Against the current background of Brexit and the US elections, low yields have somewhat become a problem for savers and retirees of this generation. And with the passage of time it has only become increasingly difficult to find financial instruments which offer at least a decent payout – for a reasonable amount of risk. However investors remain optimistic and continue their search for higher returns.
A few decades ago, one could enjoy an X amount of dollars sitting in the bank generating sufficient interest to cover all basic spending. Today’s unattractive interest rates and continuous inflationary push have suddenly made the existing earnings seem so meager. What’s worse is that these days, with interest rates at their bare minimum, savers feel rather penalised for saving; and fear the risk of outliving their money.
So instead of lending to a bank for a lower interest rate, where the bank probably reinvests it for a higher rate, there should be an alternative option which allows an investor to lend directly to external parties for a higher return than what the bank provides.
In the case of income assets such as treasuries, municipal & government bonds, and publicly-traded corporate debt and bond funds have usually been considered as a staple part of any investment portfolio. However many fixed-income securities tie up an investor's principal for an extended period. Hence, aside from safety, investors are rarely able to earn substantial returns by investing a lesser principal amount for a shorter span of time.
Another option would be investing in properties, which are by far the most popular and widely understood investment options for the masses; because of its illiquid nature and high transaction costs, investors tend to prefer publicly-traded REITs. However, where the fund managers are concerned, there once again may be reservations regarding the lack of control here.
Moving away from the traditional investment portfolio
Let’s picture this – Jane is an entrepreneur, founder, and owner of a small business in Singapore. She offers a new invention in engineering which many companies want, and her products are in significant demand that she is doubling the size of the business every year. Despite the potential to grow and expand, her business has outstanding invoices with large companies which are taking 60-90 or more days to pay and therefore her business faces cash flow problems. Local banks are unwilling to lend because her company is too small to qualify for a corporate loan.
Jane is desperate and looking for help to grow her business. Along comes Tarzan to save Jane. Tarzan is a wealthy investor that is willing to put money into a peer to peer fintech marketplace platform that has many accredited/institutional investors which can finance invoices such as Jane’s and sells them on their marketplace to the investors for 20% returns or more.
Alternative finance is financing from sources outside of banks or stock and bond markets. It is a relatively recent phenomenon, where most of the providers are less than a decade old. The rapid growth of such platforms just goes to show that it’s already providing a significant amount of capital, to fuel smaller domestic businesses. In fact, the World Bank has estimated that the world’s alternative finance market could grow to US$90b of investment by 20201. It is now emerging as mainstream in the Asian continent, catering to a wide variety of entrepreneurial needs.
Peer-to-peer platforms have become more than just a means of matching borrowers with lenders for a higher yield and less volatility than conventional fixed-income asset classes2. Recently, institutional investors have been driving much of the industry’s growth.
Invoice financing is one form of alternative finance which is set to become even more important in Southeast Asia especially in Singapore. Whilst SMEs are hungry for capital, banks are not willing to lend as quickly. Zooming into the local market, one sees that despite Singapore being the wealthiest country in the region per capita, 40% of local SMEs don’t have access to a bank loan (Deloitte3). This comes at a time where a significant portion of the country's GDP (47%) is derived from SMEs. And this market is also very prevalent with startups' innovation.
By replacing traditional “brick-and-mortar” middlemen with technology, such platforms are able to reduce the cost of servicing, and funding typical loans. As a result, borrowers receive a lower interest rate whilst lenders receive a more attractive rate of return. Investors are able to earn relatively high return (<20%) on a short-term loan for a relatively smaller risk.
Alternative finance is sending ripple effects across the industry
The banking industry is beginning to take notice of these rapidly emerging disruptions in the financial sector. Banks and other established institutions have begun to feel the pressure, and are responding by recognising new opportunities by initiating technology investments and strategic partnerships.
1International Banker: The Rapid Growth Of Alternative Finance. Barnes, Samantha (1 December 2016).
2Dara Albright: The Financial Advisor’s Guide to P2P Investing. (2015)
3Deloitte: Digital Banking for Small and Medium Enterprises improving access to finance for the underserved. (2015)
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Roger Crook, an independent Senior Advisor, is CEO at Capital Springboard. He was formerly a Member of the Board of Management, Deutsche Post AG (DeutschePost DHL) and Global Chief Executive Officer, DHL Global Forwarding, Freight Division from 2011 until 2015. Roger has more than two decades of operational responsibilities in the logistics industry.