5th UK Alternative Finance Industry Report

Bryan Zhang, Tania Ziegler, Leyla Mammadova, Daniel Johanson, Mia Gray and Nikos Yerolemou.

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The Cambridge Centre for Alternative Finance publishes the 5th UK Alternative Finance Industry Report with the support of CME Group Foundation. The UK online alternative finance market reached £6.12 billion in 2017.

Highlights from the report

  • Sustained overall growth but different trajectories by model
    The UK online alternative finance industry market volume grew by 35 per cent year-on-year to reach £6.19 billion in 2017. P2P business lending retained the top spot as the largest market segment in online alternative finance with £2 billion in transaction volume in 2017 and 66 per cent year-on-year growth rate. P2P consumer lending recorded just over £1.4 billion in 2017, whilst P2P property lending achieved £1.2 billion and invoice trading registered £787 million. Equity-based crowdfunding grew by 22 per cent year-on-year to reach £333 million, but debt-based securities stagnated to £79 million, a drop of £5 million compared to 2016. Whilst real estate crowdfunding increased by more than 200 per cent to grow to £211 million, donation-based crowdfunding only grew by 2.5 per cent and reward-based crowdfunding decreased by £4 million year-on-year to register £44 million for 2017.
  • Increasingly important source of SME funding
    Online alternative finance channels have become an increasingly important conduit for SME financing in the UK. In 2017, £4.2 billion of business funding, which is 68 per cent of the total market volume for alternative finance, was raised via online platforms and channelled to start-ups and SMEs across the country. Over 90 per cent of the online alternative finance for business was in debt, with the remainder in equity and non-investment models. To put the alternative business funding data in context, in 2017, based on the UK Finance baseline data, the P2P business lending contributed an equivalent of 9.5 per cent of total new loans issued to SMEs by the UK banks. 
    Given that most of the businesses receiving online P2P lending loans are, in fact, small businesses with an annual turnover of less than £2 million, the higher-bound estimation is that P2P business lending in 2017 was equivalent to 29.2 per cent of all new loans issued to businesses of this size in the UK. On the equity side, crowdfunding volumes remained steady in absolute terms and contributed 12.9 per cent of all UK total seed and venture-stage equity investment. The sector’s share of overall UK equity funding fell, however, as a number of large venture capital deals completed in 2017 boosted the share of traditional VC funding. 
  • Deeper level of institutionalisation across key models
    r2017 saw further increases in the institutionalisation of funding across alternative finance models. On the debt side, 40 per cent of the funding for P2P business lending was provided by institutional lenders including mutual funds, pension funds, asset managers, banks, family offices and other financial institutions. This highlights the growing institutionalisation of this funding model, which is up considerably from the 28 per cent in 2016 and 26 per cent back in 2015.
    Institutional funding accounted for 39 per cent of the funding in P2P consumer lending, up from 32 per cent in 2016. It also accounted for 34 per cent of funding in P2P property lending, up nine per cent from 2016. On the equity side, the pace of institutionalisation accelerated significantly in equity-based crowdfunding over the last three years, from just eight per cent in 2015 to 25 per cent in 2016 and 49 per cent in 2017. This upward trend is driven by the growing ‘co-investing’ activity on equity-based crowdfunding platforms, where venture capital firms, professional investors and retail funders co-invest in crowdfunding rounds. 
  • Continued adjustments in business models and product offerings
    UK alternative finance platforms have continued to refine their business models in 2017. 12 per cent of surveyed platforms reported that they have significantly altered their business model in the last 12 months, whilst 40 per cent stated that they slighted altered their business model. These numbers are comparable with the figures reported for 2016. However, more platforms altered their products in 2017, with 43 per cent of the surveyed platforms significantly altering their products and a further 33 per cent slightly altering their products. This continued trend in making business model adjustments and innovating product offerings points to an alternative finance market that remains highly fluid and dynamic.
  • Research and development play a significant role
    In the survey, the CCAF asked UK online alternative finance platforms to provide an indicative breakdown of their operating costs and budget allocation for the first time. Besides unspecified expenditures, platforms on average spend approximately 15 per cent of their entire budget on IT, 14 per cent on research and development, 14 per cent on sales and marketing, and 8 per cent on reporting and compliance. For loan-based crowdfunding, platforms spent heavily on research and development in streamlining and automation processes, customer verification, artificial intelligence and payment. For investment crowdfunding business models, expenditure of research and development focused on social media and promotional tools, payment processing, process streamlining and community management. 
  • Female market participation
    For P2P business and consumer lending, as well as equity-based crowdfunding, the percentage of female funders participating in the online marketplace has decreased over the last three years. However, female participation did increase in some business models. For instance, between 2016 and 2017 female participation as funders in both real estate crowdfunding and P2P property lending increased to 39 per cent and 28 per cent respectively. On the fundraiser side, there was a slight drop in the percentage of female fundraisers in P2P business lending, equity-based crowdfunding, donation-based crowdfunding and P2P property lending. In contrast, there have been an increase in the percentage of female fundraisers for both reward-based and real estate crowdfunding at 56 per cent and 43 per cent respectively.
  • International expansion strategy
    For the first time, the CCAF also asked platforms about their international expansion strategies. Over half of the surveyed P2P lending platforms have no current plans for international expansion. However, for those platforms that wished to expand – 75 per cent of reward-based crowdfunding platforms, half of the Invoice Trading platforms and 31 per cent of equity-based crowdfunding platforms – respondents indicated that they were operating a single global brand and global website. In contrast, the other half of the invoice trading platforms, 38 per cent of equity-based crowdfunding platforms and 29 per cent of real estate crowdfunding platforms prefer to have a global brand but with localised domains in additional countries.
  • Slight changes in industry perception towards regulation but heightened concerns in risks
    The survey was largely conducted before the FCA released its latest regulatory review findings – hence, it reflects perceptions during the first half of 2018. During that time, the UK online alternative finance industry’s perception towards regulations remained largely positive, with 83 per cent of both loan-based and investment-based platforms regarding the existing UK regulations as being adequate and appropriate. This contrasts with 17 per cent of the surveyed investment-based platforms that responded which felt that regulations were excessive and strict, up 10 per cent from 2016.
    Across the whole UK alternative finance industry, concerns over risks have broadly increased. 42 per cent of the surveyed platforms rated the risk of fraud as either very high or high, up from 29 per cent in 2016. 35 per cent of the platforms regarded the risk of a notable increase in default rates as either very high or high, compared to the 17 per cent recorded in 2016. On the regulatory front, the significant changes proposed by the FCA in mid-2018 will have come as a surprise to many platforms. Only 33 per cent of the surveyed platforms rated the risk of regulatory changes as either very high or high, whilst the figure was 25 per cent in 2016.  

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