A combination of technology, regulation and demographic change is presenting extraordinary opportunities for lenders
I was recently invited to speak at the All Party Parliamentary Group on alternative finance, where I told MPs we were in the most exciting period in the history of lending. A combination of technology, regulation and demographic change is presenting extraordinary opportunities, as well as some challenges.
Lending has long been dominated by large incumbents enjoying benefits of scale, distribution, consumer data and investment funding. But challengers have emerged. We have seen in other industries how new entrants can disrupt by better understanding customer needs and meeting them more efficiently.
The lending market has long been run by providers that designed products to suit themselves.
But the balance of power is shifting from lenders to borrowers, and borrower expectations are rising. The new lenders that will win a sustainable market share will be those that provide customer-centric propositions based on new approaches to pricing, credit risk and funding, using modern technology.
Regulators have an important role in encouraging the right kinds of prudent lender to market.
The industry supports the transfer of licensing from the Office of Fair Trading to the FCA; however, obtaining a new licence remains a challenge. For example, Lending Works announced it spent £100,000 on preparing its application for FCA approval, with full regulatory permissions costing £250,000 and taking 12 months to obtain.
This increases the cost of failure, disincentivising entrepreneurs and encouraging shadow banking. Perhaps we need a two-stage approach that allows new lenders to operate with a restricted licence until they reach a certain scale.
A younger lender would also have to hold more capital than an incumbent provider to underpin the same loan. This structural disadvantage for specialist lenders and challenger banks is something the PRA needs to address.
Borrower expectations are rising and, if providers, regulators and advisers deliver on their end of the bargain, we should see a much improved industry emerge.
Ian Larkin is co-group chief executive of Target Group