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Growing UK alternative finance

8 December 2017

The article at a glance

The UK online alternative finance market grew 43 per cent in 2016 to £4.6 billion, nearly three quarters of that for startups …

The UK online alternative finance market grew 43 per cent in 2016 to £4.6 billion, nearly three quarters of that for startups and smaller businesses, says the fourth annual UK Alternative Finance Industry Report by the Cambridge Centre for Alternative Finance.

Entrenching Innovation report

The UK online alternative finance market grew 43 per cent in 2016, to £4.6 billion from £3.2 billion the previous year, as alternative finance became an increasingly important source of funding for start-ups and smaller businesses, according to the fourth annual UK Alternative Finance Industry Report by the Cambridge Centre for Alternative Finance (CCAF) issued today (8 December).

As part of this work, the CCAF surveyed more than 8,300 investors and lenders of online alternative finance, as well as 77 crowdfunding and peer-to-peer platforms in the United Kingdom. Based on these findings, the CCAF has provided input to the Financial Conduct Authority (FCA), which is currently reviewing its regulatory regime for crowdfunding in the UK.

In the six years 2011 through 2016, there has been a total of £11 billion in UK alternative finance market volume, said the report, entitled Entrenching Innovation, which had the support of CME Group Foundation. The Cambridge Centre for Alternative Finance is based at University of Cambridge Judge Business School.

About 72 per cent of all 2016 UK alternative finance market volume, or £3.3 billion, was raised for UK startups and small- or medium-sized businesses, up 50 per cent from the previous year, as 33,000 firms used alternative finance channels in 2016 compared with 20,000 in 2015. In contrast to this rapid growth, the UK retail investor and lender market has been relatively stable.

Bryan Zhang
Bryan Zhang

“Online alternative finance has become an ever more established component of the UK financial landscape,” Bryan Zhang, Executive Director of the Cambridge Centre for Alternative Finance, says in a foreword to the report. “With equity-based crowdfunding now accounting for 17 per cent of all seed and venture stage equity investment in the UK, and peer-to-peer business lending providing an equivalent of 15 per cent of all new loans lent to small businesses by UK banks, alternative finance has entered the mainstream and is likely here to stay.”

“Progress in financial innovation is, nevertheless, not linear within such a dynamic landscape,” he said. “As market consolidation accelerates there is greater pressure on alternative finance platforms to distinguish themselves through better services and more innovative products, whilst simultaneously responding to emerging regulatory and supervisory demands.”

The report said peer-to-peer business lending was the largest market segment in 2016, growing by 36 per cent last year to reach £1.23 billion, followed by peer-to-peer consumer lending at £1.17 billion (up 47 per cent) and peer-to-peer property lending at £1.15 billion (up 88 per cent), as the market diversifies.

These market categories were followed by invoice trading at £452 million, equity-based crowdfunding at £272 million, real estate crowdfunding at £71 million, and reward-based crowdfunding at £48 million.

The five largest alternative finance platforms accounted for 64 per cent of total market volume in 2016. There were few new entrants into the market, and more than 35 UK online alternative finance platforms became inactive in 2016 through merger or closing down.

The trend toward greater involvement in alternative finance by established financial institutions continued, with funding from institutional investors such as pension funds, asset managers and banks accounting for 34 per cent of peer-to-peer property lending, 28 per cent of peer-to-peer business lending, and 32 per cent of peer-to-peer consumer lending.

The Centre’s survey found that 88 per cent of loan-based crowdfunding platforms deemed existing FCA loan-based crowdfunding regulations to be adequate and appropriate, with seven per cent saying existing rules are too relaxed and five per cent finding them too stringent. For investment-based crowdfunding (encompassing equity-based crowdfunding and debt-based securities), 93 per cent of surveyed investment-based crowdfunding platforms said existing FCA regulation is adequate and appropriate, with seven per cent finding them too relaxed and none finding the rules too stringent.

When asked by the CCAF, 84 per cent of surveyed platforms said that they considered the FCA’s ongoing crowdfunding regulatory review process to be adequate and appropriate.

Kim Taylor, President, Clearing and Post-Trade Services of CME Group, said: “Crowdfunding and peer-to-peer lending are just a few examples where new participants are accessing technological innovations to create new marketplaces. The size and growth of the online alternative finance market, new entrants and partnerships, and the impacts on regulation and tax incentives, have the potential to transform the global economy. But this transformation can be best achieved only with thoughtful analysis and a thorough understanding of the alternative finance landscape. CME Group, as the world’s leading and most diverse derivatives marketplace, is proud to support the publication of this UK report through its Foundation.”