How the rising tide of P2P loans could drown the big banks
WIRED Money takes place in Studio Spaces, London on May 18, 2017. For more details and to purchase your ticket visit wiredevent.co.uk
Question 4: What is the difference between a shock wave and a ripple?
Depending on the AS-level exam hall you’ve just walked into, you could expect – broadly – the same answer from an economist or a physicist (assuming they’re going to pass). First, there’s a sudden and dramatic change at the epicentre. Then waves expand outwards to shake (or topple) everything around them. Explosions cause shock waves; there are no good action films about ripples. But pick your financial disaster – from the 2008 crash right back to the Great Depression – and you’ll see that, however dramatic a market crash, the ripple is just as important. In both cases, the wave spreads outwards; but once it hits enough resistance, the ripple comes back to centre eventually.
After the 2008 crash, that rebounding wave took the form of everything from the Occupy protestors to businesses only tangentially connected to the ‘big banks’ losing everything overnight. But infamously the reprimand against ‘the banks’ was less of a tidal wave than a nip on the toe by a startled crayfish in a rock pool.
Heads did not roll. But tighter regulations were imposed on how much financial institutions could lend to whom. That – frustratingly for deserving small-to-medium enterprises looking for investment – was the returning ripple.
“We have two huge problems in the financial system: The low interest rate environment and the ever stricter regulation and capital requirements for banks that make it more and more difficult for banks in certain jurisdictions to extend long-term finance to the small-to-medium enterprise sector, leaving the real economy underfunded,” says Dagmar Bottenbruch, co-CEO of CrossLend. “85 per cent of companies in Europe depend on bank finance. [This] environment is a huge challenge for investors, and particularly for those who manage pension and insurance money. In this environment and the current regulatory framework, many pension plans and insurance companies will not live up to [their] obligations.”
Enter peer-to-peer lenders: the companies that appear, on the surface, to offer loans to smaller enterprises at rates that are competitive – if not better – than the traditional stalwarts. P2P loans are nothing new, but since their rise to prevalence over the last decade, the understanding was that, moreso than banks, your capital was at proportionally greater risk (should, say, yours go bankrupt). CrossLend promised to change those odds: first by connecting investors from low-interest rates to borrowers from high-interest countries, and secondly by guaranteeing those investments in a way that other P2P lenders did not. The end goal: a safer and more attractive return for investors, and fewer deserving borrowers getting loans denied due to overly strict regulation.
“A lot of the regulation comes from a different time, when risk-free rates were comfortably 5, 6, 7 or 8 per cent,” says Bottenbruch. “The world is so different now and this is causing so much pain. There is an astonishing complacency about this.”
Q&A with Dagmar Bottenbruch
1. What advice can you give someone struggling to change or evolve their organisation?
Change is difficult… The question is why the change is necessary. [Because of] a changed environment? A changing business model? Different requirements in terms of the people needed to make things happen? When you can answer the important questions, you will normally see the way out and can start to implement the change.
The things you do have to make sense, be clearly communicated and then swiftly implemented. Easier said than done. But if you do, normally you will be able to take most people with you.
2. Share your prediction on what the industry could look like within 12-18 months.
In 12 to 18 months we will be well on our way to having set up the European debt Exchange, making it much easier to place credit and risk and longer maturities where this can be handled, hopefully leveraging existing scoring and rating systems as opposed to reinventing the wheel multiple times.
3. What are you most excited about at WIRED Money this year?
I am really looking forward to listening to the speakers’ ideas and discussing the future of Europe’s financial industry. We are facing continued challenges in the macro system and several additional heavy impact events, such as Brexit, tighter regulation and continued pressure on the Euro system. It will be exciting to hear how FinTech can help to tackle these challenges.
Interested in learning more about the future of finance? Join us at WIRED Money in Studio Spaces, London on May 18, 2017. For more details and to purchase your ticket visit wiredevent.co.uk