Last year was a tough year for the alternative finance sector. Funding Circle in its own way typified many of the broad trends. On one level, 2018 was a great success for the big SME lender with its IPO. But its subsequent share price decline – to the current price of 320p – also symbolized a typically brutal public markets reaction to a hugely popular IPO process. Arguably though, the more telling story was that of its existing listed investment trust, the Funding Circle SME Income fund, which had spent most of the last year trading at a healthy premium but finished the year down 14% (YTD) with the fund’s shares trading on a discount of over 10%. My own view was that the fund was probably overpriced when it was at a premium but is possibly under-priced now it’s at a chunky discount. The broader story though was a realization by the public markets that investing in online lending can be risky. Quelle surprise!
This, of course, backed into a wider series of largely negative news stories about most of the direct and peer to peer lending platforms – the overall tenor of which has been a commentary that implied “I told you so, this stuff is much riskier than you thought”. On this theme, the year finished with much the most curious story of all – the slightly false controversy about Monzo customers being able to use their overdraft to buy shares in the digital bank’s crowdfunding campaign. I say false because I’m not sure what any online lender can really do to police how their customers use an overdraft, but the damage was done.
By way of mitigation I’d suggest that most of these narratives were just minor squalls and upsets, and to be expected as the sector became more mainstream. I have no doubt that a small legion of bank lobbyists is constantly at work helpfully pointing out to journalists the weakness in all the competing digital business models – risky SME lending, questionable digital banking practices, poor protection for savers. The industry needs to be better organized at generating smarter responses and it doesn’t really help that there isn’t one overall collective organization that represents all the disruptive financial platforms – a kind of alternative BBA, British Bankers Association. Some trade associations are vocal, the P2PFA included, but nowhere near as vocal as they need to be.
In terms of public markets, I’d also make the observation that mainstream investors are beginning to understand the asset class better. Funding Circle’s fund may have had a tough 2018 but overall the broad gaggle of funds which invest in direct and online lending had a positive 2018. According to numbers from funds analysts at Numis, the broad direct lending category was actually up over 1% over 2018, compared to big losses for mainstream equity funds. Arguably this is one part a recovery from the dreadful underperformance of funds in previous years, but its still noticeable that funds investors are now starting to buy into lending funds again – as long as they start to deliver on their income promises.
Another small positive pointer is the share price of Augmentum, one of the cleanest proxies for the public market fortunes of fintech venture capital assets. This highly concentrated fund listed last year on the market and managed to minimize share price losses to just under 4% over its short life on the London stock exchange. By comparison, most mainstream private equity funds lost well over 10% in share price terms over the year.
So, looking to the future, what should we expect in 2019?
Overall, my default position is that we should expect a much more volatile stock market with some nasty surprises. The good news is that I think there is a decent chance that investors will avoid a full-on sell-off of risk assets in 2019, presuming that is that Trump doesn’t go and do something really stupid like fire the chair of the US Federal Reserve.
But beneath this turbulent façade presented by the public markets, I think we’ll see some interesting sub trends within the world of fintech.
I’d identify a bunch of big trends starting with my favorite multiyear fintech theme – account aggregation. The big story in finance at the moment is that most customers are unbundling their various financial products. In the bad old days, they’d run most of their financial transactions through their main high street bank – this would include FX transfers, savings accounts and even investments. Quite rightly investors are now looking to unbundle product provision and looking to find the best provider for each service. So, in my case, for instance, I use Starling for day to day transactions (others rave about Monzo), Revolut for FX transfers, Freetrade for mainstream share dealing, and a long list of online lending accounts including Marcus and Funding Circle. The challenge with unbundling is that one ends up with a multitude of different accounts, all of which need constant monitoring. To date, most aggregation services such as Yolt and Money Dashboard have tended to focus on the low hanging fruit produced by regulatory directives such as PSD2 and Open banking, with a focus on spending analysis. Whilst these services may be helpful for younger savers looking to manage their tight finances (we were all there at some stage, got the badge), these aren’t the really valuable services required by a wider group of customers with deeper, fatter pockets. What we’d rather know is whether our current savings accounts are paying the most competitive rates, for instance, i.e price comparison integrated into aggregation. We’d also quite like aggregation services offered in new areas such as bill management and investment. Let’s take each in turn.
One of the most interesting new platforms of recent times is something called OneDox. It’s a really very clever idea – all your main bills, including tax and car Mot, in one place. Call it an online filing cabinet for boring household stuff. It even offers a clever assistance service (at a rather expensive £9.99 a month) which will help you save money on those bills by constantly reserving your products. The fly in the ointment is the technical integration. I plugged in a long list of bill providers and although most accepted the credentials, few of them seem to be willing to offer seamless integration with OneDox’s system. Nevertheless, it is a great idea and the start of something really interesting. Over in investment, I’m also hunting for something similar i.e a way of aggregating all my investment and robo accounts in one portal and then evaluating performance against benchmarks. In this market, there is no player at the moment, but the opportunity set around investment aggregation and monitoring is absolutely huge. If anyone reading this has any ideas, drop me a line as I’ve got lots of suggestions as to how this can work.
Which brings me to the next trend – pensions. Pensions Bee has built a smart proposition around pensions aggregation and a bunch of new platforms are on their tail but the opportunities around auto-enrolment and investment are absolutely huge. This year the level of employee/employer contributions steps up again and within 5 to 10 years we’ll be starting to see these schemes hosting many tens billions of pounds – echoing the growth of the super ann schemes in Australia which are now enormous. Again, any fintech proposition that both enables workplace access to cheap investment pensions and also the aggregation of said accounts and their relative performance is on to something truly huge.
Sticking with the investment theme I’d also predict that digital wealth providers and robo platforms will be forced to compete on a new terrain – performance. Stockmarkets disappointed last year and there will be many clients out there looking at their digital statements wondering why they lost so much. Cue an opportunity for smart players to step beyond the passive idea of strategic asset allocation and provide a much more active management process which avoids the worst of market volatility. In this new world of active robo investing, the winners will be those with the cleverest algos and not the sleekest customer UXs.
Back in mainstream online and peer to peer lending, my hunch is that the more volatile market environment will provide a similar challenge for the platforms – how will their credit risk algo’s (or just plain old human credit officers) cope with market volatility and increasing losses from defaults. Again, my guess is that performance will be hugely variable, and we’ll see a long tail of platforms struggle with bad debts and late payers. We are now truly seeing the next phase of disruption where only the strongest will survive. And in this primordial struggle for survival, there’ll be some interesting positive upsets – platforms which outperform, minimise losses and protect their investors against market volatility. Expect these survivors to move to the public markets as their alpha performance gets noticed.