Index is called the Liberum AltFi Financial Disruptors Index (LAFDI).
According to a public statement, UK based investment bank Liberum and research firm AltFi Data have launched the first equity index tracking the world’s leading financial services’ disruptors. The new index launches just as industry defining IPO of Lending Club is preparing to list shares on the NYSE.
“With the imminent blockbuster IPO of Lending Club, the leading Peer-to-peer lender ” says Rupert Taylor, CEO of AltFi Data, “we believe it is important that equity investors have access to an index that comprehensively tracks the world’s leading financial services disruptors listed on the main exchanges of the developed world. The rise of non-bank and P2P lending crowdfunding, and related fintech businesses has galvanised many investors, as they begin to realise that this emerging sector is growing at a phenomenal rate. Lending Club’s IPO might value it in the billions of dollars but there are already well over two dozen market leading firms that have a listing – some of them also worth billions. Our Index captures these disruptors, all intent on knocking the incumbent banks off their perch!”
- For the first time it gives investors targeted exposure to leading financial disruptors whilst excluding the incumbent banks
- The Index is truly global in coverage and includes not only multi billion dollar businesses but also a substantial number of high growth, small cap companies
- The Index has been constructed to emphasise liquidity requirements for the end investor – weightings within the Index have been carefully designed to balance those liquidity requirements alongside a need to limit the impact of the share price movements of the large market capitalisation companies within the Index
- The Index has been built and is monitored by market leading experts, with an established sector pedigree. Liberum is an investment bank in the UK which works with many businesses in the emerging alternative finance sector while AltFi Data has quickly built a reputation as a pre-eminent source of independent information on this fast growing sector
“The genesis of this Index is bound up in the concept of financial disruption. A paper from the summer of 2014 by HSBC looked to identify equity sectors where the potential for disruption of established business models was greatest. All the usual candidates appeared – mostly technological – but the financial services sector was mostly left off the list. Banks, we were told, were likely to be lightly disrupted (payments processing for instance might feel some effect) largely because the end user – the customer – was suspicious of change and wanted a simple product. Everything else in the paper sounded eminently sensible but this last section didn’t quite ring true. The financial services sector is undergoing a huge series of concurrent transformations, many of which will profoundly reshape the marketplace. Some of this change is coming from regulators, others from customers, many enabled using technology. In simple terms the traditional financial services business and especially the ‘bank’ model is now firmly under threat from disruption. Core parts of this ‘old bank’ model are under attack from new players and a new era of innovative financial services provision is upon us.“
AltFi Data states there is a growing body of evidence suggesting that this “disruption is long overdue”. A paper by Thomas Philippon at NYU suggests that the unit cost of financial intermediation has not fallen over the past century. In comparable industries, for example wholesaling and retailing, advances in IT have caused the ‘cost’, as measured by the GDP share of the industry, to fall dramatically. But a reduction in costs, and resultant rise in efficiency, has not yet occurred in the financial services sector. Philippon explains that “Despite its fast computers and credit derivatives, the current financial system does not seem better at transferring funds from savers to borrowers than the financial system of 1910.” If the new breed of disruptors can succeed, this of course means that they will be serving a valuable social function. If the cost of finance could be reduced it would reduce costs for all and free up capital for productive purposes.
Rupert Taylor, CEO at AltFi Data also notes;
“ alongside this societal benefit will of course come investment opportunities. Spotting the ‘stars’ of tomorrow might be tricky – investors will first have to change the way they think about what constitutes a financial services business – is it a technology business or is it a next generation online brand? Does it have a banking license or not? Does it even need a banking license?“
The Index features a number of sub sectors within the broad financial services space including P2P and direct lending, alternative financial services and related fintech businesses.
According to Sam Griffiths, MD at AltFi Data, the rise of the P2P lending sector (led by platforms such as Lending Club) is one crucial part of the transformation impacting financial services – “traditional banks have a large cost base, much of which is represented by their branch network. These branches are filled with staff, and used to perform a function as an important destination for both borrowers and lenders. However the internet has changed that. If the web can be the new destination then that cost base becomes redundant. And the web is well suited to matching borrowers and lenders, saving on overheads and allowing higher savings rates and lower borrowing costs.
“Disruptors within the financial services space are attempting to address these issues and more – many of the emerging successful disruptors actually try and provide financial products to clients who aren’t typically able to access banks in the first place.”
The new Index is rules based and supervised by a committee. It takes seriously the idea of disruption and only includes financial services businesses listed on developed world markets which are challenging existing institutions, notably banks. Crucially we insist that any business that is included in the index must make use of a radically different model to the existing industry that it is beginning to disrupt.