Why the legacy of the public-private finance franchise model makes it near impossible for more traditional “loanable funds” finance models to compete, irrespective of the technology they think they have in hand.
Here’s a snippet from the latest annual accounts of Ratesetter, one of the UK’s top three “peer-to-peer” lenders, and shows the startup taking £2m of risk on to its own balance sheet in order to fund a borrower in “financial difficulty”.
Imagine you lent a friend £2000 for three years at a 25 per cent yearly interest rate. That would be a nice little earner for you and, sure, it’s not a cheap loan as far your friend is concerned. But he’s not that good of a friend anyway and rent-seeking is easier than working. The first nine months pass and your friend pays up every month, right on time. But then he misses a payment. When you call his mobile, you get his answering machine and when you ask around, people shuffle their feet and mumble stuff like “I dunno maybe he’s like at the gym or something”.
This is a story of a startup going up against its most important investor and losing the fight. Each side has their version of events and the narrative is complicated by the various claims and counter-claims, but it’s a cautionary tale of how personal rivalries can almost ruin a business.
Andrew O’Hagan’s 35,000 word write up of the Craig Wright Satoshi affair in the London Review of Books has been out and circulating since the weekend. The market has had time to digest the information and yet it doesn’t look all that much like anyone has found much closure from the account. For now at least, more questions than answers persist. Some interesting snippets nevertheless included:
Consider this headline from the New York Times last year: Goldman Sachs Plans to Offer Consumer Loans Online, Adopting Start-Ups’ Tactics Alongside this one from the Wall Street Journal last week: Prosper Talks With Goldman, Others to Replace Citigroup on Loan Arrangement That’s Prosper Marketplace, the online lender whose lunch Goldman Sachs is planning to eat with its own consumer loans product, trying to get the very same investment bank to buy-to-securitise Prosper’s personal loans.
One of the rallying cries of the new businesses trying to displace old banks is “transparency”. Whereas in the past, the argument goes, banking was opaque and shrouded in mystery, in the future the financial system will be easier to inspect and therefore crises will be more effectively prevented. This line of reasoning has numerous failings, and of course we are recounting it crudely, but one consequence of this reach for transparency is that many online lenders who have sprouted up since the global financial crisis make their loan data readily accessible to investors and the public at large. The data are heterogeneous across lenders — hence the secondary industry of data analysis companies — but the information is still there, loan by loan, if you can be bothered to take a look.
Online lenders in the UK, who call themselves “peer-to-peer”, have been salivating at the possibility of tapping the ISA market for funds, with the government introducing a new “Innovative Finance ISA” from April 6. The change in the law will let online lenders stick their loans into a tax-efficient ISA wrapper, but there’s a snag — the lenders have to be fully authorised by the FCA before they can start selling their P2P/ISA wares. (Although that hasn’t stopped the likes of Ratesetter and Zopa releasing details of their ISA product in advance. Coming soon, etc).
An update on China’s big ball of money which we have seen pouring into stock, bonds etc before… Right now it’s still rolling hard into Tier 1 property — first Shenzhen, now Shanghai. From HSBC with our emphasis: Following Shenzhen’s lead from last year, Shanghai’s residential property prices rose 24% during the first two months of the year.