“The sanctuary of health, the nursery of temperance, the delight of frugality, an academy of civility, and a free-school of ingenuity.”
The notions of such a quote, if it was proffered today, could rather appropriately be attributed to the myriad faculties in the realms of digital business and finance. For here indeed much ingenuity, civility, frugality and temperance reside in abundance over clear, calculated and meticulously documented discussions that lead favourably to diligent deals and sedulous contracts.
However, the above excerpt describes no such thing. It comes from an anonymous pamphlet circulated amongst coffee houses in the latter years of the 17th century, and it is the very coffee houses themselves that the handbill defines as sanctuaries, nurseries, academies and free-schools of ingenuity.
It is an enlightening comparison that the pamphlet draws, and one that finds a reverberating echo in the digital sanctuaries, academies and free-schools of ingenuity in 2016 – though today we simply call them social and professional networks, online forums, and sophisticated web-based inter-business platforms. Indeed, it is amongst these digital realms – much like it was in those London coffee houses of yore – that many business relationships are built, deals are struck, and even financial revolutions are spawned.
In the Beginning…
During the late 1600s and early 1700s, professionals, intellectuals and merchants frequently thronged the 3,000-some coffee houses that played host to caffeine-fuelled debates, wheeler-dealing and heavy gossip-mongering along the streets of London.
Previously, it had been within taverns over flagons of ale where men had gathered to exchange ideas and do business. But these were not ideal places for such conduct – alcohol, money and debate, after all, are the chief ingredients for many a blighted outcome. Rowdiness brewed, futility prevailed, and any hope of meaningful organisation soon drowned beneath a fug of intoxicated oaths and, no doubt by turns, reckless gaiety and hostility.
But then, in 1652, Britain’s first coffee shop opened its doors in Oxford at the hands of a Greek manservant named Pasqua Rosee, who indeed is credited for bringing this new coffee drink to the capital. And what a drink it was, brimming with qualities that would stimulate rather than inebriate, that would “prevent drowsiness and make one fit for business”, as one printed advertisement for Pasqua Rosee’s Head delightfully decrees (an original copy of this very handbill can now be found on display in the British Museum – a truly worthy ceremony for such an important and historic document).
Rosee’s coffee house was an overnight success, and others were quick to copy. Soon there were dozens, then hundreds, then thousands of coffee houses serving the drink that “quickens the spirits and makes the heart lightsome” all over London. Newsletters and gazettes (the precursors of newspapers) were distributed in these coffee houses. Indeed, more than just locations for people to gather, the houses often functioned as reading rooms and contained notice boards announcing sales, sailings, and auctions to the businessmen who frequented them.
The best-known began to attract a distinct clientele. In 1688, Edward Lloyd’s coffee house on Tower St earned a reputation as the place to go for marine insurance. It later evolved into world-famous insurance market, Lloyd’s of London. In 1698, the owner of Jonathan’s coffee house in Exchange Alley began to issue a list of stock and commodity prices called “The Course of the Exchange and other things”, and thusly served as the genesis of the London Stock Exchange. Auction houses Sotherby’s and Christie’s, too, have their origins in coffee houses.
The arrival of coffee engendered a new dawn of sobriety in the city and laid the foundations of spectacular economic growth in the decades that followed. With networks of individuals with private capital serving as the base, the insurance industry, the stock exchange, and auctioneering all burst into life in coffee houses, directly spawning the markets, the credit and the security that facilitated Britain’s dramatic expansion of global trade.
In short, the advent of the coffee house can be viewed as a revolutionary turning point, for within those walls were spawned the beginnings of much of the financial infrastructure that still dominates today.
History Repeating Itself
It is indeed most interesting to consider that such gatherings would serve as the foundational forums for great minds who began to carve out what would become such determining ideas and futures for our civilisation. Little did they know what was to come of it upon the cusp of yet another revolution some three centuries later.
For here we are now at another turning point in history. This time a digital revolution, where, once again, the future of finance is being shaped over sober discussions between private individuals and business owners, not in coffee shops, but online in the virtual realms of social and professional networks brought together via the powerful nexus of the internet.
Mainstream finance – i.e. high street banking – whose origins can also be traced back to those coffee-swilling days of yore, has taken a rather devastating hit over the past eight or nine years. Since the financial crisis closed its icy grip around the whole planet between 2007 and 2009, the fallout has been at once shattering for the banking sector and gainful for the alternative finance sector. Once again, private capital forms the base of this burgeoning, innovative industry, and the key players have come swooping in to capitalise on the failings of the banks.
When the economy collapsed, it was the banks (and, to be fair, the credit agencies) to blame. In the UK, the government was forced into a bailout operation that cost the taxpayer a gut-wrenching £850 billion. The ‘banks are too big to fail’, we were told – yet fail, they had, and so we picked up the pieces.
The cause of the crisis was irresponsible lending. As a result, the banks were – and still are – strapped tight with burdensome regulations that makes it extremely difficult for them to lend money like they used to. This has led to somewhat of an ongoing financial crisis – for SMEs first, which need loans to grow, and for the economy at large in its need of thriving businesses for the sake of its own growth.
Naturally enough, the business world has found itself with an extremely pressing demand – for finance. But, where there is demand, so too is there innovation to create supply, and thusly we have the increasingly prosperous alternative finance sector we see before us today.
From Conception To Fruition
The concept of alternative finance began to truly take root in 2008, following the economic downturn, as an online extension of conventional financing through family and friends. Very soon, it spread to include online communities of issuers and investors across the globe, directly leading to the democratisation and globalisation of capital raising processes.
Much is made of the financial crisis as being the catalyst for the alternative finance revolution. But in fact it is only half the story. There are several factors that have contributed to the growth of the AltFi sector as we see it before us today. Not least is the emergence of Internet 2.0, which enabled – like nothing that came before it – people to collaborate and share information online. True, reduced bank lending and the low interest rates experienced in the wake of the banks’ collapse forced issuers and investors to explore alternative financial and investment models with renewed vigour, but the fact remains that there would be no such alternatives if the internet hadn’t flourished to provide them.
But flourish it did. In truth, the alternative finance platforms were already harnessing the potential of evolving technologies in the run up to the crisis, whilst the big banks remained staunchly dependent on legacy systems that were perhaps always destined to be usurped one way or another. As it happened, the crisis struck, traditional finance buckled, and, as the dust cleared, it was suddenly the tech- and internet-savvy alternative finance sector that had the upper hand – at least to a certain extent.
Faster, safer, smarter, better – AltFi platforms have always had so much more in their favour than their traditional counterparts, and perhaps it’s only a lack of general awareness of their existence, and indeed a centuries-old legacy, that has thus far stood in the way of a more meaningful takeover.
Of course, even in light of the devastation caused by the banking sector, it’s a big boat to turn around completely, and in truth alternative finance would never have seized control overnight – especially as it struggled in the realms of relative obscurity during and in the immediate aftermath of the crisis. But here we are nine years later and AltFi is growing from strength to strength, and there remains real opportunity to push it even further.
The banks are still struggling to lend to businesses. As much as 50% of first time borrowers have been rejected finance by their bank, according to the UK Department For Business Innovation and Skills. It’s almost farcical to consider that the very institutions that are supposedly relied upon to organise a nation’s financial infrastructure are at once directly responsible for its collapse, and then ill-equipped to rebuild it. Such a thing could not have been dreamed up in a 17th Century ale house.
But the modern day coffee houses – that is, the internet forums, professional networks, and the forthcoming alternative finance platforms – have been serving up not coffee in place of traditional finance, but a tonic of temperance nonetheless. An alternative that subverts, outclasses and outperforms the established bank loan processes in the forms of P2P lending, crowdfunding and other AltFi solutions, all of which have the ability, efficiency and, increasingly, the capacity to succeed where the banks have failed.
But, in order for this disruptive trend to continue, it is towards collaborative ends that alternative finance firms must now venture.
The Conquest For Collaboration
Currently, there is well in excess of 100 alternative finance platforms in operation in the UK. They range from small-time charitable crowdfunding setups to sophisticated business lending operations where high-worth individuals are loaning millions of pounds at a time to businesses – all without ever straying anywhere near a bank.
The question, then, has to be, as this sector continues to expand, will there really always be enough room for all of these operations if they continue to compete directly with one another?
It would be too easy just to say “no, of course not,” for, as with most industries, over time a handful of the very largest come out triumphant, whilst the smaller outfits first fade into obscurity before eventually having to concede defeat and shut their doors once and for all. Indeed, it is most likely that this familiar scenario will play out to a certain extent in the AltFi sector over the coming years. Already there is a dominant force within alternative finance. Funding Circle, Zopa, Seedrs, Crowdcube and MarketInvoice are some of the true industry leaders, any of which, it is reasonable to suspect, will at some point be quite capable of either buying or stamping out the competition if they are so inclined.
However, what the vastness of the alternative finance sector has in its favour is the fact that there is an extraordinary wealth of speciality platforms that make up the bulk of the 100. Indeed, although the need for alternative forms of finance is broad, the operators, for the most part, focus largely on servicing considerably niche segments of the market – and it is in this sense that the opportunity for collaboration presents itself.
Rather than acting in direct competition with one another, some of these niche platforms would do well to join forces, broadening their respective opportunities for generating new business.
Bill Fleischmann-Allen who runs The Private Debt Platform at The Route – Finance endorses this view.
“Despite the fact The Private Debt Platform was established in 2008, and has lent quite a lot more than some newer players who are becoming household names, we operated in splendid isolation for a few years.
“I really see that changing now. There are so many synergies between the High Net Worth syndicated membership model that The Route operates and the better known online P2P and crowdfunding platforms. I am having valuable discussions with many other AltFi businesses and do see the whole sector maturing as firms identify partnerships that add value to the whole proposition.
“The large number of participants in the AltFi space now will probably coalesce into a smaller number of players, but the sector will undoubtedly be stronger for it.”
Funding Valid Rejects
The rate at which banks reject business loans is crushing to consider. But there are already collaborative initiatives in place. One such programme is found between various alternative finance platforms that have joined forces to launch the small business finance portal Alternativebusinessfunding.co.uk.
Collectively, the businesses involved are regulated equity crowdfunding sites Crowdcube and Seedrs, invoice finance marketplaces Platform Black and MarketInvoice, peer-to-peer lenders Funding Circle and Zopa, and pension platform Pensionledfunding.com.
Together, the initiative is designed specifically to redirect rejected business-loan applicants from the banks to these alternative sources of finance. Similar initiatives are also live, such as can be found at the government-owned British Business Bank and the NACFB.
The Traditional And The Progressive
Another collaboration model that is emerging is that between traditional investors and financial institutions with progressive digital AltFi platforms. Rather than trying to displace traditional banking and venture capital, there are instances whereby digital platforms are working side-by-side with traditional and institutional investors.
Take crowdfunding. The basic assumption of this model involves many hundreds or thousands of individual unsophisticated investors contributing small amounts of money to a company in exchange for very small pieces of equity. However, in practice, this is rarely the case. As crowdfunding has continued to expand, traditional investors have been attracted to an increasing amount of interesting investment opportunities. Indeed, Nesta’s 2014 study of alternative finance in the UK revealed that 38% of investor survey respondents from equity-based crowdfunding sites identified themselves as being either “sophisticated investors” or “high net worth individuals”.
As the Nesta blog explains:
“While much of this participation is ad hoc, some platforms have sought to formalise the relationship between traditional larger investors and the smaller, often inexperienced investors. One of these is The Syndicate Room. Here, ‘the crowd’ can invest (with the caveat that the minimum retail investment is £1000) alongside active business angels, provided that a lead angel investor is investing at least 25% of the overall amount. Crowd-investors then get the benefit of investing on the same terms as the professional investor, so in effect, when they look after their own interest in the company they look after the crowd investors too.”
In addition, the PUSHING BOUNDARIES – The 2015 UK Alternative Finance Industry Report shows increased involvement from institutional investors in the P2P sector. Namely, 32% of loans in P2P consumer lending and 26% of P2P business lending were funded by institutional investors in 2015.
Large institutions are starting to utilise P2P lending as well, with the UK’s Metro Bank announcing last year that it would start lending customer deposits through P2P platform Zopa. Goldman Sachs, widely seen as the pinnacle of traditional investment banking, has even announced that it will start lending through a digital consumer-driven platform.
The culture of collaboration already exists within the alternative finance industry. It is something that the traditional players are indeed waking up to, and have now started to jump aboard, bringing their gigantic legacies and the universal awareness that they enjoy with them. These moves are testimony to the disruptive power the AltFi sector has over finance. But now the existing members of the alternative finance community need to start reaching out to one another, perhaps over a coffee, though more likely and reliably via their own digital networks that they have built themselves upon, where together the futures of financial health, temperance, civility and ingenuity can be nurtured to thrive.