Bypassing the banks

At Adam Street Private Members’ Club, businesses planning to circumvent the lumbering inefficiencies of big banks are plotting the future of finance.

A company selling huge contracts to a client in the Middle East signs a deal, but is then not paid for nine months. It manages to sell this contract on a new website called MarketInvoice, which sits between companies with cash-flow problems and private individuals happy to provide a factoring service on an invoice-by-invoice basis.

An entrepreneur from Scotland decides to get the best return for his money on deposit. He places £10,000 with Zopa and gets a 9 per cent return.

The new financial businesses emerging in London are begging the question: do we really need traditional banks for anything besides their cash machine infrastructure? James Minter, the founder of Adam Street Private Members’ Club, and Guy Rigby, of Smith and Williamson, have launched a series of lunches with London’s “fin-tech” entrepreneurs to find out.

Both have been surprised by the welcome their idea has received from the disparate but exciting worlds of peer-to-peer lending, online exchanges and crowd-funding. The two lunches they have put on so far have attracted the chief executives of Zopa, Rate Setter, MarketInvoice, Caxton FX, Crowd Cube and Funding Circle – “plus a host of smaller start-ups,” says Minter.

Almost as importantly, the lunches have gathered together characters just off-stage, with Dawn Capital, Piton Capital and Jonathan Moules from the Financial Times among the other attendees getting stuck in to debates about the future of finance. Minter has identified, and is capitalising on, widespread disgust and dissatisfaction with the big four.

“Before we even started asking people to come along,” says Minter, “We tried to suss out the view of the man on the street, and where the City’s conventional wisdom on the subject pointed. Given the potential size of these businesses, the efficiencies they bring to their respective sectors, and quite apart from the fact that everyone hates investment bankers for their bonuses and retail banks for not lending to small businesses, I was surprised that this sector was so poorly understood.”

The mainstream banking sector, which does not like to separate proprietary trading from retail banking, barely registers these new companies as a challenge. One hedge fund manager Minter spoke to thought “it might be a good idea to have such companies in the future” (“I pointed out that Zopa had been going for eight years,” says James) but, regardless, he would rather put his spare cash into corporate bonds.

“Retail bankers similarly did not see such small companies as any kind of threat,” claims Minter. “Maybe they should have a chat with their buddies in the music industry.” Even within the entrepreneurial community, where you would expect a higher degree of knowledge and affinity for such products, awareness remains stubbornly low, in part thanks to a tech blogosphere that doesn’t understand money.

Adam Street’s lunches focus on the burning issues of the day for new businesses. Firstly, there is regulation. A concerted effort is being made by three of the companies mentioned to lobby the Government in an effort to make the legal standing of their businesses clearer – and at the same time, to create barriers to entry to safeguard the reputation of this nascent industry.

There are signs that the current, apparently entrepreneur-friendly Government is persuadable. Experts like Mark Davies, formerly of Betfair, have weighed in with advice at the lunches.

The second problem facing these companies is confidence and reputation. Different companies handle this in different ways but they all show extremely low default rates and sometimes even none. This is an area that requires work. It may be that word of mouth alone will work its magic.

A problem that specifically affects the peer-to-peer lending market is finding good quality borrowers. These are in shorter supply than lenders: an obvious function of the fact that the smaller your credit risk, the less you will need or want to borrow.

Finally, the Holy Grail for peer-to-peer lending, currency trading or crowd-funding, is scale.

There are promising products being discussed here, with the potential to deliver huge efficiencies, narrowing spreads and tangible value for clients on both sides of the lending relationship. Reputation, trust and public awareness seem to be the three elements needed for these exciting sectors to thrive.

Adam Street appears to be ably meeting the need from founders to connect and share problems: a perfect example of the connective tissue role this well-known “entrepreneurs’ club” has played for many years.

“Anything we can do here at Adam Street to help build connections within the industry, and more importantly to help educate people looking to bypass traditional banks to lend, borrow, carry out foreign exchange functions, raise funds or cash against invoices, we will try to do,” says Minter, with the mischievous glint in the eye of someone who knows he’s just delivered a money quote.

The next invitation-only Bypassing the Banks lunch will occur at the end of September.