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LendIt Europe 2017 – Open Banking and financial marketplace technology:

Online direct lending and the technology to support it (like Madiston's own global software platform) was explored at LendIt Europe 2017 in London, alongside Open Banking and the imminent seismic changes that could follow new regulation, PSD2 and GDPR. So what were the visions for the future?

Open Banking

Imran Gulamhuseinwala OBE, Trustee of the Open Banking Implementation Entity and Global Head of FinTech, EY talked us through why Open Banking came about and what it could mean for banks, FinTech companies, small businesses and consumers.

Essentially, the major shift in thinking is that individuals own their financial data, not banks, so Open Banking means that registered, trusted companies can, with consent from the individuals, access their transaction data or initiate payments. This improves access for SMEs and individuals to financial services at the best prices and creates opportunity for FinTechs. It was also considered an opportunity for banks with the right, positive approach.

Marketplace Banking

Marketplace Banking was compared to Open Banking by Richard Peers of Microsoft in his first vision of ubiquitous financial services of the future. This is where the banks, via well-defined APIs, offer the services of trusted partners alongside their own. The banks stay in control and offer additional services to their customers but not the unlimited choice that people could potentially have with Open Banking.

Richard's second vision was centrality, where commoditisation becomes a virtue, using technology to drive down costs and providing "banking as a service" (like Clear Bank) to FinTechs and other banks. His third vision of the future was nodality, where customers perform banking functions themselves and institutions provide the infrastructure as trusted nodes. He cited Skype or Alexa as non-financial tools used to execute financial services.

Online Lending 2.0

Renaud Laplanche, now of Upgrade, talked about Online Lending 2.0 where new technology delivers lower operating costs, faster development cycles and better underwriting. Borrowers benefit from greater affordability and convenience, and lenders from greater predictability and liquidity. He described a landscape of low debt ratios and economic stability which were clearly emerging from US statistics (perhaps not so in the UK) then made his own predictions for the next 15 months:

1) Growth of online lending will accelerate
2) Organised Secondary market for online loans will emerge
3) Continued re-bundling will give birth to at least one major consumer product innovation

Interestingly, Madiston's presentation (picture above) was called "Road to Profitability" because, like Renaud, we believe that technology will save platforms money by driving down operating and software development costs.

Artificial Intelligence and Blockchain

There were many threads from LendIt Europe 2017 that touched on the possibilities of Artificial Intelligence (AI) and Blockchain technology. Anthony Jenkins of 10x Future Technologies and Eileen Burbidge of Passion Capital bust some of the myths of AI:

  • Matrix style sentient machines – not in the short term but might happen in our lifetimes
  • Banks are advantaged – AI needs a mass of clean data but banks' data is generally in the wrong place which will be slow and costly to sort out
  • Collaboration between banks and FinTechs – might work but will need to be a separate area otherwise the "mothership" might kill it off because of compliance, risk management etc
  • Compliance – banks can use AI to monitor themselves and regulators can use techniques to assess how the "black box" works and make sure it works as it should for end users.
  • Ethics – with great power, comes great responsibility. For example, AI predicting health care needs could make some individuals uninsurable. The industry can't just rely on self-regulation alone.

Blockchain technology is also having an impact, discussed in numerous panels and presentations. Unheard of a decade ago, it is growing rapidly particularly in the last 6-12 months. There have been incredible valuations for Initial Coin Offering (ICO) and a great deal of interest from Hedge Funds and institutions, even at pre-sale or earlier stage.

Crypto-currencies are seen as a method of gaining efficient low-cost payments across borders. Good borrowers in high interest rate countries could benefit from funds from lenders in low interest rate countries, where the meeting in the middle is a win:win.

A de-centralised, free market world using the advantages of Smart Contracts blockchain technology could be revolutionary and the idea is no longer unimaginable. Regulators are still busy learning, looking to continue their mission of providing a prudent regulatory framework where innovation (and competition to banks) is encouraged and participants are protected.

So, are Artificial Intelligence and Blockchain technology over-hyped? It was noted at LendIt Europe 2017 that things that are over-hyped in the short term are often under-estimated in the long term.

This is just a flavour of some of the conversations at LendIt Europe 2017 and thank you to the organisers for another well-organised conference. Videos of presentations, panel discussions and corporate demos (including our own) are available on http://www.lendit.com/europe/2017/videos. 

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LendIt Europe 2016 & Peer to Peer Lending technology

 

Reflections of LendIt Europe 2016

The mood had changed markedly at the LendIt Europe 2016 conference in London. Gone was the focus on turnover growth, more evident were the goals set for profit, sustainability and long-term development as the industry moves into its next stage of evolution. Technology was considered key to achieving profit, with flexibility of platform, data aggregation and analytics just some of the ways of achieving and maintaining profitable growth in marketplace lending.

From dark days to golden age

The challenges faced by the industry in the first part of 2016 focused attention on the Peer to Peer Lending business model, rather than the excitement of challenging traditional finance. The industry will stand up to this scrutiny, said Samir Desai of Funding Circle in his opening address at the conference, going further by saying that we’re entering a golden age combining the best of financial services and technology.

Oxera Report

The new Oxera analysis of Peer to Peer Lending in the UK, demonstrated that the major players assessed would be able to weather the storm in an economic downturn. Even if there was a doubling of borrower defaults in potentially harder times ahead, those firms assessed in the Oxera report were expected to continue to deliver positive interest to their customers.

FCA “Loan-based Crowdfunding” review

Technology to ensure compliance would also be important to help Peer to Peer Lending (aka Loan-based Crowdfunding) platforms to satisfy the rules of the Financial Conduct Authority and gain their FCA Full Permission. The FCA continues its aim to encourage innovation and choice in the financial sector, whilst maintaining consumer protection. As Chris Woolard of the FCA emphasised, their latest review will help them establish there are no “expectation gaps” as the many business models across the industry are changing and developing. Review feedback is expected before the end of the year.

IFISA on the horizon

Christine Farnish, chair of the Peer to Peer Finance Association, noted that Innovative Finance ISAs would begin to emerge as platforms neared the point of achieving FCA Full Permission, perhaps around February/March 2017. In times of low yield elsewhere, Christine highlighted the importance of this to retail investors.

The Trusts “will come good”

Cormac Leech of Victory Park Capital (who prefers the term “Online Direct Lending” to describe the industry) noted the turmoil in recent IPOs with unrealistic expectations (Lending Club and On Deck) and felt that investors should bear with the Trusts, that they will come good. He still believes that Continental Europe will overtake the UK Peer to Peer Lending market in due course but may take slightly longer that previously forecast because of the recent slowdown.

Credit Crunch spare tyre

Though the industry has an identity crisis (Online Direct Lending, Marketplace Lending, Peer to Peer Lending or Loan-based Crowdfunding), perhaps the best description came from Lord Adair Turner when he referred to it as a “credit crunch spare tyre”. This was in stark contrast to his widely reported comments from earlier in the year where he said that losses from Peer to Peer Lending over the next few years would make bankers look like lending geniuses. It seems he understands Peer to Peer Lending better now and feels that more direct lending could help make the economy more stable, providing funds when banks shut up shop.

Again, Lord Turner recognised the role that new technology was playing in giving Peer to Peer Lenders an advantage over the banks beset with legacy systems. He also noted that “sophisticated credit analysis” in the industry was not radically different from the banks. With greater understanding of this industry, so comes more converts!

Global Peer to Peer Lending

Laimonas Noreika of FinBee in Lithuania, was one of the panellists from around the world who participated debates. FinBee, which uses the Madiston software platform, was invited to join the “Up and coming platforms” panel. Laimonas cited good regulation, technology and the personal touch as some of the elements that had enabled FinBee’s growth and described their plans to expand beyond their borders to neighbouring countries like the Czech Republic.

This panel debate and videos of other speakers and panels are available on the LendIt site. Our thanks to all the team at LendIt and the P2PFA for another interesting conference.

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