Alternative Finance & Are The Banks Dead to You?
The latest Like Minds Breakfast was held at The Clubhouse on Grafton Street. A bright and sunny room greeted us on one of the brightest and sunniest days of the year so far for a panel discussion on the possibilities of transforming the business finance marketplace.
In the networking over coffee and pastries, I spoke with Tony Morgan of Verus360 about banks and their poor customer service, especially when it came to speed of decision making. Banks appear to working at the speed of snail mail in a digital business world that is used to instant response times. Tony told the story of the hoops he had recently gone through to confirm with a bank that a fax had been received successfully. The very fact that this involved call centres and a fax told its own story.
Breakfast and networking complete, it was time for the panel to introduce themselves. Moderating the panel was Andrew Davis, who is an Associate Editor and Investment Columnist at Prospect Magazine.
The first panellist was Tony Morgan, CEO at Verus360. Verus360 is an online platform for applying for and managing flexible finance in the form of revolving credit. The aim is to transform the business finance experience through speed of processing and offering fair and transparent costs.
Next up was Jonathan Keeling, who is Head of Partnerships at Crowdcube. Crowdcube allow entrepreneurs to control fundraising through their own network of friends, family, customers, and interested strangers. They’re working currently with 270,000 investors and have 390 funded clients. In total, £160m has been invested through Crowdcube in UK businesses.
Finally, it was the turn of Malcolm Durham. Malcolm is the founder of WealthBeing and the Chairman of Flexible Directors. The former is a guide – both online and in book format – to creating wealth and enjoying well-being, while the latter supplies businesses with financial, human resource, or sales directors on a flexible – often temporary – basis.
The Banks Remain Dominant.
Andrew set the scene: there has been a revolution in the financial world, especially as it relates to small businesses. There is peer-to-peer lending and online equity investment. The Treasury and FCA are both actively encouraging new avenues of investment and lending to SMEs and public money is available through the British Business Bank to support the growth of alternative sources of money. And yet…. the great majority of funding still goes through four or five main high street banks. Why is this?
Tony’s take on this was that the banks are embedded in the traditional environment. They are almost seen as the default option. He believes there is need to address the educational challenge around alternative sources of finance. This is, in part, also a trust issue.
Malcolm saw the situation as indicative of the fact that many business owners hate thinking about finance. He mentioned a client who calls days spent on finance as ‘misery days’. This means that researching options is not a simple option for many business owners. So they take what, at first, appears to be the quickest route to finance – and that is usually down to their high street bank. Many SMEs also rely on their accountants for financial advice — which is like running your business by looking the rear view mirror. It is an Financial Director who can tell you how to get where you want to go.
Jonathan, recounting his experience with a previous company, acknowledged that the thought of hiring a Financial Director can feel scary — and expensive — but is essential. As for educating owners on the options for alternative funding, at the moment this tends to be crude online algorithm sites where the input of numbers leads to a source of funding being suggested, e.g. Funding Circle. This might improve with time and better data.
The panel as a whole then discussed data sources and APIs and the way this would lead to both data consolidation and disintermediation of the banking and advice space. Malcolm then made the excellent point that there is a fundamental difference between data and intelligence. In other words, someone has to look at the data and know what it shows.
The Search For Funding.
There was a suggestion from the floor that perhaps one of the problems facing banks was their inability to spot opportunities. Banks, perhaps, are not equipped to recognise the new. Malcolm responded that this is because banks are not, despite beliefs to the contrary, providers of risk finance. This is precisely where alternative finance, therefore, plays a vital role – matching opportunity with the very investors who are able to measure risk against the potential upside.
Tony talked about the struggles of dealing with a bank in the early stages of finding finance. In many cases it takes time to find out what you need to do before you can even start doing it. This immediately puts obstacles in the way of the busy business owner.
Another remark from the floor highlighted the ways that younger entrepreneurs perhaps do not look automatically to banks. They’re less tied into traditional views of money. There was general agreement with this point, although Malcolm believed that, for all the different approaches and views on lending and debt, the fundamentals remained the same. The difference in the end was about the distribution of funds.
Tony saw the less traditional approach as a massive opportunity and Jonathan agreed this was already bewaring fruit: traffic to the Crowdcube platform is already largely skewed towards mobile devices. Andrew suggested that younger people wanted quicker decisions and more flexible terms. Tony agreed that transparency of fees was essential for the future of aggregator sites when it comes to finance provision.
Much of the disruption to the traditional banking monopoly of business finance is obviously driven by online platforms but it’s worth noting that online has a scalability challenge: automation takes us only so far because human intervention is almost always needed at some stage of the funding process. It’s also true that many businesses remain reluctant to reveal too much information. This is ironic because most don’t realise how much information is already available in the public domain that takes little or no effort to uncover.
And that more or less brought the time available to an end. It had been a fascinating look at some of the potential disruption offered by the Alternative Finance (#AltFi) revolution and, at the same time, gave an optimistic snapshot of the amount of funding available for enterprising new business in the UK.
The next Business breakfast in on Thursday May 26th. Sign up on the right for our newsletter to be invited along.