Innovate Finance chief Charlotte Crosswell talks to Andrew Saunders about the new 36H Group and the role peer-to-peer lenders can play in the pandemic…
When fintech industry body Innovate Finance took over from the Peer-to-Peer Finance Association (P2PFA) as the trade organisation for peer-to-peer lenders back in January, the last thing that was on chief executive Charlotte Crosswell’s mind was the prospect of having a global pandemic to deal with.
Rather than battling with the impact of Covid-19 on her members and the wider economy, Crosswell’s plan was to spend the first few months of the year getting to grips with the needs of the 36H Group, as the P2P sub-group within Innovate Finance is known, before rolling out a shiny new strategy and a membership drive to get more of the famously diverse and independently-minded P2P sector on board.
“We were doing quite well, mapping out not only the immediate policy concerns but also the longer-term ones. Now we will have to start again with quite a lot of it,” she says, ruefully. But the best laid schemes o’ mice and men gang aft a-glay, as the poet Robert Burns wrote. Instead Crosswell has found herself immersed in advising on the coronavirus business interruption loan scheme (CBILS) – the government-backed scheme aimed at saving the nation’s small- and medium-sized enterprises (SMEs) from collapse.
Using government funds provided by the British Business Bank, CBILS loans are largely being distributed via traditional high street banks and established lenders, because only those with government-endorsed accredited lender status can provide CBILS loans.
But Crosswell says that P2P platforms, alternative lenders and the fintech sector as a whole also have a vital role to play, because their reach extends into parts of the SME landscape that traditional banks simply don’t serve any more.
“What we’ve been focussing on is the role the sector can play in placing the loans as quickly as possible,” Crosswell states. “I am working with over 40 nonbank lenders at present – they are lending to the real economy, a lot of it outside London, and the relationships they have with SMEs are often the only lending relationships those SMEs have.”
While she recognises the scheme has been set up quickly and in difficult circumstances, she is keen to see more alternative lenders involved as it matures. “There’s been a herculean effort to get this set up quickly, but the banks still don’t have much spare capacity,” she comments.
“What they are telling me is that that they are either prioritising existing customers, or only issuing loans to existing customers.”
That’s unfair on the 500,000 or so small businesses which have chosen alternative lenders over banks, she says, but it’s also missing a trick on the whole point of the scheme – to get loans in place quickly so that as many viable businesses as possible have the funds they need to weather the storm.
“What we’ve been highlighting is that [alternative lenders] could facilitate these loans more quickly, because they have the technology to scale up, they have the data analytics and machine learning algorithms and they have the relationships with their SME customers,” she explains.
Speed is important, she adds, because small businesses do not typically have large cash reserves to fall back on. And speed is one of the USPs of many alternative lenders – so what are the prospects of more of them, and more P2P platforms in particular, being able to join the scheme?
A small number have already been accredited – Starling Bank and OakNorth were among the first challenger banks to receive accredited status, followed shortly by Funding Circle, the first P2P platform to have announced that it is taking part in the scheme.
Assetz Capital became the second P2P lender to be accredited this week.
But while there are other P2Ps going through the accreditation process, it’s not a route that will suit everyone, says Crosswell, because of the associated liquidity requirements. 80 per cent of the credit risk on every CBILS loan is underwritten by the government, but the lender has to have enough liquidity to take on the remaining 20 per cent. And some platforms are in a better position to take that risk than others.
“Who has access to liquidity, the ability to get the loans out quickly, and the appetite from their investors to do that? Platforms that have raised funds recently may be in a better position, and I’m aware of others who are in talks with their investors to say if we had access to the scheme, could we put more investment there?” There is also an emerging issue which could inadvertently damage the P2P sector, she warns.
SMEs which receive a CBILS loan are often required to take payment holidays from any existing loans they have with other lenders, including P2P and alternative lenders. “That’s unfair on all the fintechs which have filled a much-needed gap in SME financing as it has been withdrawn on the high street,” she says.
“We have been very vocal in regulatory discussions on the risk of forbearance – the sector needs to be supported and protected.” When she is not championing the interests of the whole fintech sector, Crosswell chairs the 36H Group – so called because membership is open to any firm regulated under article 36H of the Financial Services and Markets Act, 2000, which covers all platform lenders.
Officially launched on 13 January, backed by inaugural members Zopa, Funding Circle, RateSetter, Lending Works and CrowdProperty, the accompanying press release stated that the 36H Group’s aim is to “focus on policy and regulatory matters, and to focus on the benefits the sector is delivering”.
One of the primary differences between it and its predecessor, the P2PFA, is that once the responsibility for regulation of the sector was passed to the Financial Conduct Authority there was no longer a need for a self-regulatory body.
“Without that change we would have been more reluctant to take it on,” says Crosswell. “I think that the key challenge the P2PFA had was being accepted as a membership association whilst also having to regulate that membership.”
And despite the coronavirus chaos, plans are progressing to build a more representative membership and to start providing platform lenders with the kind of wide-ranging policy support and smart networking that Innovate Finance has become known for across the fintech community more generally.
Efforts that will be spearheaded by freshly-hired head of platform lending, Mike Carter, currently chairman of The Money Platform. “He knows the sector inside out,” she says. Whilst some may fear that P2P might lose its specific representation within Innovate Finance, Crosswell says that the majority of issues facing the sector – around talent, funding and regulation for example – are shared by other lenders and also by the wider fintech community. Being able to make common cause with as many others as possible is key to her approach.
“I think it’s important to see P2P as part of the wider alternative sector rather than as something standalone,” she says. “Industry bodies, especially smaller ones, always struggle with impact. It’s pretty difficult to have impact when you’re only representing five or 10 companies.
“But I can call on UK Finance, I can call on the Confederation of British Industry, and we can work out where the common areas are.
That shows my members we have the weight of argument there when we need it. You have to show value to the membership, but ultimately people will only want to join if you are being effective for the wider ecosystem.”
Crosswell’s first job was in equity sales at Goldman Sachs but she has spent most of her career in “market infrastructure”, including stints at the London Stock Exchange, and at Nasdaq where she ran the entire non-US business.
“I did 50 initial public offerings out of China in one year,” she says. “I spent my life on a plane.” Looking for a more varied and less travel-heavy role, but one that still involved using tech to “make better markets”, she joined Innovate Finance as chief executive in August 2017.
As well as trying to mitigate the effects of coronavirus on the SME community, Crosswell is also grappling with the impact on Innovate Finance’s own business, not least on the events side. Its annual Global Summit, scheduled for 20-21 April, had to be cancelled, but it managed to turn another calendar highlight in the same month, UK Fintech Week, into a virtual event.
One week of live sessions became three weeks of online seminars, spread out so that delegates could fit them in to their daily routines more easily. The content was also rapidly reformulated.
“We’ve tailored it all to reflect the current position, and the response has been great,” Crosswell says. “People are quite happy to give 45 mins of their time to a session – we had 500 people dialling in in the first week.”
What are her views on the prospects for the sector to survive and even thrive as we eventually emerge from the coronavirus lockdown crisis?
“There are opportunities, but there is also significant risk,” she asserts. “As in every crisis, there will be businesses that succeed, who can show that their business model is really robust, and those which unfortunately cannot. We see that across the whole SME landscape too – some will use the crisis as a growth opportunity, while for others 2020 will simply be about survival.”
The critical point that the government and regulators should bear in mind, she adds, is making sure that the sector remains healthy enough to play its part in restarting the economy as quickly as possible when the time comes.
“I do believe the economy will bounce back quite quickly but we don’t yet know when that will be,” Crosswell comments. “The last thing we want is to compound the problem by stopping the origination of new loans, because we will need P2P and non-bank lenders to keep doing what they do, and to be part of the solution as we emerge from this crisis.”