Funding Circle leads the firms taking on traditional banks

Samir Desai, chief executive and co-founder of Funding Circle

The year is 2010. UK banks are on life support after their near-death experience in the crisis. After the worst recession for nearly forty years, lending to small businesses was not a top priority.

It was in these circumstances that the idea for Funding Circle was hatched by Samir Desai, James Meekings and Andrew Mullinger: let companies borrow from ordinary investors, other firms, not the traditional banks.

Today they announced plans to become a public company worth over £1.5bn, a UK-born company which is the number one peer-to-peer lender to small business in the UK, US, Germany and the Netherlands.

And Funding Circle is just one of a new crop of fintech companies, that may prove to be a real threat to the traditional banking industry.

Chief Executive Samir Desai said his company might not have existed were it not for the crisis.

"Before 2008, small businesses didn't necessarily like their bank but they trusted them. After the crisis even that wasn't true," he said.

"Small business lending was always a pretty small part of the bank's business - around 5% of their total lending - so the banks didn't care that much if small businesses felt neglected."

Trust

Funding Circle was born out of that neglect. But while the financial crisis was necessary, it wasn't a sufficient condition for the fostering of this new breed of financial services companies.

The other piece of the puzzle was the technology. The ability to match buyers and sellers, lenders and borrowers, at scale did not really exist before 2008 and neither did people's trust in using the internet for financial transactions.

As customers' trust in banks shrank, their trust in internet companies grew, and companies like foreign exchange platform Transferwise, online bank Monzo, and Funding Circle have been successful in cannibalising bits of the banking industry by offering quicker, easier to use facilities.

Funding Circle has arranged £5bn worth of loans since 2010 - which sounds like a lot but is, in fact, tiny compared to the £70bn a year that banks lend to small business.

Risk

As a business born after the crisis, Funding Circle and other newbies have never seen their business models tested by a serious financial downturn, which has been a source of concern.

The Financial Conduct Authority recently published a consultation paper that proposed blocking retail investors' access to peer-to-peer lending by placing the same restrictions on it that apply to investment platforms that are perceived as high risk - like crowdfunding sites. That would mean investors wanting to use Funding Circle would have to be very wealthy, have a recognised financial adviser, or declare that they are not investing more than 10% of their net assets.

That sounds ominous, but in truth, might help pull up a drawbridge behind the company, keeping other competitors out. Funding Circle is increasingly being used by governments, development banks (like the British Business Bank who have lent £100m via Funding Circle) and institutional investors. It's less about small retail investors providing the funds to small business borrowers, that's becoming a smaller proportion of their business.

Who wins?

To be clear, this is a company that is still losing money and has grown in a benign economy, offering returns of over 5% when traditional savings are yielding 1% to 2%. This is not a savings product and investors' money is at risk of loss.

However, the real losers from this new crop of Fintech upstarts may be the banks. RBS Chairman, Sir Howard Davies, told a small group of journalists last week.

"They have the tech, we have the customers - the race is whether we can get the tech faster than they can get the customers."

It's going to be an interesting race to watch.