The alternative finance market has enjoyed explosive growth since it arrived on the scene and today a range of platforms provide among others lending, crowdfunding and donation services to business and consumers alike. In the UK, the alternative finance market is valued at £3.2 billion, up from £1.74 billion in 2014 and £666 million in 2013, yet looking ahead the market is gearing up for change. Competition is heating up, and key risks such as the collapse of one or more well-known platforms due to malpractice and cyber security breaches are looming around the corner.
In a new report by the University of Cambridge, Nesta and KPMG, the authors explore the UK’s burgeoning online alternative finance market. The study, supported by the CME Group Foundation, involved an assessment of 94 alternative finance platforms in the UK, capturing over 95% of the visible UK (online) alternative finance market.
The analysis finds that in 2015 the alternative finance industry hit an aggregate turnover of £3.2 billion. Particularly the peer-to-peer market has seen large lending volumes, with the peer-to-peer business lending market totalling £1,490 million last year and the peer-to-peer consumer lending market hitting £909 million. In terms of the wider market, the £881 million in peer-to-peer business loans (excluding real estate) amounts to of 3.9% of new loans lent to SMEs, and specifically in the segment of new bank loans to small businesses the share of alternative finance has become sizeable – representing 13.9% of loans.
Invoice trading has been on the increase too in recent years and last year saw trade of £325 million, while equity-based crowd funding hit £245 million. Reward based crowed funding came in at £42 million, while donation based crowed funding, which has gained a considerable amount of press, collected £12 million on the platforms surveyed.
The growth of the market has been explosive, find the researchers, with the market itself almost non-existent in 2011 with a value of under £100 million. Strongest growth was initially in the peer-to-peer consumer lending market, which grew 66% year-on-year since 2011, and managed a 78% average growth rate for the period 2013-2015. The peer-to-peer business lending segment saw massive growth between 2014 and 2015, growing 99% year-on-year, while over the past two years the market has realised an average growth rate of 194%.
Invoice trading has seen a 20% increase from £270 million in 2014 to £325 million in 2015, and, while growth is slowing, the 99% three-year average growth rate is still substantial. Donation based crowed funding too has seen significant growth at a 507% year-on-year growth rate, with the funding channel providing a new means for charity organisations to gain traction.
The research finds that the number of platforms facilitating alternative finance means grew rapidly from 2008 until 2013. The last two years has seen a considerable decrease in activity in terms of the incorporation of platforms. Since previous years’ studies, a number of alternative finance platforms have either ‘gone quiet’ or disappeared altogether. In addition, while 24 new platforms started trading in 2014, 2015 saw only 14 new platforms start trading. Today market growth is driven by both existing platforms increasing their total volumes, as well as new platforms that are still entering the market.
The data further highlights a gap between incorporation and actually starting to trade, which, for a peer-to-peer business lending platform is 1.16 years and for an equity-based crowdfunding platform is 1.27 years.
While the market has enjoyed explosive growth in recent years, risks to future growth exist that – given the relative immaturity of the market – are yet materialise. Perceived risks to the market include the ‘collapse of one or more well-known platforms due to malpractice’, 20% see this as a very high risk, 36% as a high risk and 28% as a medium risk. ‘Cyber security breach’ is seen as a very high risk by 18%, a high risk by 32% and a medium risk by 35%. Of less concern to the industry is the ‘potential ‘crowding out’ of retail investors as institutionalisation accelerates, followed by unexpected regulatory changes.
“From our findings, it is evident that the industry is going through a transformation,” write the authors. “Existing taxonomy and business models were challenged and expanded. New market segments such as the peer-to-peer real estate lending and equity-based real estate crowdfunding are making their marks. And a wide range of marketing, deal flow and investment partnerships were forged and arrays of innovative products are now on offer for lenders, borrowers, investors and fundraisers.”
Looking ahead, they conclude that the market is expected to continue to grow, not just in terms of size, but also in terms of complexity and diversity. Competition is forecasted to intensify, sparking consolidation in some areas of them market, while innovation is targeted to push existing boundaries beyond their assumed limits.