London Summit 2018

Monday 26 March 2018

Thanks to all who made the AltFi London Summit 2018 such a success. We were delighted with the attendance and with the energetic discussion. Particularly intriguing were the sessions dedicated to our key theme “Making the Marketplace”, which inspired some fascinating debate on the main stage and in the breakout room. 

Tandem’s Ricky Knox set out his stall, which is simply that neo-banks must make money by taking deposits and lending them out, while allowing marketplaces to drive “lifetime consumer benefit”.

To an extent, Revolut’s James Gibson seemed to agree. The head of BD for Revolut for Business revealed at the event that Revolut is planning to launch a marketplace for its business customers called Revolut Connect. The service will provide businesses access to a wide range of business products.

But Gibson also revealed that the banking challenger would not be taking a marketplace-based approach to SME credit. Instead, the app intends to underwrite loans itself, and already has a dedicated team working on this.

In our breakout room roundtable, on the same subject, more or less every UK digital bank and a broad array of fintechs battled it out on how marketplaces should function in a fiery debate that was perhaps the highlight of the day.

We sincerely look forward to hosting you again next time.


Opening keynote

  • As the UK parliament’s body on fintech Afriyie says the All Party Parliamentary Group (APPG) is focused on both helping fintechs to grow as well as promoting financial inclusion. He says one key issue will be make sure alternative finance and fintech does not become a party political issue, however.
  • While the UK and London specifically have a fintech capital, Afriyie warns this primacy is “not a birth right” and could change in a matter of months.

Small business; big global impact

  • Funding Circle’s chief says the firm is seeing strong growth across geographies and that it has now originated over £4bn of loans in total with £1.75bn in the past year alone.
  • Desai says that the Brexit process has not so far derailed demand for P2P loans from SMEs because small business lending is still neglected by big banks who have actually pulled back somewhat since the referendum.
  • He ends by saying that Funding Circle is also very bullish on the prospects for alternative lending in continental Europe.

Myth or reality? Fintech is expanding access to financial services

  • Ratesetter’s Lewis says it’s underestimated how hard it is to access financial services on the investor side and that P2P is helping with that.
  • Baclin agrees that more than 10 years later P2P lending is still radical in the way it opens access to finance for both borrowers and lenders.
  • Lockhart says fintech has the ability to give customers a much better experience than traditional financial services as well as exposure to an asset investors may not have had access to before.

The psychology of saving and investing

  • Hugh said she sees consumers hugely overspending on insurance.
  • Ford said the psychology of saving is a hugely complex and difficult subject. The relationship between spending and saving and is being wrapped-up in “spending being the enemy of saving.” People also tend to say one thing and do another, he adds.
  • Savova, meanwhile, said one of the problems with ‘roundups’ – an increasingly popular method of saving for financial apps - is that it hard to save a meaningful amount and then when someone’s pot does become large people tend to withdraw it.
  • Scalable Capital’s CEO Miller adds that recent hype around cryptocurrencies won't cross over into the savings industries.

Full automation is the key to improving the health of small businesses

  • Knecht said Billie has managed to dramatically cut down on-boarding time and costs with its own fully automated technology.
  • He added that if you want to build an automated end to end digital platform you also have to take particular care over securities measures to avoid fraud attacks.
  • Every week, Knecht added, Billie is attacked by fraudulent behaviour. 

A deep dive into the Revolut marketplace

  • Gibson believes the best way to describe Revolut at the moment is a "global money app", with interbank exchange rates accessible via debit cards, the ability to hold multiple currencies at once and exciting new features. Its business offering, Revolut for Business, was born out of users wanting to use those appealing exchange rates for larger amounts of funds. However one thing Revolut would not describe itself as is a "marketplace": it aims to curate an offering for its users, instead of create one. 
  • One of the things that Gibson has found is that often business users "aren't aware" of the charges incumbent banks levy on card usage, FX or online pyaments. Once they realise how much it costs them, Revolut then becomes a very easy sell. In the next few months, Revolut hopes to launch "Revolut Connect": a marketplace for different business products and services, such as accounting and payroll solutions.
  • But will the marketplace model last forever? "Definitely," says Gibson. There's no fintech out there "just purely working by themselves", and Revolut has no plans to be underwriting its own insurance or offering its own peer-to-peer lending service any time soon. Open Banking and PSD2 have increased the marketplace model's potential ten-fold, but Gibson notes that the slow release of the incumbents' APIs has hindered the ability of neobanks to establish a secure timeframe.

How does a good bank make money?

Ricky Knox provides a rundown of the different approaches banks take towards making money, whilst still being a "good bank".

  • Right now, most banks make their money through making loans, whether that's via credit cards, mortgages or business loans. However, Knox says it's worth noting that the next generation banks have instead chosen to centre themselves around offering a marketplace. This is both to make money off selling products via commission, and to serve its users by giving them the products and services they want with little to no up-front costs. Tandem chooses to offer its own product and those provided by third-parties, to give their users the best choice possible.
  • Knox says that for Tandem, the marketplace model is primarily about "generating customer lifetime value", over monetisation. Where its digital banking competitors have signed up multiple partners and integrations to build up their marketplace offerings, Tandem hopes to provide its users with a lifetime benefit through developing the right relationships and creating the right product view.
  • He predicts that digital banks are going to present a "real and credible challenge" to incumbent banks once they reach profitability, which in his mind is also a certain outcome. Knox stated that although Tandem hasn't become profitable yet, "we're not that far off either".

Applications of Open Banking in third‐party marketplaces

  • Boden believes that while PSD2 and Open Banking are important, the marketplace model is "a step beyond that". Starling Bank has always been compliant with these regulations since it was founded, making it better placed than most incumbents to make good decisions about how best to serve its customers through data. However the offering of third-party products is "not to be done lightly", or dismissed as an add-on: the Starling Bank marketplace proposition is continually and carefully assessed to manage its risk, while fulfilling all its regulatory requirements. 
  • Klestil wonders whether the incumbents will eventually catch up to their digital counterparts in terms of making these marketplace partnerships, but Boden believes that the model will outrun them all. While big banks will try to copy every feature that digital banks currently offer, they won't be able to copy the neobank cost-base. At the moment, Starling Bank has more than 90 firms queuing to negotiate partnership deals for its marketplace. By the end of 2018, Boden hopes to have 25 of those partnerships go live. Once business accounts are live, Starling hopes to expand its marketplace model to cater to its business customers, too.
  • While a lot of people have been trying to figure out how GDPR and Open Banking might work together, Boden believes that GDPR won't have a large effect on digital banks. Being digital first and foremost means that they're already ahead of the game. By September 2019, all banks will have to catch up in line with regulation.

Direct lending is about more than just lending; managing relationships and recoveries

  • Silkowski believes that alternative finance won’t - in time – be deemed to be ‘alternative’ and that traditional banking also won’t be called ‘traditional’ due to convergence between the ‘disruptor/incumbent’ model.
  • He said, however, that platforms being solely focused on scaling loans volume will be dangerous.
  • He added that it is harder to raise capital for direct lending, especially in the asset leasing space, in the US compared to UK where demand is high.

Beyond investment trusts: Where's the next wave of capital going to come from?

  • Lüth said Raisin is working on developing EFTs with passive fund giant Vanguard while Aikens said Prodigy Finance is looking at different fund structures very closely.
  • Newsome said that two forms of private debt have sprung up. First is $850bn and more mid market private equity based and the second is platform based lending being $50-100bn. He added that a type of ‘fund of platforms’ could happen soon to help the latter grow.
  • Ramaekers said Aegon are planning a long run investment in the private credit space but that it can takes a while before actually buying the first loan in a platform. “It was a year before we deployed money after first meeting Funding Circle for the first time,” he said.

EIF spotlight: The case for supporting small businesses through online lending

  • Salvatore, who has invested on behalf of the EIF in Lendix, said the returns on offer are not the only important thing for the supranational entity but that the consistency of returns was equally important. He says, in the wake of Brexit, We the EIF is trying to increase exposure to us many EU countries as possible as well as neighbouring countries such as Turkey. “Brexit has created uncertainty but nothing has changed so far,” he added.
  • De Nonneville said that the benefits of the EIF fund as a source of capital are numerous.  He added that the Brexit vote has not yet really been much of a factor in de-railing demand for either loans or investment, but he said there is a apparel increase in demand for higher ticket size loans.

The next phase for the SME funding revolution: Taking on mid‐market lending

  • Will technology-enabled platform lending move into the mid market space? Thabe said to lend to the mid-market he believes every loan needs “a pair of real eyes” along side automation of certain aspects of underwriting.
  • Law adds that “it is hard work in the middle”. He said online lenders will do well in the sub-200k level where as banks will dominate £10m plus.
  • Kindert, head of alternative credit at NNIP, said there is some oversupply in some areas of the non-bank lending space but that in others “there are still opportunities.”
  • Spotcap’s Turfboer meanwhile said that going into multiple jurisdictions is not  easy for mid market lending and added that banks and fintechs may both find it difficult to make this space profitable.



Rewiring bank lending

  • Challenger banks might have the slick operational features that customers like, but they don't have the trust or origination that big banks can access. Zuck believes that while the cost of acquisition can be low for fintechs compared to incumbents, it's scalability that will prove the hardest to overcome for smaller players while they reach for profitability. Customer segmentation is going to prove key: as use cases and models appear of what customers need or require from their banks, platforms need to pay attention to how their relationship with their customers will progress.
  • If you look at where banks will go in the future, as you strip away core services, all that will be left is customer trust. Bringing in the ability to "farm out" other services like lending to partnerships is going to become the way forward, says Taussig. People don't use banks like they use Instagram, but they'll still feel the value in being able to access all their banking needs in one place.
  • There are areas where it is natural for banks to partner with fintechs for rapid reinvention, says Kerton. Esme is looking at product innovation just as much as tech innovation, but it's important to get the systems in place and then build the tech around it. Alba-Ochoa says that OakNorth, on the other hand, adapts to all its clients. From a lending point of view, OakNorth creates a new product for every new client it gets. Every second, something new is being tested.

The big banks already have better technology than fintechs

  • Kamp says that banks must have good tech, if they are to handle the mass of data and transactions they see every day. But that doesn't make them better than fintechs: their legacy, and volume of data that they must carry to every new product, makes it very difficult for them to practice innovation. However that's not to say that the fintechs are at their peak: in some ways, they oversell. Speed of development and speed to market is not the same as quality of service or product. If big banks are to overcome their fintech counterparts, their internal fintech hubs need to not just focus on idea innovation, but also on product implementation and development.
  • Mould admits that fintechs can get products out quicker and with less obstacles, but if the banks can solve their own bureaucracy issues, they will be able to "totally wipeout" fintechs. But the question is, can they do that? To date, it has yet to happen. The tech that banks own is far superior to what fintechs have been able to achieve so far, but that has yet to translate into tangible products. Kamp agrees, it is far more secure for banks to wait and see which fintech services develop and flourish, copying them later after the risk has been fully assessed.

Break Out Room

Making the Marketplace ‐ Round Table Discussion

  • All in attendance were in agreement: marketplaces are something we can expect to see coming out of every digital bank, sooner or later. But will the model become a money maker? Clark doesn't think so, suggesting that Tandem prefers to see its marketplace as simply a "benefit to the customer" over a tool for profitability. Myatt also pointed out that we have yet to determine an exact and widespread definition of what we mean by 'marketplace': does it refer to only third-party products being sold by a bank, or will banks eventually sell their own services and products within their apps too? 
  • In essence, the marketplace model should be about "putting the customer's data back in their hands" and allowing them to get the most out of it, said Barbosa. Indeed, both Chisell and Magliulo added that a marketplace should be about "giving way" to those who are specialised, in order to create the most value for their customers. Campbell mentioned that Bud has found higher traction from users sits on non-core products and services: things like energy-switching, travel perks and insurance. 
  • However Plumb warned that at times the marketplace has become a "sexy term" for a bank's partnership strategy, when what they're really offering is not a true marketplace at all. Often we speak about marketplaces as if they are just one generic product, but as in the case of robo advisors, not all marketplaces will be a good fit. Bibas suggested that each bank should develop a specific strategy for different partners, allowing them to create true customer value.
  • For the future, Moreni highlighted the need for banks to be focusing on what value in a marketplace really means to their customers. Whether you give a customer 10 or 3 choices for a service, "it doesn't matter unless you know what it is your customer needs from you," said Dallas. Muis agreed, sayng that if you want people to give up their data, banks will have to show them the value they're going to gain as a result. While a partnership strategy is a no-brainer for most, it'll be the new categories that come out of the marketplace model that will be the most exciting to watch.

Alternative Credit ‐ Round Table Discussion

  • The 22-strong roundtable discussed various aspects of opportunities in the non-bank lending space including the opportunities in SME lending, the maturity of the market and the sustainability of some platforms' business models and the need for greater transparency.
  • Christian Gut, manager of the P2P lending Fund, said investors need to fully understand track records of managers/funds and of how loans are performing. He said it is “really hard to understand” like-for-like comparisons when platform are changing underwriting models.  “Every country and platform is doing things in different ways. The industry should decide a certain level of credit and risk that should exist across the aboard,” he said.
  • Maseco’s Matthews added that niches are well suited to alternative credit but  “you can’t throw a lot of money” at them as this would harm yields.
  • RM’s Nicholl’s said that trust in the sector could be improved by third party audits leading to more capital into the sector.
  • AltFi Data’s Fekete added that lenders are showing more and more interest in having their data assessed and compared on a like-for-like basis. That is a vital part of the maturation of the sector, he said.


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