Alternative financial markets in Europe came in at €2.9 billion in 2014, with a 144% growth since 2013, a recently released report between EY and the University of Cambridge reveals. With the UK providing the overlarge segment of the market. Especially peer-to-peer consumer and business loans are trading in large volume – with crowdfunding projects also continuing to grow rapidly in the period.
Since the financial crisis and the credit crunch, a rich landscape of alternative sources of credit and finance, for a variety of needs, have sprung up in the UK, continental Europe and the US. These financial instruments give SMEs and individuals an alternative to the financial markets while providing the ability for SMEs to expand and further develop.
That the sector exists, formed mainly through online platforms, is no shadowy secret. The size and scope of the alternative financial sector though is booming, reveals a joint report by the University of Cambridge in partnership* with consulting firm EY – titled ‘Moving Mainstream: The European Alternative Finance Benchmarking Report’.
The aim of the report is to map out the landscape so that key educational, economic and government institutions can gain some grasp on the size and scope of the sector. To provide a map, the report collected industry data directly from 255 platforms in Europe through a web-based questionnaire, accordingly capturing an estimated 85-90% of the European online alternative finance market.
In the period 2012 to 2014 the market volume grew six fold, at 146% year-on-year, from €487 million to €2.9 billion and is expected to grow even further in the coming year – projected to reach €7 billion. The European market, excluding the UK, increased from €137 million in 2012 to €338 million in 2013 and reached €620m in 2014, with an average growth rate of 115% over the three years. This massive growth has opened up access for a fivefold increase in ventures funded, from 75,000 - 350,000 over the period. With the UK being by far and away the forerunner in the market, increased its share of the overall European market from 72% in 2013 to 79% in 2014.
Instrument diversity (excluding the UK)
The market is made up a diverse range of services and products – with most offered through online platforms. These offerings mark meeting the different kinds of needs. The peer-to-peer lending market is the largest segment, made up of debt–based transactions between individuals; most are unsecured personal loans, makes up the largest volume with €274 million in 2014, growing at an annual rate of 113% since 2012. The second largest kind of service is the reward-based crowdfunding, where backers have an expectation that recipients will provide a tangible (but non–financial) reward or product in exchange for their contribution (like Kickstarter, or Gofundme) – with a total volume in 2014 of €120 million and growing at an annual rate of 127% since 2012. Peer-to-peer business lending has grown massively, at an annual rate of 272% since 2012 and has a volume value of €93 million.
The UK story
The UK is by far the biggest alternative finance and credit market. Making up 79% of pan-Europe’s offering. Especially the peer-to-peer business segment has large volume – growing from €81 million in 2012 to €998 million in 2014 a spectacular 253% growth rate. The peer-to-peer consumer lending category, now surpassed by P2P business, has a volume of €752 million and has grown at a rate of 113%. Invoice trading, where firms sell their invoices or receivables to a pool of individual or institutional investors, has grown at 174% from 47 million in 2012 to 354 million in 2014. Equity based crowdfunding, involving sale of registered security by mostly early–stage firms to investors, has grown at a spectacular 420%, from 5 million in 2012 to 81 million in 2014.
Institutional and regulatory future
The research shows that the sector has quickly grown from small grassroots in 2010 to what it is today, with further growth expected. According to the researchers, 2015 may see large and sophisticated institutional investors become interested in the segment, with capital flows coming in to look for profits in the peer-to-peer consumer segment, among others. Analytics providers may too come in to play, with a detailed analysis of the market structure, highlighting potentially profitable investment opportunities.
While the alternative market has the potential to drive economic growth among SMEs that gain access to capital to grow, the partners note that a balance needs to be struck between freedom to invest, and protecting investors. Regulatory influence therefore has a part to play, in what is shown to be a rapidly expanding alternative to traditional financial products. The alternative providers and brokers, the predominantly online platforms, understand the requirement for transparency and trust and have (or will further) developed their own tools to provide balance.
* And 14 leading national/regional industry associations.