Traditions are seldom easy to change. That is probably one of the most important reasons why alternative finance is not especially broad based in Scandinavia. A relatively high bank intensity (many banks per inhabitant) and high loyalty between banker and client make it difficult for independent players to get a foothold. Lending from non-banks feels uncomfortable for many private individuals and lots of corporates are not big enough to tap the bond market, where liquidity is scarce. Recently, entities collecting pension funds for financing SMEs have been established. However, until now it has been no outspoken success. In our opinion, one reason could be that pension organizations prefer a more broad based exposure to credits than direct lending as the latter demands relatively heavy resources to assess credit quality and follow up activities. We see a better perspective in financing the SMEs through crowdfunding, where small and midsized lenders are also able to buy shares of loans.
Three factors points to an overall change in the dearth of alternative finance in Scandinavia. Firstly, there should be demand for direct lending return in a scenario where both stocks and bonds are heading full valuation. Secondly, currently European banks are selling off large chunks of their loan portfolios or simply deleveraging to accommodate to the Basel III capital requirements, creating a supply of loans for alternative finance providers. Thirdly, political sentiment is working in favor of a more friendly regulatory environment for alternative finance providers, leading to several relaxations that eases doing business. On the borrower side, we see possibilities in the crowdfunding of companies, which in banking terminology belong to the “wrong” sector or geographic area. However, capitalization among Danish SMEs is not especially strong, which makes it difficult for them to borrow. We estimate the potential Danish market for crowdfunding to be around DKK 4-5bn.
The Anglo-Saxon countries have a stronger tradition for financial innovation than Europe. Political understanding of the importance of a well-functioning financial sector is far more outspoken than in many Continental European countries where public opinion and a kind of revenge attitude towards the banking sector in the wake of the financial crisis play a role. The U.K. authorities stress understanding of the importance of a strong and innovative financial sector after the recent decision to make it easier to get a banking license and prioritizing effectiveness in the approval process when new players are knocking on the FCA door. That decision demands competences, e.g. the ability to attract and keep the best people in the FCA organization. A future systemic crisis is the main risk in financial innovation. However, if financial regulation becomes too uniform, you probably ignore the danger signs of the next financial crisis.
Nils Thygesen
Chief Risk Officer & Partner
Lendino
