I love writing about alternative finance because I get such great emails about it.
It turns out that lots of Risk and Reward subscribers are basically alternative finance experts. Lots of you have been investing in alternative finance for years. So you know the market from the inside out.
That’s the great thing about an email like this. It’s a dialogue. I get ideas, hints, advice, and flat out criticism from you. And that helps me come up with better topics, better questions, and better conclusions.
Anyway I had to revisit alternative finance this week, after all the drama at the giant American marketplace lender Lending Club. You can find the article here. But basically what happened is that Lending Club grew very fast, ran out of lenders, and turned to fraud to plug the gap. Their charismatic young CEO has gotten the boot, and the company is still very much in trouble.
So that’s the background. Over to you:
The regulatory framework is different in the USA, the general thrust in the UK tends to be towards a greater level of transparency.
The IPO is often the high point for a company for quite a while after (why I haven’t invested in one since the tell Sid campaign!).
An alternative view might be the system worked! No one can stop a criminal from acting on their criminal intent be it breaking and entering or white collar crime, the system if it works identifies the malfeasance and deals with the perpetrator, which in this case seems to be the case. To propose that one offense is the harbinger of the demise of the system is like suggesting that a burglary is the demise of the rule of law, journalistic hyperbole!
The solution is greater transparency, combined with a recognition of the realities of human behaviour by investors. It’s not as though those pillars of the establishment probity, banks have not had their examples of wrong doing! As has every institution created by man, so a more rational and balanced though watchful approach is called for.
There may well be a case for investors to be chary of too much of a drive towards institutional investment/financing in to the p2p market. We need to be clear in our minds exactly what we are investing in and if it strays from the guiding principles that encouraged us to invest in it, remove our money!
Profit alone is not the be all and end all, as the banks amply proved.
In theory I agree with Shaun… but I’m not sure how it’s meant to work in practice.
For example, here in the UK marketplace lenders have to disclose their loan books in order to join the industry body. Sounds good.
But because Lending Club is a listed company, it’s had to be very transparent about its loan book. It’s more open than any other lender. That still wasn’t enough to stop problems, because (in my opinion), it’s almost impossible to get full transparency on lending standards until after the fact.
Ben Thompson, a technology analyst, has made the point that incentives aren’t matched up properly here. Lending Club needs to grow by finding more lenders. So at the margin, there’ll be pressure on staff to fudge lending standards in order to hit their targets.
In other words, what’s good for Lending Club the business isn’t necessarily good for Lending Club borrowers/investors.
Here’s another email – this one’s from Jules:
I generally agree with Lord Turner on this. Which makes a change, as I think he’s deranged re helicopter money…
Lending to people directly doesn’t change the problems with vetting them. What the old school, now extinct local Bank Manager used to major in. So I’ve never been tempted.
However I did think that being the platform provider was a good bet. No risk, little funding, just keep pocketing the commissions. Hence I took a punt on GLI Finance (GLIF), who invest in platform providers, in late September ’14. I’m still hanging on… the yield is still very juicy, BUT both shares and dividends have halved.
So I’m guessing they hold a chunk Lending Club… and hoping none of their other bets are as dumb! Did they buy the IPO I wonder? Seriously, how could that business model ever be worth $4.6 billion!
It seems to me there’s a tension at the centre of the marketplace lending business.
On the one hand, banks are inefficient and costly. Surely the spread between borrowers and lenders could be narrower than it is now. That’s a point in the marketplace lenders’ favour.
On the other hand, Ben Thompson’s point is a good one. When a business’s incentives aren’t matched with the interests of all its customers, there’s potential for trouble.
I’ll leave it there. I’m sure we’ll be back to this topic. And as ever, I look forward to reading your emails: Sean@agora.co.uk.
Have a great long weekend!