United we stand, divided we fall

By Geoff Miller on 15th October 2015

David Stevenson yesterday published an article calling for the industry to step forward and address the concerns hovering around the alternative finance industry, and I couldn’t agree more, although in some areas I would go further.

United we stand, divided we fall

Firstly, I wholeheartedly support David’s call for everyone in the sector to get the message out that there are some very solid platforms that are genuinely changing the lives of people and businesses around the world. The “alternative“ finance sector is just becoming part of the finance sector these days and the wider world needs to understand that this is an integral part of global finance, not a peripheral activity.

However, crucially the business needs to leave behind the mentality that this is all about one particular business and instead look to promote the sector as a whole. In my personal experience there is too much time spent by too many people within these businesses trying to do down the opposition. Sure, we all believe that we have a model that gives us a particular competitive advantage but it should not be the case that businesses should go out of their way to attempt to undermine one another. It has been a very bitchy industry and at a time like this it is time for everyone to pull in their horns, acknowledge that there are competitors out there and sing the praises of how competition has given the customer a better deal and made us all better businesses. Focus on the positives about your own business, not the negatives you perceive in others.

Secondly David spoke of the need for transparency and it is something close to my heart. The problem with transparency is that there is a lack of clarity about what data should be provided to the outside world and in what format. The sister organisation to AltFi, AltFi data, has assisted in this process but still there needs to be further progress. Standard definitions of industry wide metrics need to be achieved and work done to avoid massaging of data. Having worked previously with middle market loans in the US, I have seen the granularity with which data can be presented and the clarity around delinquencies, defaults, recoveries, refinancings, fees etc etc.

This transparency needs to be achieved through a broad coalition of platforms across the industry. Personally, as an investor in loans as well as in platforms, I would also like to see work towards common standards in areas such as documentation, since investors cannot currently truly compare apples with apples, and it also makes secondary markets entirely platform-dependent, reducing liquidity.

Thirdly we, as an industry, need to do more to address the bad actors in our business. If we are to be taken seriously as a core part of the financial eco-system then we need to be absolutely clear on how firms should tackle issues such as handling client money, anti-money laundering, countering the financing of terrorism, business risk assessment etc etc. because our businesses, being relatively new players without legacy systems and sclerotic procedures, should be able to address these in a far more comprehensive and effective way than the banks, but not everyone in the industry is giving enough focus to this.

We also need to acknowledge that the regulators have a tough task in finding appropriate regulatory structures for the alternative finance industry because we don’t always fit within the rules. We should work with the regulators to ensure an appropriate regulatory structure is in place, and in a jurisdiction in which there is regulation, we should never seek to set up a platform and back-fill the regulatory approvals as we go along. Too often I have heard from platforms “the regulators don’t really worry about us, and we’ll deal with them when we have to”. Needless to say, we have never invested in a business with such an approach, but others have. To investors in platforms (and to platforms potentially looking at M & A) I would say, do your regulatory homework and where a platform has not got all the boxes ticked from a regulatory perspective, walk away.

Fourth, and I say this as someone that sees a lot of platforms pitched to me increasingly by advisers to those platforms, I would appeal to the advisers to understand that this is not simply a gravy train that can be taken for granted. You need to be far more selective in the types of businesses that are promoted, because now the investment community is waking up to risk as well as reward, you can’t just keep assuming that investors will back yet another round of funding from yet another platform.

This leads on to my final point, and again one close to my heart. These businesses are finance businesses at their core. A finance business, if run correctly, should be inherently cash generative. Platforms need to be run to focus on profits, not volumes. Christian Faes from Lendinvest has been very vocal on this point and I would applaud and endorse his approach. There is too much talk at every alternative finance conference about how much platforms originate. Who cares. What is important is whether you are capable of making any money, because that is the only way that platforms in the future will be able to get the funding required for expansion and will allow development of a successful future with or without an IPO or other crystalisation event.

We have never expected the development of the industry to be a straight line from the bottom left to the top right of the chart. Since the AltFi conference in March last year I have been banging on about the risks inherent in the industry and the fact that there will inevitably be casualties, but from this volatility will emerge a core part of the financial eco-system. The past few days have been a reminder of the risks; the industry should reflect on where we are today and how we progress together towards a healthier and more sustainable tomorrow.

AltFi Berlin Summit 2019

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18th November 2019