«Banking is necessary; banks are not» - Bill Gates.
14th January 2016
At the very beginning of the AltFi revolution it was unclear of exactly what impact it would have on the banking system. As peer-to-peer lending moved in on the gaps left by the traditional financial system, more questions have been highlighted and asked about these systems and models that have been relied upon for so long when raising capital. Has the time come where a solution to a very simple problem could replace banking services as we know them?
2015 saw another poignant development in the alternative finance sector for both peer-to-peer lenders and traditional finance lenders. Although it is still a relatively new concept for raising capital for a business, the peer-to-peer space continues to disrupt and revolutionise the way businesses can raise funds, and larger corporations, such as banks, are now adapting accordingly by treating crowdfunding and peer-to-peer platforms as an opportunity as well as a disruption, by partnering with them.
Large financial institutions have a decision to make, do they compete or cooperate in this fast growing alternative finance sector?
Lending Club and Citigroup teamed up last year, in a $150million venture which remains strong today. J P Morgan joined sides with On Deck Capital, and it is now common place to create partnerships and cooperative relationships with institutions to deploy immediate credit to the P2P platforms users. The relationship a customer has with their bank is now complimented by the innovation, agility and efficiency of the p2p online lender. The slow, over regulated and old fashioned bank process has now been overtaken by offering a quicker, simpler way to access credit with higher returns rewarding the once yield starved investor. Competing with the P2P lenders would mean lowering operating costs, navigating the regulatory constraints cost effectively, implementing data driven models and simplifying the customer experience – in other words, a huge change to the present operating process.
A recent example of collaboration between a peer-to-peer lender and a bank can be seen in the example of thesqua.re raise.
Serviced Apartments Provider thesqua.re closed an investment round of $2 million from London basedFinTech company Crowd2Fund and OakNorth Bank. Thesqua.re is an award-winning online accommodation business providing luxury-serviced apartments for corporate clients. The funding supports the company’s expansion to 500 apartments in Central London over the next two years, growth of its digital platform and the aim to open up offices in New York. The financing round was closed successfully between the two finance companies and highlights what collaboration achieves.
Thesqua.re has its brand close to its heart and running a crowdfunding campaign allowed them to publicise the business to the public and also build a sophisticated team of private investors to help grow the business over the longer term.
Chris Hancock, CEO of Crowd2Fund says: “'Crowd lending is such an exciting and fast-growing industry. We loved working with Sid and the team at thesqua.re, they are an excellent example of the innovative, British businesses we helped fund on the platform and a fantastic way to provide our investors with a good return on their investments.”
The campaign closed with 17 high profile investors, making thesqua.re the first UK Serviced Apartments Provider to secure investment through crowdfunding.
Founder Sid Narang says: “Crowdfunding gave us an opportunity to reach out to investors who were involved in the latest tech and industry trends. We specifically chose to raise on Crowd2Fund due to them understanding our business and the only crowdfunding platform to allow us to raise a loan in this way.”
As more peer to peer products become available, 2016 will see more institutions collaborating with lenders viewing them as an opportunity, rather than a threat. Peer-to-peer platforms will need to remain innovative and agile in order to compete in, what is fast becoming, a crowded space. The FCA will continue to enforce strict regulations on any lenders, so the winners in the market place will be those who protect their investors from losses and who will then be supported by intuitions. What is certain, p2p platforms will fund a greater amount than we saw in 2015 as the appetite for swift and simple funding increases.
Past performance and forecasts are not reliable indicators of future results. Your capital invested is not covered for compensation in the event of a loss by the FSCS. Tax treatment will depend on the individual circumstances and may be subject to change. Please see our Risk section before making an investment decision.