Lending services revolution piles pressure on banks as fintech sector grows

From banking to investment, mobile technology has revolutionised access to financial services as clients demand the ability to transfer money or take out an instant loan while they are on the move.

In the past year, traditional lenders have been working hard to keep up with the latest developments or risk having business models upset, or even killed off, by nimble “fintech” companies.

While this is not expected to change in 2016, some investors believe there are certain fledgling companies in particular sectors that are set to grow over the next year, which may present opportunities for would-be backers.

Warren Mead, head of alternative finance at KPMG, expects that investment in fintech will balloon to more than $30bn over the coming year, up from $20bn this year and $12bn in 2014.

Mr Mead says that 2016 could be “the year in which peer-to-peer (P2P) lending becomes mainstream — expect significant growth and continued investor appetite. We might even see the first UK initial public offering of a P2P business.”

Peer-to-peer lending, which emerged in 2004 with the UK’s Zopa platform, connects investors to borrowers online with the aim of reducing rates on loans and increasing returns on investment.

These lenders, who provide loans to companies and individuals quickly and often attract smaller business that banks have rejected, are growing at a rapid rate. In the UK, cumulative lending reached £3.7bn by the end of the third quarter, up from £2.6bn at the end of the first.

Government is also increasingly interested in the sector. Harriett Baldwin, economic secretary to the Treasury, said in October: “We believe that peer-to-peer lending is a brilliantly innovative new form of finance, which we want to see continue to grow and evolve.”

Other alternative lenders that are not P2P, such as Iwoca, which offers credit facilities to small businesses, have emerged in recent years.

“The revolution in lending will continue with [companies such as] Zopa and Funding Circle leading the charge, while emerging players, such as Iwoca, Borro and MarketInvoice will all be ones to watch in 2016,” says Tim Levene, founder of Augmentum Capital, which backs European fintech companies.

Other potential competition for the traditional institutions comes from the so-called “challenger” banks, such as the UK’s first mobile-focused lender, Atom, which will be launched next year.

Paul Lamacraft, fund manager of Woodford Investment Management, a shareholder in Atom Bank, says: “Due to the many different IT systems that traditional banks have in place, they face a real challenge in modernising and have, therefore, been slow to embrace new technology.”

In contrast, challenger banks have no legacy issues. They can develop infrastructures that adopt and adapt to the latest technologies and offer products designed for “the needs of today’s consumer”, says Mr Lamacraft.

But large high street banks, as part of their fightback, are starting to work with innovative companies and, in doing so, they are providing another possible growth avenue for investors.

Chris Wheatcroft, of Angels Den, a crowdfunding platform, says one example is DataSine, a UK tech company whose proprietary platform analyses transactions to create psychological personality profiles that can be used by banks to personalise services and target marketing messages better.

Next year could also see more disruption in the insurance industry from the likes of Digital Risks, which provides online specialised insurance and risk management services for tech businesses. Mr Levene at Augmentum says: “I’ve no doubt that there will be several unicorns [start-ups with more than $1bn in funding] in that space in the coming two to three years.”

One area affecting all sectors and businesses is the “cloud”, which uses a network of remote internet-based servers to store data, rather than a local service or computer.

Mark Hawtin, manager of the GAM technology strategies fund, says that of the $1tn companies spend annually on IT hardware, software and services, somewhere between 2 per cent and 5 per cent goes to the cloud.

With banks, insurers, asset managers and traditional businesses all facing the prospect of disruption, many are now being forced to digitally innovate and collaborate with new cutting-edge companies offering to guard against hackers.

“Until recently, security has been a key barrier to broader cloud adoption, with companies worried about losing control of their data,” says Mr Hawtin.

“But, with the endless string of security breaches in the past two years, the vast majority penetrating corporate-owned IT systems, cloud is looking like a relative safe haven.”

Read the full article at Financial Times .

About the Author:

Jay wrote about luxury asset trends for Borro Private Finance