offers insurance protection for 100% of its loan book.
Well, I reckon I’ve stretched this metaphor about as far as it can go! I hope the point has been at least mildly clear. Business development routes for the platforms via strategic partnership are multiple and diverse, and there isn't an alternative finance provider out there that needn't be cognisant of that.
Now in its sixth year, the AltFi London Summit returns on 18th March 2019 to 155 Bishopsgate. Last year proved to be a crucial turning point for the key players building the future of finance. Leading platforms launched oversubscribed IPOs, digital banks proliferated and mainstream financial institutions started their own disruptive propositions. With 2019 certain to be another landmark year, more questions will be asked by regulators with investor interest in disruption also poised for more rapid growth.