How Alt-Fi Becomes Slow Fi

I am Principal of Avamore Capital an Alternative Finance provider, specialising in Bridging and Development loans to SME property entrepreneurs. The UK finance world is abuzz with talk about how Alternative Finance (or AltFi) is changing how projects and things are financed. It’s the “new big thing’ in finance and how banks are quaking in their boots. But so far my experience is that most Alt-Fi providers that are successful ultimately end up becoming banks anyway in a lot of cases.

The largest sector of the financing market remains the residential mortgage market, and the dominant players in this space remain banks. This is a space of the market that is highly regulated and fiercely price competitive. The only operators capable of working the space effectively are banks because of their access to cheap capital through wholesale markets and having the necessary infrastructure to manage the regulatory burden. Even in commercial property finance, the funding market remains dominated by traditional banks.

The penetration of alternative finance providers into the overall UK finance market is fairly inconsequential at this stage, standing at just a few percentage points of the total. Whilst banks bemoan the lost business to AltFi operators that once would have been their preserve, which is a trend that is not reversing until banks are able to draw down loans in under 6 months, ultimately the impact on their business is limited.

You only need to look at a mature “challenger” bank like Aldermore, to see where some of the current crop of “challengers” are likely to be heading. Aldermore made its name (or at least in my view) offering entrepreneurial property investors and developers finance where they part-filled a gap left by RBS, Barclays and Lloyds etc. Since becoming a bank their core business now appears, to me, to be providing BTL mortgages for term. (They do offer a wide range of other services I might add but that’s what sticks out in my mind).

Furthermore, in my opinion, the likes of Amicus who are currently applying for banking licences will end up going down the same road, if ultimately filling a slightly different niche. It would not surprise me if someone like Lendinvest ultimately followed a similar route too (and if they do, that’s perfectly fine).

These firms have up to now been serving SME businesses and SME property developers on high lending margins. However, the challenge they face is that once they obtain a banking licence they become subject to capital controls which inhibits their ability to serve their current customer base as effectively. That means the types of loans they carry out have to be safer, i.e. have a less risky profile spread across their lending book than they would have done prior.

Whilst the range of services offered might remain the same or broader as it might have been pre-banking licence, as the business grows the speed of credit decision slows (and the type of business that they target changes). This is because headcount inevitably increase, chains of command increase and the number of credit processes increases. All for good reason because as a bank you are holding (retail) depositor cash and have to conform to PRA and FCA rules.

The key attraction of AltFi from a borrower’s perspective is the flexibility offered by the provider and the speed (I will ignore the “crowdfunding” aspect of it because a borrower couldn’t care less where the money comes from). Once you take speed, service and flexibility off the table, your business is not AltFi you’re slow-Fi. So it therefore follows that as Alt-Fi operators mature, grow and develop they become Slow-Fi because they become, in essence, banks (or bank-like). And banks post 2008 don’t make quick credit decisions

As a private lender (see Avamore Capital), backed by our own discretionary family cash (and that of other HNW families) we have the ability to offer speed, flexibility and service. But we are just a small team and can only service a small segment of the market right now. There are many others like us in the market fulfilling our respective niches but Alt-Fi providers still make up a tiny proportion of the finance market. However, it appears that ultimately once Alt-Fi providers reach a certain critical mass, their size bloats them and they slowly cease to be a true Alt-Fi provider.

My hope is that the likes of Amicus and Lendinvest remain true to their roots and stay Alt-Fi like we aim to do at Avamore Capital.