Alternative finance and traditional finance - the lines begin to blur

While they may have hit rock bottom in the popularity stakes, UK banks will doubtless take comfort from the fact they are officially considered to be financially stronger than many of their continental counterparts. Two recent health checks – one conducted by the European Banking Authority, the other by the European Central Bank, no less – revealed that up to 24 banks out of 123 in the Eurozone would not, in the opinion of the experts, survive another banking crisis. None of these were British; nine were Italian, three each were from Greece and Cyprus and two were from Belgium. All the ‘failures’ are on a warning to fix their capital deficit pronto or face the possibility of being put into administration.

That’s alright for us then, you might say. Well, not quite. First of all, our own Lloyds Bank only just squeaked through the criteria for a ‘pass’. More importantly, our banks can’t really claim too much credit for only doing what the UK authorities told them to do. Any medals for being sensible should rightfully be handed out to the Bank of England which forced the clearers to top up their balance sheets to match raised insolvency thresholds. In truth, they weren’t given any option and, thanks to an early spoonful of medicine, were spared the ignominy of failing the EU’s stress tests. Observers can’t wait to see how they fare when they face the UK’s own Prudential Regulation Authority’s stress tests in December.

In the meantime, the goodish news is that we can all sleep easy in our beds and not worry about another banking meltdown, at least in the short term. The less good news is that the traditional banks have used money that could otherwise have been lent out to customers to bolster their own balance sheets. They are also in a cleft stick: damned for not lending to small businesses, but double damned if they make loans that turn bad. Long-suffering shareholders may yet revolt. 

So who do business customers turn to for funds to expand their business? And where do interest-starved savers go to secure a decent return on their money? Fortunately, the UK’s capacity for financial innovation has lived up to its reputation and, supported by a Government hell bent on introducing competition, the ‘Alternative Finance’ market is currently expanding exponentially. Regulators just need to make certain that reasonable safeguards are in place fast enough to prevent the unscrupulous exploiting the innocent.

One possible development centres on a rumour that a major clearing bank – the one owned 81 per cent by British taxpayers – is looking to forge a link with one of the P2P lending platforms (as yet unnamed). If this comes to fruition, it means that one bank at least has had the nous to find a way to lend to small business customers, albeit by a circuitous route. Will more follow suit? If they do, it will be just in advance of being ordered to do so under legislation to mandate banks to refer lending that they themselves don’t want to do to Alternative Finance providers, The guidelines for which are currently being thrashed out by the Financial Conduct Authority (FCA) and Competition & Markets Authority (CMA). 

However, it is arguably of even greater significance that a bridge has been created at all between opposite sides of the great financial divide. All of which goes to show that Louise Beaumont’s insightful prediction some months back that the term ‘alternative finance’ will eventually disappear to be replaced by just ‘finance’ could turn out to be spot on.

As the banks continue their retreat from the High Street in the face of competition from the internet et al, maybe the lines of demarcation are already blurring and the process has begun. And for those who argue that safeguards for the innocent are inadequate, it would seem – judging by the stream of nasty revelations still seeping out of the banks – that regulation is not necessarily a guaranteed antidote to institutional wrong-doing.