Alternative vs High Street; a question of language
Finance Over the past year the NACFB has seen commercial lending take another big step in the direction of turning Alternative Finance into Mainstream Finance.
We’ve seen more than fifty new lenders wanting to work with us. They don’t all get through the door – about half do – but they’re all looking to fill niches within niches. It’s all helping the savvy commercial finance broker say Yes to deals that he or she might otherwise have to turn down.
Personally I have never seen such fierce competition, and with competition comes argument over who’s innovative, who’s respectable, who is different for the sake of being different. There are alternative funders who prefer to be called FinTechs and traditional banks who would rather be thought of as High Street or Established. One simple rule of thumb used to be: if it’s got big balance sheets, lots of customers and multiple distribution channels, it’s probably a traditional/high street bank. But that rule doesn’t necessarily work any more.
The FinTechs at the other end of the scale acknowledge that a bank is not just a website or an app – but some new lenders who have approached us are actually not much more than that.
There is an idea that a bank can be too big to fail and small enough to dodge failure, in which case, there would be non natural wastage and the market would fill to breaking point. Are we at that stage already? Is there actually room for all the lenders in the market right now?
The answer … and a large part of the reason for the competitive heat … is that demand is more than keeping pace with supply. To take an example, the Peer 2 Peer Finance Association (currently made up of nine lenders) reveals that its members are on target to complete more than £2 billion in lending in 2015, around double the figure from the previous year. Our own survey figures show that our members are lending 25% more than last year. And the leaps in some fields have been enormous:
- Commercial mortgages registered the biggest level of growth in 2015, climbing from £2.226 billion to £3.448 billion, a rise of 54.9%
- Lending levels by what we refer to as Alternative Finance continued to rise, from last year’s level of £624 million up to £847 million. This means our brokers are on target to exceed £1 billion in the alternative finance field by the middle of 2016.
But how does Alternative Finance make a shift away from being seen as Alternative, while finding the right language to convey positively how different it is?
One way might be to focus on the more tangible advantages of a product. All lenders want to be seen to be fast, flexible and transparent. (Very few, interestingly, promote themselves as being cheap!) To stand out in amongst a chorus of similar claims is very difficult. What we’re seeing is a decision to focus more tightly on specific areas of finance. So we now have options for pension-led funding, specialist funders for marine assets, lenders who will work with start-up businesses. The volume of different lenders is crowding the marketplace and what that’s doing is it’s pushing new lenders into the unoccupied gaps. And that is great news for small businesses who thought they would be unsuccessful if they applied for a loan.
At the NACFB, we are strongly promoting the idea of filling gaps, so in that sense, we can see the appeal of nobody at all being marked as “Revolutionary” or “Alternative”. The terms “High Street” and “Non-High-Street” might be usefully retained, because this is an industry that continues to value face-to-face meetings and handshakes. High street branches being retained not necessarily because they are profitable and continue to make good business sense, but closing them generates negative headlines and removes a differentiator that remains important.
Among the (relatively) new kids on the block, for example, Aldermore chooses not to have a high street presence, whereas Metro Bank decides it wants to be there. But if Lloyds and HSBC et al were not putting up plate glass windows and nine-till-five staff, perhaps no alternative funders would bother either. Or maybe in the absence of such a culture, alterative lenders would reinvent the concept in the same sort of way as Apple’s shops don’t resemble much that went before them.
Particularly in the leasing and asset finance field, there’s enormous variety in the types of asset being funded and the appeal of talking a deal through with a human being can drive a broker or client towards a lender that projects a friendly interactive experience. The broker-client relationship is very different to the perception of the modern high street bank experience and is also different to the classic chat with an avuncular bank manager that is sometimes referenced as a way of how things were done in “the good old days”.
What the heavyweight lenders have actually done very well is to embrace the technology that on the face of it looks at odds with their need to take premises on high streets. Challenger banks don’t necessarily offer a better experience for smartphone users, for instance, and their websites don’t necessarily set them apart from big established lenders. The High Street banks have moved quickly enough to “get with the times” where it matters.
But one of the golden rules of marketing is to be consistent, and here is where a small alternative funder has an advantage over a high street bank because as a challenger they do not need to try to be all things to all people. If your bank has branches in towns across the country, chances are you want to appeal to individual savers, to offer instant access accounts with no minimum opening level, to give overdrafts to students, and so on. There’s a certain dilution of the brand if that lender is also looking to make a loan of £10 million to a construction firm. But hypothetical alternative funder “Funding Planet” has no such risk of spreading the message too thin. “Funding Planet” only lends to construction firms and only sums in excess of £1 million. This clear focus puts a big tick in the “good marketing” box.
“Funding Planet” saves the expense of operating on the High Street. On the other hand, it’s open to accusations of having all its eggs in one basket. Big established banks all around the world, and notably in the US, might have been expected to spread their eggs in enough baskets to have enough left to bake a family-size omelette. But as events in 2008 show, it’s still possible to drop all the baskets …