Many commentators believe the banking system is broken and suggest banks are not absolutely necessary.

Christian Faes, Managing Director at Montello Bridging Finance, describes how there is an argument gaining momentum which challenges the traditional role of a bank as intermediary between customer’s deposits and spending. He also talks to us about the growth of Fund investments and the boom of alternative finance…

The growth of online platforms is allowing investors to lend directly to borrowers in what is called ‘peer-to-peer’ lending or ‘crowd funding’. There are also various alternative finance funds being set up to lend directly to SMEs, property developers, and for mortgages. It seems that the market to lend money is not a monopoly for banks.

There are a number of players in the real estate bridging finance market that are pioneering new funding and alternative finance models. West One Loans, for example, has a unique private funding model that they have been able to implement very successfully.

Furthermore, our own Montello Income Fund is a fund that has been very well received in the investment community as a way for investors to gain exposure to the market opportunity presented in the current environment.

Investors are now increasingly investing their money directly into a loan, or fund making such loans. This gives them a much more direct and informed assessment of the risk profile of their investment, as opposed to giving money to a bank and not really knowing what the bank is doing with their cash. They can also usually achieve a significantly higher return on their cash than a deposit with a bank.

The other reason alternative finance is rising in popularity is because investors are simply not getting a return on cash in the bank. With interest rates at historically low levels (and likely to remain low for a long time) investors are looking at other alternatives to make a return on their cash. Some of these alternative finance models provide a superior risk adjusted return, particularly in relation to bridging finance, where the investment is secured by real estate.

In the current environment, banks are having significant difficulty coming to terms with the new world order of things. There is a shifting regulatory and political landscape that banks are now dealing with.

We only have to look at the Council of Mortgage Lenders (CML) figures that were released this week. Mortgage lending from mainstream banks in the UK is dire. It will be a long time until the banks return to previous lending levels, and as a result other lenders will come in to fill that gap.

In addition, we are currently in the lowest interest rate environment in the history of time. Therefore, many investors are struggling to get a return on their cash. The stock markets remain relatively volatile, and many investors are still shaken by the phenomenal roller coaster experience of investing in equities during 2008 and 2009. Alternative finance, peer-to-peer lending and similar investments offer a unique alternative that can capitalise on the current market situation.

With uncertainty in the global economy prevailing, and a less than enthusiastic view towards 'banks', the burgeoning trend in alternative finance is likely to continue.