Why AltFi mustn't forget its social purpose
- 06 Jun
Institutional investment in Altfi has been back in the news recently with the FT reporting that that the P2PFA was taking steps to ban institutional 'cherry picking' - a practice that was quickly denied to exist in the UK by the main players such as Funding Circle and Zopa.
Many commentators argue that AltFi is hurtling towards banking at warp speed. They say this is inevitable as the institutions pour into the sector in the search for yield and introduce the ways of investment banking to further enhance returns and distribute risk. Securitisations and collateralised debt obligations have already appeared, even if not explicitly named as such, and one wonders how far away we are from the first credit default swap.
Nobody is denying the industry's need to mature and the platforms' right to secure liquidity from any legitimate source, indeed, it is essential if we are to see a sustainable, broad-based and competitive financial services industry. But there is another really important point in play here and that is the social purpose of the AltFi industry, namely to re-engineer an uncompetitive and, some would say, morally bankrupt banking system, by directly connecting the individual investor with the creator of value - typically an ambitious SME.
Lending to SMEs via peer-to-peer is socially useful - it creates jobs, it advances innovation and is a service to the community at large. The capital is used in the real economy for productive purposes and not for speculation in shadow banking products that nobody understands. That is its inherent beauty.
True peer-to-peer lending, particularly local peer-to-peer lending, goes even further than this because it allows for due diligence in a very personal way: the lender can see how their money is being put to work to create the interest payments and the borrower knows who their lenders are.
By re-connecting people with their money, Altfi has the potential to reduce the alienation that has become so characteristic of the banking industry. People are trusted to make the right decisions for themselves. Investors are given control to support the businesses they believe in and, as importantly, to refuse the ones they don't. Borrowers know that the money is coming from real people who are showing a tangible belief in them. To this extent the relationship between lender and borrower is genuinely mutualistic.
If AltFi is going to contribute to a better society, it needs to view its role as being more than wealth creation for its own sake. It needs to be about reforming the values of the financial services sector, increasing the transparency of the system and directing money into activities that are understood and good. AltFi mustn't allow itself to become just another supplier of raw material to the investment banking value chain.
The major UK platforms have remained very well balanced between retail and institutional money to date and long may this continue. By relying heavily on institutional money and, in turn, allowing those institutions to engage in financial engineering of their loans to create investment products, platforms risk re-constructing the emotional disconnect between the lender and borrower that exists in traditional banking. Not only does that raise the spectre of the banking crisis of 2007-8, it misses the opportunity for the biggest financial revolution in generations.
Recent reading has included 'The Heretics Guide to Global Finance: Hacking the Future of Money' by Brett Scott (Pluto Press) and The End of Banking blog by Jonathan McMillan, both of which have inspired this article. Thanks to both.