Conrad Ford, founder of Funding Options, looks in CityA.M. at the alternative-finance implications of the Competition and Markets Authority’s report on open banking. He compares it to finance’s equivalent of the Cambrian Explosion – which saw the emergence of new life forms.
“[It is] an impending financial services revolution has been compared to the Cambrian Explosion, an era half a billion years ago when high oxygen levels led to an unprecedented boom in life on earth. Just as the availability of oxygen led to an explosion of new life forms, rich data from Open Banking APIs will add rocket fuel to innovative fintech firms like alternative finance providers.
“For example, some alternative lenders will use read-only access to Open Banking data to make better credit decisions. Ironically, high street banks often have more automated lending approaches than their online peer-to-peer rivals, because traditional banks sit on a treasure-trove of valuable account data. With Open Banking, expect to see peer-to-peer lenders finally compete on equal terms against the dominant banks. Equally, equity crowdfunders may use the same technology to drive better due diligence and transparency.
“Some alternative lenders may go further and utilise read-write access to Open Banking data, giving them the ability not just to view bank account payments, but also to initiate them. Imagine a world where an SME can raise an invoice on their mobile phone then immediately finance it at the touch of a button, rather than waiting weeks to get paid. Indeed, in an Open Banking world, SMEs won’t even need to have both online banking and online accounting software – a veritable Battle Royale now beckons for control of business banking.
“For banks, the worst case scenario of Open Banking is to become the expensive “dumb pipes” on which other people build great companies. After all, it was telecoms companies that built the hugely expensive infrastructure on which Google built its $500bn market cap business. In the best case scenario, banks will open up huge new revenues from alternative lenders, financing their underserved customers, just as smartphones created fat new revenue shares for Apple and Google from third-party app developers.
“The losing banks will be those dragged kicking and screaming into Open Banking by regulators, losing control over strategy. Indeed, some banks employ extraordinary mental gymnastics, on the one hand arguing that Open Banking is impractical, while at the same time already offering the same API technologies elsewhere (such as to preferred accounting software partners). The CMA is rightfully taking a tough line on them.”
Meanwhile, our latest B+ loan offering is just launched on site. It has a five-year term and a gross indicative yield of 9 per cent. The purpose of the loan is to fund franchise expansion of Subway sandwich-shop franchises. At the time of writing, the loan is 5 per cent filled, with a gross yield, based on bids so far submitted, of 12.2 per cent. Experience of other auctions indicates this notional yield may well drop as the loan fills and cheaper offers of credit drive out more expensive ones. The auction has 20 days to run.