Are alternative lenders better served operating as standalone businesses, working with banks, or becoming banks?
To be or not to be a bank? That was the question asked by Funding Circle boss Samir Desai at the AltFi Europe Summit in London earlier this year (video below). It is also a question on the minds, no doubt, of many a person tasked with sourcing lending capital for fintech firms in Europe.
Clearly there are differing opinions on the matter in the UK. But what of Europe?
Younited Credit, a French platform that has facilitated over half a billion euros in consumer loans, is licenced as a European credit institution, and as such is able to take deposits. A quarter of its loans are now funded in this way. Its CEO Charles Egly is a strong believer in what he calls a “hybrid” approach to funding loans, utilising both balance sheet and direct investment (through SPVs, in Younited Credit’s case).
But Egly aside, some of Europe’s biggest marketplace lenders are happy, for time being, remaining non-banks. José Rego, who runs Portuguese P2P firm Raize, sees the issue as black-and-white.
“By definition, if you become a bank, you stop being an alternative lender,” he said. “Becoming a bank is an extremely complex and very expensive strategic decision which typically takes into consideration other elements besides the equity value generated by the alternative lending. Only a select number of platforms are likely to have the opportunity to become banks (if they wish so). So, in reality, I don’t think it should be something we're thinking about within the industry.”
Raize signed a 2 year, €10m funding deal with Portuguese challenger bank Banco BNI Europa in May. As you might imagine, Rego is much more up for discussion that's centred around bank collaboration, but with certain constraints.
“Working with partners (i.e. banks) may be a good idea, but only if it adds value to the franchise – so depends largely on the type of partnership,” he said. “I don’t believe in ‘partnering for PR’ as a source of equity value.”
“It is in the interest of alternative lenders to be exactly that, alternative,” he said. “Whilst working with banks and other lenders is critical for improving regulation and preventing financial crime it is also their responsibility to customers to provide an original product that can continue to be inventive.”
Patrick de Nonnville, chief operating officer at French marketplace lender, was again in agreement – suggesting that the flexibility that is afforded to non-bank lenders should not be lightly cast aside.
“There are business lines where a banking licence gives you an incredible competitive advantage, but others where the benefits are more balanced and becoming a bank can cripple operational flexibility,” he said. “We intend to keep that flexibility as long as possible.”
But his final words are indicative. It has long been suggested – primarily by industry detractors – that marketplace lenders benefit from a kind of regulatory arbitrage, freeing them from the capital requirements and various other strictures that banks must adhere to. Perhaps de Nonneville, formerly a partner at Goldman Sachs, detects the winds of change.
Rego, Clannachan and de Nonneville will each be speaking at the AltFi Global Summit in Amsterdam on November 7th, alongside a host of other speakers. There is plenty of information about the event available on the webpage, and you can register to attend here.