UK online alternative finance market grows to £3.2bn
The UK online alternative finance sector grew 84 per cent in 2015, facilitating £3.2 billion in investments, loans and donations, according to a new Cambridge report.
The report also highlights the rapid expansion of donations-based crowdfunding, the perceived risk of fraud and malpractice by the industry, and increasing institutionalisation – as around a quarter of peer-to-peer loans are now funded by institutional investors, including traditional banks and government through organisations such as the British Business Bank.
The research is published by the Cambridge Centre for Alternative Finance at the University of Cambridge and UK innovation foundation Nesta, in partnership with KPMG and supported by CME Group Foundation.
While the 2015 figures represent a significant increase in volume, growth of the online alternative finance market is slowing down, with the annual growth in 2014/2015 being nearly half the 161 per cent growth from 2013/14. Although the absolute year-on-year growth rate is slowing, the report says that the alternative finance industry still recorded substantive expansion across almost all models.
‘Pushing Boundaries – 2015 UK Alternative Finance’ is the latest in an annual series of reports from the University of Cambridge Judge Business School and Nesta, which track the size and development of online alternative finance, such as P2P lending and crowdfunding, in the UK.
Key findings of the report, a survey of 94 crowdfunding and P2P lending platforms, highlight an increased share of the market for business finance.
In 2015 it is estimated that online alternative finance platforms provided the equivalent of over three per cent of all lending to UK SMEs.
For small businesses – those with a turnover of less than £1 million a year – P2P platforms provided an amount lending equivalent of 13 per cent of all new bank loans.
Institutionalisation is also taking off: 2015 saw increased involvement from institutional investors in the online alternative finance market. The report shows that 32 per cent of loans in P2P consumer lending and 26 per cent of P2P business lending were funded by institutional investors.
Although starting from a relatively small base (£2m), donation-based crowdfunding is the fastest growing model in the 2015 study – up by 500 per cent to £12m.
Real estate was found to be the single most popular sector: in 2014/2015 the most popular sector for online alternative finance investments and loans was real estate, with the combined debt and equity-based funding for this sector reaching £700m in 2015.
The second fastest growing area of the alternative finance market is equity-based crowdfunding, up by 295 per cent from £84m raised in 2014 to £332m in 2015.
Excluding real estate crowdfunding, the equity-based crowdfunding sector contributed to £245m worth of venture financing in 2015 – equivalent to over 15 per cent of total UK seed and venture equity investment.
The biggest risk to market growth is fraud or malpractice: when asked what they saw as the biggest risk to the future growth of the market, 57 per cent of P2P lending and equity-based crowdfunding platforms cited the potential collapse of one or more of the well-known industry players due to fraud or malpractice.
Robert Wardrop, executive director of Cambridge Centre for Alternative Finance, said: “The substantive growth of alternative finance in the UK last year is not surprising, given that these new channels of finance are increasingly moving mainstream. One of the key drivers underpinning this development is the growing institutionalisation of the sector.”
Stian Westlake, Nesta’s executive director of Policy & Research, added: “2015 has seen another year of remarkable growth for alternative finance in the UK.
“Little more than a collection of plucky startups just six years ago, the sector now does £3.2 billion of business a year. As the sector grows and matures it is sure to face challenges – investors will be keen to see returns, and another financial crisis would certainly test the robustness of P2P lending.”
PHOTOGRAPH SHOWS: Robert Wardrop