On the face of it, the arithmetic looks simple enough. Banks typically pay only 1% or so to their loyal customers for their cash on deposit and then use this cheap capital for lending on to their credit card holders at 18% or more – ipso facto, that leaves them with a big fat 17% margin on which to feast and prosper.
FinTechs, on the other hand, as typified by P2P lenders, have no such source of cheap money and pay investors maybe 7% and lend on to borrowers at, say, 3 percentage points more (circa 10%), thus giving them only a relatively slender margin on which to live. Question: why would any bank want to enter the world of P2P lending on the basis of those numbers?
That very question was posed by the CFA (Chartered Financial Analysts) in a report published earlier this month. The answer, of course, is firstly that not all bank lending is through expensive credit cards and secondly, that they have a much higher cost base to maintain than P2P lending platforms.
The CFA report goes on to argue that it is a myth that banks and FinTechs are sworn enemies and that, apart from some cultural differences, they both occupy the same space; i.e. they both use finance and technology to make a living. Indeed, the report recommends that they be friends in cooperation. Discuss.
A more pertinent comment came in a recent speech made by Sam Woods, Deputy Governor Prudential Regulation, CEO Prudential Regulation Authority (PRA), on the subject of ‘supervision’ which he described as “the dynamic pursuit of the relevant authorities’ statutory objectives, through oversight of the activities of individual firms” and essential not least because “history tells us that the commercial incentives of firms will create pressures to find ways to minimise the impact of regulations.”
He said that the PRA has identified behaviour that “might meet the letter of regulation, but is designed to circumvent the spirit.” He cited the fact that “some institutions are now moving ‘on balance sheet’ financing to off balance sheet formats using special purpose vehicles, derivatives, agency structures and collateral swaps.”
I interpret that to mean that the banks are finding ways to circumvent the increased capital requirements placed on them to prevent another 2008-style catastrophe and the need for a taxpayer funded bail-out. Having to put aside more capital for safety reasons is bound to act as a drag on profits, but can it be right that the banks are writing business that, history tells, they don’t really understand and have the potential to blow up in their faces? Despite the apparent lack of margin, perhaps entering the world of P2P loans is not so crazy after all – it is certainly less dangerous.