UK’s fallen fintech star highlights sector perils

Funding Circle’s Samir Desai has entered the trough of the fintech hype cycle. His lending website for small businesses, which was valued at 1.5 billion pounds when it listed in London last September, is now worth 70 per cent less. Racy financial technology peers face the same stark choice between slower growth and imprudent risk management.
The nine-year-old London-based group matches cash-rich retail and institutional investors with small companies looking to borrow, filling a niche left by the major high street lenders which retreated after the financial crisis.
Shareholders fretting about a slowing economy and possible chaotic Brexit had their worst fears confirmed on Tuesday, when Chief Executive Desai halved his forecast for revenue growth in 2019 to 20 per cent, citing weaker demand for loans and an “uncertain economic environment”.
Funding Circle investors are probably wondering what happened to the company’s ambition to grab a slice of the 470 billion pounds of relevant outstanding small-business loans in the United States, Germany, Britain and the Netherlands. All those economies will grow this year, according to the International Monetary Fund. Besides, Funding Circle should be snapping up some of the long tail of companies it claims are desperate to borrow but shunned by big banks.
Many investors aren’t sticking around to find out: Funding Circle shares fell a fifth on Tuesday, shrinking its worth to 450 million pounds. Strip out cash and the enterprise value is 120 million pounds – less than its 140 million pounds of revenue last year.
That’s a cautionary tale for other financial startups which have promised investors prudent risk management alongside rapid growth. Desai thought he could square that circle by raising interest rates on Funding Circle’s riskier loans.
That would help protect lenders from defaults while keeping loan volumes high. He now fears that some of the borrowers that the company ranks in its two highest-risk categories might be too ropey. Funding Circle is pulling back from those loans after seeing rising consumer insolvencies elsewhere.
Others have been less prudent: peer-to-peer group Lendy was recently forced into administration by Britain’s Financial Conduct Authority, while a corporate debt platform called the UK Bond Network closed earlier this year.
Funding Circle is sacrificing growth for prudence. Regulators should be on the lookout for rivals who have made the opposite trade-off. — Reuters