English Councils Have Large Reserves
This article on the BBC shocked me. I always get the impression that councils are strapped for cash, but the Audit Commission says that they have £13 billion in reserves.
The councils should take a leaf out of this widower’s book and put it into peer-to-peer lending in their own area. I proposed putting a regional element into something like Zopa here.
They might lose the odd bit, but it would be safer than putting the money in an Icelandic bank.
A Predictable Autumn Statement
Predictable in that it was more of the same, even if you don’t like one or more of bankers, large corporations, benefit claimants, pensioners, unions or drivers. I don’t like at least three!
Some taxes and allowances went up and some went down. Was it ever any different?
We need some radical ideas to get the economy going?
Take these statements which are more or less agreed policy between all the major parties.
1. Banks should lend more to individuals and businesses, so that they purchase capital goods and services.
2. Savers should get a better return on their money.
3. The banks should have more capital reserves.
Point 3 is the elephant in the room, as any money the banks get goes on salaries or to improve their balance sheet rather than more lending.
So let’s leave it out and go to peer-to-peer lending, where borrowers and savers are put in touch by intelligent computer systems.
The Chancellor didn’t take the radical route and help peer-to-peer lending at the expense of the banks. After all if he did, the price of all those Government bank shares would drop. So as they will continue to lose value, wouldn’t it have been better if Gordon Brown had done the prudent thing and put them down, when they went bust?
But then Labour would never have got another vote in Scotland. As it is, Labour doesn’t seem to get many!
The Alternative Finance Routes Are Coming
I found this article on a website called Bridging and Commercial.
It talks about how Funding Circle are trying to bridge the gap in the market left by the withdrawal of ING, by paying an increased commission of 4% to intermediaries.
It is an article that should be read.
My reservations about Funding Circle is that they are very small in the overall scheme of things. They have currently lent about fifty million pounds, as against five times that amount by Zopa, which lends to individuals.
Is Now The Time To Ditch Your Bank?
Mervyn King is warning the UK’s big four banks to make sure they have enough capital in their balance sheets to provide for future losses on dodgy commercial loans. The story is here on the BBC.
They only talk about the big four banks; HSBC, Royal Bank of Scotland, Barclays and Lloyds.
So where are these banks going to get the money they need? Shareholders will probably tell them to get lost, as you don’t throw a lifebelt to a man, who’s obviously dead in the water. You get prepared to fish him out and take him to the mortuary.
They will get the money from the mugs in this equation; the customers. Charges will increase, interest on savings will drop and I believe that free banking will end in the next few years. It’ll probably not end before the next election, as then the hated bankers will give the election to the Labour Party.
So in my view, the best thing you could do is to see if you actually need your bank. Especially, if it’s one of the so called Big Four!
But where would you move your money?
How about a big foreign bank?
I know that Santander hasn’t been specifically named as in trouble, but with Spain on life support, you wouldn’t want to keep your money there. It after all breaks one of my late friend, David’s Golden Rules. Never bank with a bank that is head-quartered outside of the UK.
There’s always the Bank of Mattress. Sadly, I think many wll start to use this, when they are levied the inevitable bank charges.
But I suspect that my combination is one of the best. I use an old-fashioned building society for my working capital and paying bills, and keep the rest invested in various places such as safe investments and peer-to-peer lending.
Zopa Hits A Quarter Of A Billion
Zopa are reporting on their web site, that they have now lent out over a quarter of a billion pounds. That may seem a lot of money, but consider that ING have pulled four times that amount out of lending in the UK in this year alone. But every little helps.
You can make an estimate of Zopa’s income, by starting with one per cent charged on all loans. So that looks like £2,500,000. And to that you can add about a £100 for each successful loan.
But this is probably a lot less than Barclays or another big bank, would make by lending a quarter of a billion.
So possibly Zopa is really only an irritant in the hide of the big banks.
On the other hand, Zopa is a company that lives without the cost structure that any bank feels it must have.
So if they ignore Zopa, the banks will live to regret it. But they won’t live very long in their current bloated and top-heavy forms.
The reason is simple. Zopa’s financial model appeals to both lenders and borrowers and is very simple. So all the discontent, that many feel about the banks, has found a home.
My only worry about Zopa is that politicians legislate against social lending to protect their shareholdings in LloydsTSB and RBS.
Regional Finance
I have a bit of form in this area, as I was a partner in a small finance company in Ipswich, which was setup, when I sold my stake in Artemis. The company lent money to local individuals with good credit ratings for quality products like cars, trucks and various forms of machinery. It was profitable and it was eventually bought up by one of our sources of finance. My partner in the business has continued lending money since, but recently he has had problems obtaining wholesale money at a reasonable price. The withdrawal of ING from this market has not helped and the result is that businesses are having to pay more for leasing contracts.
Locally-based or regional finance is an opportunity for someone to step into the gap. Funding Circle have created what they call a Local Business Lending Partnership with Lancashire County Council. It is a small step in the right general direction.
I’m a great believer in peer-to-peer or social lending for three reasons, having invested around £100,000 of my savings in companies in the area.
- It gives lenders a better return on their savings. I consistently get 4-5% before tax after all charges and bad debts on Zopa.
- It gives borrowers access to affordable loans with very fair terms.
- Because of the way they run their businesses, peer-to-peer lenders have a low bad debt rate, which is much better than those of established banks.
The only downside is that lenders’ money could be at risk. On the other hand, if you use a social lender sensibly, like I believe I have, you can minimise your losses. In four years on Zopa, with tens of thousands invested, I’ve only got a few bad debts that total just over four hundred pounds. Possibly due to Zopa’s collection method, this figure is reducing.
Others have not been so lucky, but then I am by training a control engineer, with extensive experience of modelling financing and lending systems.
So is Funding Circle’s approach of a Local Business Lending Partnership a good one?
It’s an attempt to target money, but then as Dieter Helm has said “Ministers who try to pick winners should remember that losers tend to pick governments.”
Politicians and money are rather a toxic mix. They should stick to enabling good practice by sensible laws and rules.
I know Zopa well, so what does their system have that is good. I mused in this post that Zopa might be a stable system, where borrowers and lenders find a sensible balance between their needs. Nothing I have learned since makes me believe I am wrong. In fact Zopa is in some ways so stable that I hardly ever change the interest rates that I charge.
Zopa too, has very good credit checking, which I know is the key to successful lending businesses. Royal Bank of Scotland appreciate this now.
The Zopa model is also so simple, that the average eight year old would understand it. This simplicity means that anybody can invest and lend money from a few pounds upwards and borrowers only face a thorough, but not particularly onerous checking process, before the computer allocates all the funds.
Because of its computer system, Zopa is infinitely scalable. At the time of writing it has lent about £250,000,000 in seven years and if it were to be lending say ten times more, it would only need to increase staff in the back office.
I suspect too, that a lot of what I’ve said here applies to other social lenders like Funding Circle and Ratesetter. But I have not been investing in those companies for anywhere near like as long!
Zopa is unique in that it doesn’t allow the lender to have any choice in the borrowers they lend to. All lenders can do is choose markets and set rates. The computer then does the allocation, which are then thoroughly checked by a team of expert humans.
So in my view Zopa is the purer and more stable system from a control engineering point of view.
It also requires the least intervention from the lender to run successfully, which probably explains why it is the largest peer-to-peer lender.
Funding Circle may get success with its lending partnership, but I suspect it tends to make administration more difficult and requires intervention from lenders. It’s also open to skewing by politicians, who favour their friends.
So could a regional element be built into Zopa?
I believe it can and Zopa’s model is absolutely the right one to regionalise.
You would not change anything major to the computer system or the way the staff work.
The first thing you would do, is to add a facility which is common in on-line dating and car sale systems. You can type in your post-code and say you’d like to meet someone or find a car within say twenty miles or so. Obviously, a guy in Carlisle doesn’t want to meet a lady in or by a car from Penzance!
But people have strong regional affinities and an investor in say Suffolk, might like most of his money to be lent out there. Especially, as they might get a £50 bonus from Zopa for introducing a borrower. Traditionally, these bonuses get spent on something like a shared meal, so it’s an unusual form of creative cash-back. Imagine how this could percolate through something like a golf or tennis club, or a school common room.
So I would allow lenders to restrict their lending to those that lived within a certain distance.
This would also have a marketing advantage as people would like to think that their savings were helping others where they lived.
But of course, there would be no deterioration to Zopa’s bad debt rate, as the same credit checks would still apply. In fact, this regional element might mean that those with better credit ratings went to Zopa, as they would prefer the profits to stay in their local area, rather than to the City.
So yet again, we see how feedback and control engineering principles can be applied to make a system better.
Zopa’s company model also allows credit checking and other processes from anywhere, as that is what the Internet is for.
So they could move some checking to regional areas, if they wanted, to use local knowledge and promote the company. But this would hardly involve them in vast expenses, as they would just be putting a bum on a different seat.
Other tweaks could also be added, but whatever is done, mustn’t compromise the simplicity of the system.
A Chinese View On Peer-To-Peer Lending
I found this article in the South China Morning Post.
It would appear that peer-to-peer lending is taking off in China in a big way. Here’s an extract.
According to an unofficial source, there are an estimated 100 such Chinese lenders in operation, with projected total outstanding loans this year of 18 billion yuan (HK$22 billion)
That sounds a lot to me.
The Two Sides Of The Personal Banking Crisis
We have a personal banking crisis in this country and I suspect many parts of the developed world.
A headline in the FT says that the bill for mis-selling PPI has now passed ten billion pounds. And that only includes direct costs to the banks. What about the indirect costs to all of us, who never went near PPI, but are constantly plagued with all forms of nuisance calls and e-mails. Hopefully after the action of Richard Herman, these calls will stop.
We also have the story on the BBC about basic bank accounts offered to those with bad credit histories. Apparently,more and more banks are dropping these accounts.
So what does a basic bank account do. This
These are simple accounts which allow customers to have their wages, benefits, and cheques paid in.
Customers can gain access to their money from some cash machines, or the Post Office.
Bills can be made by direct debit from the account, but these accounts offer no overdraft facility or access to credit – unlike most standard current accounts.
According to the BBC.
In fact that is not unlike the facilities, I use my Nationwide account for.
Although, I do have a credit card, the ability to get my money from virtually all cash machines, full on-line access and a small authorised overdraft, which I never use.
But I never buy anything from my bank or phone them up.
So the opportunities for making money from personal accounts by retail banks from most of their customers is dropping like a stone.
Especially with investors like myself, who use things like Zopa to hold our savings and surplus cash.
It all sounds like to me, that there is a real gap in the market for a personal bank that has these characteristics.
On-line only.
No expensive High Street branches.
No phone lines, with all queries dealt with on-line.
No cheque books.
A simple savings account.
Small overdrafts.
Cash out from any cash point.
Even some of the new entrants to banking like Metro, Marks and Spencer and Tesco don’t seem to be ditching the physical branches. With all the work I did with a major clearing bank in the 1970s, I know that these contribute significantly to the cost of doing everything.
The only certainty is that banking will go this way and there is going to be a lot more empty spaces on the High Street. I just wonder what is going to fill them. We can only have so many mobile phone and payday loan stores.
Applying Control Engineering Principles To Pensions
Pensions are a nightmare and more rubbish is talked about them than any other financial matter, except possibly credit cards.
I’m in some ways typical, but the size of my pension pot is not typical.
When I worked for Metier, our wonderful accountant, Brian, set me up with a pension that I can live on.
I also have an income from the cash I got from selling the stud.
And when the DWP sorts it out I’ll have my State Pension.
So basically, I have a fixed sum coming in each month, from which I take my living expenses. Which of course varies on a month by month basis.
So at the end of each month I have a current account, which either has a small surplus or perhaps a small deficit. If it’s a surplus, the money goes into my Zopa account and if it’s a deficit, I withdraw a proportion of the payments made in at the first of the month.
So Zopa acts like a deposit account, that pays a reasonable rate of interest. The great thing, is that it costs me nothing to transfer money to and from Zopa.
There is of course a slight risk with Zopa, but I’ve used it long enough to have developed a philosphy that minimises bad debt.
Effectively, I’m using Zopa to damp out the fluctuations in cash flow, just as a control engineer might add damping to a feedback system.
Zopa Start Processing Early
I check my Zopa account every morning when I get up.
At 6:30 this morning, I had £121.91 on offer, with 27 offers totally £2630 being processed.
Now at 7:30, it’s £221.91 and 26 (£2530)
So someone has already said, that a proposed loan shouldn’t be approved.
The Anonymous Widower 