Fintech, as a word, is highly efficient, combining finance and technology in a cool, new form — a bit like the businesses it aims to describe. But, as with so many 21st century portmanteaus — think glamping, mansplain and, er, Brangelina — it can often be more one than the other. Take the latest UK fintech planning to float: peer-to-peer lender Funding Circle. Its price makes it look more “tech” than “fin”. Its challenges, though, look more fin than tech.
Based on the 420p-520p price range it announced on Wednesday, the lossmaking group will be valued at £1.4bn-£1.8bn. That is 15-17 times 2017 revenue, of £95m. Admittedly, growth in the loans being made to small businesses by the individuals and institutions on its online platform should lift that revenue 50 per cent next year, and 40 per cent thereafter. That brings its prospective valuation down to 7-9 times 2019 revenue. However, the price to revenue multiple of the KBW Nasdaq Fintech Index is only 4 times. So that makes Funding Circle’s valuation more tech than even fintech, let alone fin.
By contrast, Funding Circle’s business model is almost entirely fin. More than 80 per cent of its revenue is from loan transaction fees. So, for all the risk profiling its boffins have pioneered, it is the availability of that finance— not advances in technology — that determine its performance.
And the challenges to this business model are all fin, too — with no wizzy tech able to overcome them.
Funding Circle’s customer acquisition costs are high, at 41 per cent of revenue. They have been falling, and should continue to do so as it secures more repeat business— which already accounts for four in 10 borrowers. But the company still has to rely on low-tech TV adverts to keep the lending flowing.
Funding Circle secures most of its lending from institutions, which brings diversification but adds concentration and supply risk. Bank of New York Mellon’s Alcentra unit wants to lend $1bn via the peer-to-peer platform but any change in institutions’ lending policies — regardless of how good the platform is — will hit Funding Circle’s earnings disproportionately hard.
Funding Circle’s lenders may soon opt to change policy, too, as higher interest rates make it possible to earn yields elsewhere, without the risks of small business lending. Again, tech can help profile those risks but not stop lenders from choosing to avoid them.
Funding Circle also faces a regulatory limit on whose loans it can facilitate, as the Financial Conduct Authority consults on restricting peer-to-peer platforms to sophisticated investors. Tech can help quantify that risk, but not change a worried regulator’s mind.
Clearly, Funding Circle’s many backers — including Asos website investor Anders Povlsen — see value in both the finance and the technology. It is just that the combination — like certain portmanteau power couples — does not seem a marriage of equals.
So Long to Royal Mail
Poker-faced Peter Long made his name as a skilled player when he merged First Choice with Tui in 2007, writes Kate Burgess. The 66-year-old has been off his game recently, though. Or at least shareholders in Royal Mail, which he chaired until his resignation on Wednesday, think so.
Just over a third of them voted against his reappointment in July. Royal Mail under Mr Long had crossed many lines. Most recently, the company proposed hefty rewards for its outgoing and incoming chief executives, having narrowly avoided a strike by its workers. Mr Long’s multiple directorships distracted him, said investors. He is a member of Tui’s supervisory board and executive chairman of Countrywide, the estate agency that had to raise £140m in emergency cash just to keep going.
Giving up Royal Mail has been pretty much a certainty ever since. However, Countrywide may prove a better ground for Mr Long. It faces plenty of hurdles — not least a property market downturn — and its shareholders are as ornery as Royal Mail’s. They forced the withdrawal of £20m of proposed payouts for Countrywide executives, including £6m for Mr Long, in August.
Still, Countrywide is not as attritional as Royal Mail, which remains highly regulated, politicised and unionised while facing structural decline in its core letters business. Earlier this year, Mr Long gave himself three years to turn Countrywide round. That is the Long game. Time enough for a return to form.
Jack: fine young cannibal
Tesco boss Dave Lewis was trying to explain that he would open a new Jack’s discount food store next to an existing supermarket, if it stopped customers defecting to Aldi or Lidl. But his words conjured an unfortunate image: “I’d rather cannibalise myself than have somebody else cannibalise me.” Had he just tried Jack’s own-brand liver? With fava beans and a nice Chianti?
Royal Mail: email@example.com
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