Folk2Folk chief executive Giles Cross is on a mission to boost rural economies through peer-to-peer lending. He speaks to Peer2Peer Finance News about Folkonomics, the crime of faceless money and what a good day’s work means to him…
Barely a month into his new role as chief executive of Folk2Folk when we meet, Giles Cross is buzzing with ideas about where he wants to take the Cornwall-based local business lender, and why its rural focus makes it stand out in a crowded market.
“Investors are attracted to us by the interest rate we offer – 6.5 per cent,” he says enthusiastically. “But they are lending to local businesses – to food producers, retailers, restaurants and hotels.
“Businesses that they can see, visit, buy from and stay in. It gives them a good feeling, that they are stakeholders in the local economy. It’s why we have such incredible rates of return business.
“Yes, we are in the business finance space, but if that’s all we talked about I think it would be a real shame.”
What Cross likes to talk about instead is the importance of local lending in building strong local communities, which Folk2Folk has distilled into its very own micro-economic version of trickledown theory, catchily christened Folkonomics.
“We’ve trademarked it, it’s ours,” he says proudly. “Folkonomics is about creating socially and economically successful rural economies. It’s about creating jobs and retaining talent. It’s about more affordable housing, keeping schools open by keeping the numbers of pupils up, it’s about retaining local transport routes and tackling issues of rural deprivation and homelessness.”
And the real beauty of the Folk2Folk approach, he adds, is that the good stuff happens not via complex and expensive interventions mediated by the blunt instrument of government, but as a consequence of the simple business of matching investors who want to lend with businesses who want to borrow.
“Our model is about rich people who require interest on their money beyond what the bank or building society can provide, lending to asset-rich businesses which require funds for growth,” he explains.
So local people help other local people, and money is put to work creating jobs and spending power right on investors’ doorsteps.
That’s the theory. Of course it is no secret that trickledown – the idea that as the very wealthy get even richer, money leaks out of their coffers and trickles down through the social stratas to the benefit of all – has been widely criticised since it was popularised by the Reagan administration in 1980s America.
But its failings, says Cross, are those of our financial institutions rather than a flaw in the principle itself. “If it doesn’t work as advertised, it’s because since 2007/2008 the large central financial institutions no longer facilitate the free movement of capital in the way that they used to,” he asserts.
“At a micro-economic level, we know that it works. It creates a throughflow in the economy that benefits everyone.”
As Folk2Folk is “just about to trip over £200m” in loans there are clearly quite a few lenders and borrowers who have been persuaded to give its brand of localism a try. And the word is spreading – Folk2Folk now has 10 local branches across other parts of the UK including East Anglia, Cheshire, Cumbria and Yorkshire. It has also been hiring, with two significant new posts – chapter development manager Claire Thayers and head of farm and rural engagement Ian Bell – both aimed at raising Folk2Folk’s profile and promoting its local lending ideals.
“We are building a national local lending network,” says Cross. “I want to be in the agricultural and rural economy, that’s where we started and where our roots are.”
Although Folk2Folk itself is only five years old, those roots really do go back a long way, thanks to its connection with solicitor Parnall’s, also based in Launceston. Folk2Folk co-founder Mark Parnall is managing director of the family legal firm, whose predecessors began arranging secured loans in the form of private mortgages as long ago as 1647.
As well as being an eye-catching USP, that heritage was actually a spur to getting involved in P2P, says Cross. “Our financial model predates banks and building societies. You only have to watch Poldark to see how Ross [Poldark, the TV show’s eponymous hero] funds his mines through solicitors and local investors.”
What’s new is not the concept so much as the technology platform that is used to deliver it, enabling Folk2Folk to get to more potential investors and borrowers than any 18th Century entrepreneur could have dreamed of. “This is modern lending, done the way it used to be,” says Cross.
The blend of old and new extends to a very cautious attitude to risk. Loans are all secured and only at a conservative maximum of 60 per cent loan-to-value. Cross admits that the one metric he is really keen to maintain is, “our record of zero customer losses for lenders. Only a foolish man would assume that we will, but we will certainly fight for it.”
Despite the received wisdom in banking that if you are not taking any losses, you are not maximising your returns overall? “One of the great crimes of the financial services industry has been that it only deals in faceless money,” states Cross. “You forget that the money actually belongs to someone.
“So if you question your value on your own profitability rather than on your losses of other people’s money, that smacks to me of traditional finance not alternative finance.”
Folk2Folk has lent to a wide range of businesses from property developers to specialist engineering firms, and has also helped several individuals buy their own pubs. But farmers are still the mainstay of the rural economy in many parts of the country, and a big part of Folk2Folk’s business. How will they fare post-Brexit, especially if and when the EU subsidies on which many rely start to dry up?
Regardless of the Brexit outcome, if the aim is to build a prosperous and sustainable agricultural economy, subsidies haven’t worked, he says. “Six out of seven farms in the UK don’t make a profit – and that’s with the subsidies,” asserts Cross. “The answer for UK farming is diversification, irrespective. So let’s work together to enable that, and to make [the issue of subsidies] irrelevant.”
But doesn’t all this talk about the countryside put off less muddy-booted investors? Apparently not. “Over the past 19 months we’ve seen that our lenders are becoming increasingly urban, but with an ‘escape to the country’ mentality,” Cross explains. “The business is also looking for institutional funding to boost its lending power and smooth out the peaks and troughs in supply and demand.
“We will attract a certain level and style of institutional money on our platform. But it will never take primacy.”
Cross says that the priority for Folk2Folk is finding investors who share the company’s ethics.
“If someone came along and said ‘Here’s £300m’ – well I could never place that. But if someone said ‘We’d like to invest so much a month in these kinds of loans, and please treat us exactly the same way as any other investor’ we would certainly entertain that. In fact we’d do so with glee.”
It’s been a busy few months for Cross who started last summer as chief marketing officer but then found himself in the running for the top job after then-chief executive Jane Dumeresque left unexpectedly. “When my predecessor chose to resign it was for reasons as reported – a conflict over the rate of growth,” he says. “Too quickly, too much.”
The temptation to throw his hat into the ring proved too great to resist. “I fell in love with Folk2Folk, I felt I had found my place. I didn’t want anyone else to take the opportunity.”
His big challenges, he says, include many that would be familiar to anyone running a small business. “Any small firm that says business origination is not a challenge is probably fibbing,” he comments. “Cashflow is always interesting. And at what point do we seek further investment?”
He’s also been thinking about the structure of the business that he has inherited, including those branch offices, which makes Folk2Folk one of the very few P2P lenders where customers can literally walk in off the street. But in a sector known for using technology to keep costs down, aren’t those office locations an expensive luxury?
Perhaps they are. Cross is certainly sold on the value of face time with customers – but there may be more than one way of delivering that interaction. One of his big ideas is to put Folk2Folk branches on the road, visiting remote rural villages and towns in the same way that mobile libraries, shops and even banks used to, back in the day.
“What if we were to change our focus to mobile branches?” ponders Cross. “I am committed to a branch network, but I don’t know what that looks like.” So keep your eyes peeled, the Folk2Folk mobile lending van might be coming to a village square near you soon.
Folk2Folk’s Innovative Finance ISA (IFISA) has had a good response so far and is now open for transfers in from other ISAs. “The appetite for transfer in is very high,” says Cross. “Were never going to take out the big ISA providers, that’s not what it’s about. But we anticipate that in the first quarter we will do quite a few million in new funds via transfer in – as quite a niche player that is significant for us.”
He would also like to make Folk2Folk available to smaller investors – there is currently a £20,000 minimum investment threshold. “I would like to further democratise our position and reduce that threshold in time, but we must do it properly,” he affirms. “We are not for people who want a punt.”
And there is a new website in the offing, part of an integrated online and offline profile-raising drive to drum up more customers. The site promises to be something a little out of the ordinary, says Cross. “What delights me about it is that every care has been applied to make sure that it uses the keenest, newest and most customer-focused technology,” he explains. “But in our slightly rural way, it looks like no other website I’ve ever seen.”
What about his longer-term goals, both for Folk2Folk and for P2P in general? He isn’t keen on the growth target he inherited, “This notion that by 2020 we should have £1bn in cumulative lending. It doesn’t make sense – we could do that and only have £10,000 in live lending on the books”, but won’t be drawn on any new ones just yet.
But if the destination is yet to be revealed, he knows how he wants to get there. “I want to build a best-loved brand in financial services,” he states. “I have no desire to be enormous but I do want to have real social, financial and emotional value and be the goto financial provider for the local and rural community. That would be a good day’s work.”
As far as the wider alternative lending market goes, the challenge as he sees it is to keep growing without losing sight of its original aim – to be something that banks were not.
“I hope that alternative finance remains alternative, that it doesn’t morph into traditional finance,” he says. “I hope that those of us who were attracted to it because of its purity and ability to deliver positive outcomes don’t get hoodwinked into being just like everyone else.”
This article first appeared in the March issue of Peer2Peer Finance News, which is now available to read online.