Panel Debate at the NACFB: What is so special about specialist lending?
We really enjoyed our time at the recent NACFB conference and gained many valuable insights from our peers in the sector. As CEO, I joined Lloyds bank, Investec and NatWest as well as fellow lenders Funding Circle and Amicus, for a fascinating discussion about the current landscape of specialist lending.
So what is specialist lending?
"There is no such thing as specialist lending, just lenders who do things differently", according to John Jenkins from Amicus. So-called specialist lenders often work for businesses who do not fit the frame for traditional bank loans. I support this idea - a different approach to lending is what makes alternative finance providers stand out from the crowd but it also makes them necessary. There is very little point in competing like-for-like on everything. Lenders like Nucleus have a different approach, we have intentionally found a niche where we can fulfil an SME need in the market.
Interestingly, although the debate was pitched as traditional lenders vs alternative finance providers, everyone was in agreement - specialist lenders have a crucial role to play, it is just a different one at the moment. Andy Bishop from Lloyds Bank reiterated that specialist lenders had an important place within business lending. Indeed, such institutions can fill in the gap for businesses who don’t fit the mould of a 'tick box' or online algorithm criteria checklist.
Where will specialist lending be in five years’ time?
In times of uncertainty, it is harder to speculate and of course matters such as the scale, structure and resources of such companies will play a part in their survival. Given the important role alternative lenders have within funding, who would benefit if they became 'just another bank'.
Certain lenders, such as Funding Circle are adamant they will not become a bank. As John Jenkins pointed out, it is very possible that the gap will widen rather than narrow. Traditional banking may delve deeper into 'safer' areas for funding, while the alternative finance providers could branch out, experimenting with entirely new sectors.
I would add that geography is an important factor in this question. Ultimately, the more local you can be as a lender, the more success you will experience. This is also reflected in levels of specialist knowledge - a personalised and tailored approach and true understanding of their needs is what really matters to businesses.
Will the P2P bubble burst?
Wesley Harfield from Investec expressed concern that the bubble may well burst. Within P2P, private individuals are lending around £6 million every day to complete strangers. This certainly raises some alarm bells and the sector has already come up against negativity for this exact reason. If or perhaps when an individual loses their life savings through a P2P platform then 'the small print' will do little to calm the outrage. Just because capital is clearly stated to be at risk, does not prepare the world for the backlash when a normal, unsuspecting retail investor loses everything. And the media are waiting to pounce on this kind of story - it would be sensationalised - everybody's prediction was right and potentially it would cause irreparable damage to the brand.
In my opinion, it’s all a matter of scale. Businesses that have scaled effectively would never need to dip their standards when it comes to on-boarding customers - if things get competitive this is often the first area to spiral, with disastrous consequences. One prediction does not fit all. I think we need to make a clear distinction in predictions between small and more established case studies. The level of scrutiny on larger largers lenders, through their Government endorsements, regulation or institituional investment means it would be hard for their processes to be anything but robust. It is much easier however for the smaller firms in competititon to drive each other's prices or standards down as the landscape becomes more fierce and that is when they get themselves in trouble.
This was backed up by Tom, who said the Funding Circle had used virtual simulation technology to test the strength of their own loan book against the 1970s, 80s and 90s economic crashes - and it held up.
So, when it comes to the battle between specialist lenders who wins in terms of technology and visibility?
Conventional wisdom would point to traditional banks having greater visibility, while specialist lenders have the upper hand with technology. Indeed, Infrastructure within banks is outdated, which does not make for an easy transition when introducing new technology or systems. However, in terms of resource, with the correct approach and the right level of forward planning the banks are way ahead of an independent or alternative lender.
Both Lloyds and Investec agreed that there is likely to be lots of banks teaming up with FinTechs. Investec in particular announced a new partnership that will allow brokers to get answers on their client applications in 4 hours through an online platform.
However, the idea that specialist lenders like Nucleus are entirely technology led is not correct. The real specialty for us as an alternative lender, remains investment in an experienced team and building excellent client relationships.
The key take away from a debate which was supposed to pitch alternative lenders against traditional banks was in fact that one size doesn’t fit all. The most important thing a lender can do is to work for the businesses they aim to serve, and to focus on the customer - an area that alternative finance providers such as Nucleus excel in.