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Small-business lender iwoca raises £150M, aims to become household name

A New Era For Blockbuster Bank M&A

Opinion: Look Outside the US for Insurance Blockchain Projects

Street Talk Podcast

Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

Citi Placing Lots Of Bets On Blockchain Startups

Small-business lender iwoca raises £150M, aims to become household name

British lending platform iwoca Ltd. is aiming to replace household names such as Lloyds Banking Group PLC and Royal Bank of Scotland Group PLC as the U.K.'s top lender for small businesses, CEO Christoph Rieche said.

His comments come as the financial technology company pulled in £150 million of debt and equity funding from a series D investment round led by venture capital firm Augmentum Capital LLP, according to a Feb. 18 company statement. Other investors participating in the round include Dutch-based bank NIBC Holding NV and existing investor Prime Ventures.

Iwoca focuses on small businesses in the U.K., Poland and Germany, and provides loans of £250,000 or less.

SME-related opportunities

Small companies are bearing the brunt of mainstream U.K. banks' pullback from the small and medium-sized business lending market, creating an opportunity for iwoca to grab market share, Rieche told S&P Global Market Intelligence.

Iwoca hopes to win a slice of the £775 million fund that Royal Bank of Scotland is preparing to award to challenger banks and fintechs as part of its plans to boost competition and spin off its Williams & Glyn brand, Rieche said.

"We're watching the process closely. I think it would be unfair if the money ends up being handed out only to companies that already have banking licenses. We are genuinely driving competition," he said.

The company has facilitated £550 million in loans to more than 25,000 businesses since its 2012 launch. Rieche said iwoca hopes to grow the business to 1 million customers, although it has not set a formal deadline to reach this number.

"We want to become a household name," Rieche said.

'P2P' an anachronism

The U.K.'s alternative finance market grew to £6.19 billion in 2017, a 35% rise on the previous year, according to the Cambridge Centre for Alternative Finance, which includes crowdfunding as well as peer-to-peer lending.

Major players in the U.K. P2P lending space include Funding Circle Holdings Ltd., which floated on the London Stock Exchange Group PLC in October 2018, and has facilitated more than £3 billion of lending since its 2010 launch, and consumer-focused P2P platform Zopa Ltd., which has facilitated around £2.9 billion since its 2005 launch.

As well as matching borrowers and lenders, a lot of lending risk is absorbed by iwoca's own capital, Rieche said. The company has also sold some of its exposures on to mainstream commercial banks who are looking to build up their retail lending books — but without having to worry about providing a "customer experience" for borrowers, he said.

In this sense, the term P2P is starting to become an anachronism as the business models of lending platforms such as iwoca evolve, he added.

Construction, clothing ... but not cockroaches

Investment banks including Italy's Intesa Sanpaolo SpA and Germany's Commerzbank AG have participated in previous iwoca funding rounds, each investing an undisclosed amount.

"Intesa are very keen for us to work with them in Italy to help them to meet customer needs with lower costs," Rieche said.

Iwoca, whose name stands for "instant working capital," has lent to companies in a range of sectors, but tends to lean toward "asset-light" companies in the service sector, according to Rieche.

The fintech has worked with small businesses ranging from construction to clothing — but turned down a loan to a small business that bred cockroaches as food for exotic animals, Rieche said.

Fundraising has become more difficult for fintechs in the U.K. in the shadow of Brexit.

"I'm very glad we closed the fundraising round when we did. But the climate has cooled. Investors look at the U.K. and they see a massive mess with Brexit. No one is jumping up and down saying that they want to invest in the U.K. I think U.S. investors are getting more reluctant," Rieche said.

A New Era For Blockbuster Bank M&A

Feb. 08 2019 — The days of large bank acquirers pursuing deals to plant a flag in a new market might be receding as more buyers see transactions as a way to support much needed investments in technology.

In the latest Street Talk podcast, we discuss how BB&T Corp. touted that prospect when announcing its merger with SunTrust Banks Inc. and talk about the implications for future big-ticket transactions.

BB&T said the deal, one of the largest in U.S. banking history, will create a premier financial institution fueled by increased capacity to invest in innovation and talent. That stands in stark contrast to other blockbuster deals announced before the financial crisis, when buyers sought to create financial supermarkets or extend their footprints to new markets.

The size of BB&T's landmark transaction might have caught some members of the investment community off guard since Chairman and CEO Kelly King suggested the company was focused on organic growth and internal initiatives to drive costs lower. Still, while the merger of equals, the largest in BB&T's history, might have come as a surprise, it is part of a small group of large deals that received applause from the Street. The projected tangible book value accretion certainly played a role, but King also emphasized that the expansion would allow BB&T to achieve its previously stated goal of investing in technology to meet growing client demands.

Street Talk is a podcast hosted by S&P Global

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"We'll transform platforms to drive out cost, that's important, supporting a more technologically enabled business. And we will gain incremental efficiencies through automation by enabling faster, smarter and more secure way of doing business," King said on a call to discuss the deal.

Investment bankers have suggested others could follow BB&T's move and use cost savings from transactions to upgrade technological offerings. Some advisers even predicted an increase in larger deals before the BB&T/SunTrust transaction surfaced, arguing that regional banks needed to play catch up with the nation's largest institutions and upgrade technology and digital channels to keep their clients happy.

For his part, King emphasized that the world has changed considerably, even in just the last 12 months. King echoed comments made during BB&T's investor day in November 2018, when the company rolled out a new initiative, dubbed "Disrupt or Die," focused on improving efficiency while investing in delivery platforms.

"We talked about disrupt to thrive. And this is it, this is kind of the ultimate disrupt to thrive," King said on the SunTrust call.

That theme has recently become more common in larger bank deals. Chemical Financial Corp. and TCF Financial Corp., for instance, highlighted the opportunity to invest in technology as a combined franchise when discussing their $3.55 billion MOE announced a few weeks ago. The companies said the deal would allow them to invest and innovate more efficiently, enhance customer-facing digital service offerings and streamline internal systems and processes.

WSFS Financial Corp. offered a similar assessment when announcing plans to buy Beneficial Bancorp Inc. for $1.5 billion in August 2018. While WSFS took heat for the price paid on the deal, the buyer outlined plans to use some expected cost savings to invest in digital channels and shrink its branch network considerably.

"This combination allows us to economically address the question in every bank's boardroom," WSFS Chairman Mark Turner said on the call. "That is, how and when are we going to adjust to the new realities of banking delivery to meet the changing customer behavior and their needs."

The Street seems to think it makes sense to spend on technology to play offense. Jeff Davis, managing director at Mercer Capital and a S&P Global Market Intelligence contributor, said in a recent blog post that scale might be required to protect existing returns in the face of improving technology. He said the Amazon effect could apply to deposit pricing as "informed depositors with mobile technology" could force increased competition. Davis said the same thing occurred in the asset management business, where cost-conscious investors utilized widely available information and easy-to-use technology to upend the industry's pricing model.

BB&T seems to recognize the threat of fintech and other technology providers creeping into its space. As King noted on the conference call to discuss the SunTrust merger, he wants to get ahead of that sea change and lead rather than follow.

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Opinion: Look Outside the US for Insurance Blockchain Projects

Aug. 28 2018 — Despite a wealth of conceptual applications for blockchain, U.S. insurers do not appear as engaged with the technology as their counterparts overseas. But if initiatives in Europe and Asia prove successful, U.S. insurers may plunge more deeply into the blockchain waters.

There is no shortage of thought experiments around how blockchain — and distributed ledger technology more broadly — will revolutionize the insurance industry. These include smart contracts, fraud detection, claims prevention, proof of insurance and product authentication. Insurers overseas have made significant progress with blockchain technology, including a consumer application for flight delay insurance and a commercial platform for marine insurance. But activity on the part of U.S. insurers is less apparent.

Conference calls provide a useful barometer for a company's interest in blockchain, as they indicate that executives are thinking about it. When startups try to introduce new technology, one of the common hurdles they cite is a lack of commitment from those with decision-making power at incumbent institutions.

When we published research in April on how U.S. financial services companies are using blockchain, we found roughly 40 transcripts since the start of 2015 from publicly traded U.S. banks that mentioned "blockchain," versus only three from insurance underwriters. Publicly traded banks greatly outnumber insurers in the U.S. But insurers also lagged broker/dealers and asset managers in terms of transcripts, and those sectors each have fewer publicly traded companies than insurance. For this piece, we expanded our transcript analysis to include global insurers, which offered a wealth of information. Many more European insurers discussed their projects than companies in other regions, despite there being about half as many publicly traded insurers in Europe as in the U.S. and Canada region.

One project that caught our attention in the European market was Axa's Fizzy. The flight insurance product uses smart contracts written to the Ethereum blockchain and automatically pays a claim if a passenger's flight is delayed more than two hours. Axa launched Fizzy in September 2017 and at the time offered coverage for only a few routes a day. As of mid-June 2018, Axa had expanded the app to 5% of worldwide routes. But merely the fact that it launched is noteworthy, as many projects from other companies, both in and outside the insurance realm, remain in proof-of-concept mode.

Ping is king

While European insurers collectively discussed blockchain on the most number of conference calls, Chinese insurer Ping An Insurance (Group) Co. of China Ltd. took the top spot in our ranking of individual insurers.

Ping An considers blockchain one of its five core technologies, as executives mentioned during an investor day in November 2017; the others are biometrics, big data, artificial intelligence and cloud computing. One of its main initiatives was the creation of a blockchain-as-a-service platform, which provides services to small and medium-sized enterprises that want access to the latest technology.

Come together

While they might not be as forthcoming about their internal projects, a number of U.S. insurers have discussed their membership in consortium initiatives. One of these is The Institutes RiskBlock Alliance, or RiskBlock for short, which works with underwriters and brokers to develop blockchain applications specifically for the insurance industry. Europe is also home to a consortium that has been generating buzz: Zurich-based B3i. Short for Blockchain Insurance Industry Initiative, B3i began as an industry collaboration but in March announced that it was becoming an actual legal entity, incorporating itself as B3i Services AG.

The bottom line

While it is possible that U.S. insurers are more secretive about their blockchain plans than other industries, they are more likely taking a wait-and-see approach. The fact that insurers in other areas of the world are experimenting with the technology and even launching apps supports this assessment.

Right now seems like a make-or-break moment for distributed ledger technology, as projects across multiple industries are going from proof-of-concept to live implementations. Perhaps if those bear fruit it will compel U.S. insurers to further embrace the technology.

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Listen: Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

More banks are reaching further out the yield curve in their loan portfolios to meet customer demands but, increasingly, advisers believe institutions need to proceed with caution. In the episode, experts from PIMCO, Sandler O’Neill, Chatham Financial and PrecisionLender discuss rate risk and how banks focused on funding will ultimately prove the winners.

Street Talk is a podcast hosted by S&P Global Market Intelligence.

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Citi Placing Lots Of Bets On Blockchain Startups

May. 02 2018 — A number of large, publicly traded U.S. financial institutions have been investing in blockchain startups, and none has been more active in the space of late than Citigroup Inc.

Through its holding company and various subsidiaries, Citigroup has invested in seven startups since the start of 2015, which is more than Goldman Sachs Group Inc. and JPMorgan Chase & Co. combined. Based on our research, which looked at private placements from all publicly traded U.S.-based financial services companies, we think this could be a wise move. One of the perceived benefits of blockchain is that there is not a central intermediary influencing the system, so investing in the technology at arm's length might play to Citigroup's favor.

US-based, publicly traded financial services companies that have made the most investments in blockchain companiesWe chose 2015 as our starting point because that was when U.S. financial services companies seemed to take a keen interest in blockchain, enough that they began discussing it on conference calls, at investor days and at industry events.

Citigroup has tended to invest in blockchain startups focused specifically on financial services applications, which makes sense. In addition to offering a potential return, funding a startup can help the incumbent institution become well-versed in the technology without having to do development work in-house. This might explain why JPMorgan, for instance, made fewer investments, since it created its own organic blockchain initiative known as Quorum.

But JPMorgan's approach has reportedly presented some issues. JPMorgan is trying to spin off Quorum because other banks were reluctant to use a system linked so closely to the bank, according to a Financial Times article published in March. This might serve as a good argument in favor of the passive investment route. That way, the incumbent can potentially benefit without being perceived as too involved in the process. Startups can likewise gain from such relationships.

In addition to the obvious monetary benefits, the startup can use its backers as beta testers in pilot programs. Since blockchain is a network technology, it helps to have large institutions testing it out in the early stages. R3 offers a prime example. The software firm, known for its open-source distributed ledger platform Corda, has attracted more than 40 of the world's largest banks as investors, including Bank of America Corp., Wells Fargo & Co., and Citigroup from the U.S. Those large banks have in turn tested new concepts using the platform. In March, for instance, Credit Suisse Group AG and ING Groep NV announced that they settled a securities lending transaction using Corda.

Blockchain companies that have the most US-based, publicly traded financial services companies
It remains to be seen how the potential of blockchain is ultimately realized. In our view, investing in startups seems like a shrewd way for financial services companies to explore the many facets of the technology without seeming overbearing and without committing massive amounts of internal resources to projects.

More discussion of blockchain can also be found on the Street Talk podcast, which is available via  iTunes.