A wave of radical new firms is challenging the old order
Who will really reform the banks?
A royal commission? Occupy London protestors? My bet is that when the revolution comes it will be entrepreneurs who do the damage.
Entrepreneurs will use the internet to reinvent finance. The way firms raise money, FX, asset-based finance, seed capital… all are going to be turned on their heads by clever new business models made possible by the web.
The first wave of disruptive financial firms has already arrived. And where they lead others will follow. So let LondonlovesBusiness.com introduce you to the real revolutionaries in London, set to bring fire and brimstone to the world of finance.
Transferwise: Currency exchange
FX is very often a rip-off for consumers. When you go on holiday and change your pounds for euros you can be looking at a six per cent hit. There’s the currency dealer’s spread plus commission. And you know that if the commission is waived then the spread is likely to be even wider. It’s a scandal.
Taavet Hinrikus thinks he’s got the solution. His claim to fame is being the first employee at Skype. His idea is to match individuals changing cash, just as Betfair matches punters in the betting industry.
For a flat fee of £1 you get paired up with someone trying to change money in the opposite direction. You hand over your Pounds, they hand over Euros. The exchange happens at the mid-market rate. That’s zero spread.
The service launched in January and has already dealt with millions of pounds worth of currency changes. In the long run this model represents a serious threat to FX dealers.
MarketInvoice: Invoice finance and factoring
Small firms raise working capital by selling invoices. But the invoice finance trade hasn’t changed in decades.
MarketInvoice is a startup which hopes to bring eBay style auctions to invoice finance. Firms can auction invoices to the highest bidder, a process which is both quicker and cheaper than the traditional routes.
The firm began auctioning invoices a year ago, and so far rates paid are 70 to 90 per cent of face value with an average auction size of £25,000.
MarketInvoice was founded by two City investment bankers, Anil Stocker and Charles Delingpole (brother of Spectator and Telegraph journalist James “Making lefty liberals history” Delingpole). The volume of buyers and sellers is already large enough to offer a liquid market.
Catch the Tube at Green Park and you’ll notice the huge ad posters for Borro, a new type of pawnbroker. Borro has taken the basic idea of offering loans secured against valuables, and taken it online. Customers send goods by courier, rather than by walking into a high street shop. Up to 70 per cent of the resale value of the goods can be borrowed.
The model is particularly significant at a time when the ability of banks to determine credit worthiness has been called into question. Currently the unemployed, housewives and retirees will have a negligible chance of landing a loan from a traditional bank. Borro gives a modern twist to an ancient model to offer funding to anyone with the assets to secure the loan.
Borro was founded in 2008 by Paul Aitken. He’s put together an impressive management team and board, including Paul Gratton, former chief executive of Egg Bank and Mark Blandford, founder of Sportingbet. These guys wouldn’t be tinkering with a project like this unless it could scale. So far this year Borro’s loan book has grown from £100,000 in January to £2m in July. Annual revenue – which is all derived from interest paid by customers on their loans – should hit £5m this year.
Funding Circle: Corporate loans
The concept of invididuals lending directly was pioneered by Zopa.com. The website allowed investors to lend, anonymously, to people of varying risk profiles, setting the interest rate accordingly.
Now Funding Circle has taken the concept to business lending. Investors lend direct to businesses. Average returns are 8.4 per cent.
The key is to ensure that the repayment risk is accurately assessed. Funding Circle uses a two-stage process. First, the Funding Circle underwriters investigate a loan request to determine the creditworthiness of the business. This follows the normal procedures of traditional banks. Then Funding Circle’s roster of investors are given a long list of suitable loan applications to sift through online. Loan applicants are rated for creditworthiness from A+ to C. Investors are privvy to a detailed business profile, credit score and explanation of what the money is need for.
Investors can also see which other investors have made a loan offer, and at what interest rate each investor is demanding. Interestingly, the current crop of firms looking for investment tend to be mature, medium sized firms in industries ranging from manfucturing to healthcare. This isn’t about emergency cash for flaky micro-firms.
Risk is spread, so that a large group of investors fulfils each loan. Some investors may only risk £20 at a time.
Funding Circle was founded by former private equity executive Samir Desai, former management consultant James Meekings and former investment banker Andrew Mullinger. Ed Wray, co-founder of Betfair is a non-executive director, as is Neil Rimer, co-founder of legendary venture capital house Index Ventures. Backers include Andy Homer, chief executive of Towergate Partnership, and Jon Moulton, the founder of private equity firm, Better Capital. It’s a stunning team, reflecting the awesome potential of the business model.
Funding Circle has to date received £32m of loan bids.
The key advantage is that investors can control precisely who gets their money, and at what rate: the opposite of the untransparent model operated by banks, where neither depositors nor shareholders has any clue which borrowers are being given loans. There’s no doubt that the Funding Circle approach represents a massive threat to traditional banks’ monopoly on commercial lending.
CrowdCube: Seed finance
The web is the perfect place to find angel investment these days. Angels Den offers angels an online database of firms looking for investment, though it also has a strong offline presence too, with speed-funding events and traditional events.
Crowdcube is the most radical offering in angel finance. It gives investors the chance to buy micro-sized slices of equity in startups. Bodycare business Bubble & Balm is a recent success story, having raised £75,000 from 82 investors in return for 15 per cent of the equity. And if you think this model can only work for paltry sums, then think again. Ex-bartender and drinks “anorak” Alex Kammerling raised £180,000 for 23 per cent of the equity in his Kammerling’s botanical alcoholic drinks business. That’s the sort of deal which would give
traditional venture capital houses the heebie-jeebies.
Now that the model has been proven to work with startups we can expect a long journey up the value scale. How long will it be before a firm valued at £1bn decides to offer equity stakes in the same manner?
After all, what is the Stock Exchange but an early version of the internet, connecting investors via a primitive computer network?
Finance is being demystified and deconstructed. The five firms listed here are just the vanguard of what will be a growing cohort of alternative finance providers. It is brilliantly creative businesses like these that bankers should fear, not the agendaless placard wavers loafing about on the steps of St Paul’s.
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