The Americas Alternative Finance Benchmarking Report
Robert Wardrop, Robert Rosenberg, Bryan Zhang, Tania Ziegler, Rob Squire, John Burton, Eduardo Arenas Hernadez & Kieran Garvey
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Over the last few years, an array of crowdfunding, marketplace/peer-to-peer (P2P) lending and other online alternative finance platforms have emerged that use technological innovations to change the way people, businesses and institutions access and invest money. Increasing numbers of consumers - raised on ATMs, credit and debit cards and online money transfers - are embracing the speed, convenience and transparency offered by these platforms. Furthermore, businesses, limited by nearly a decade of tight credit and declining loan approvals from banks and traditional lenders, are turning to online alternative sources of commercial loans.
The impact of alternative finance is rippling through the financial services industry and the economies of the Americas. While capital access via alternative finance platforms remains a small part of the overall markets for debt and equity, online alternative finance addresses demands unmet by traditional sources. Banks and other established players are feeling competitive pressures, recognising new opportunities and responding with technology investments and strategic partnerships. Over the last two years, an influx of institutional funding has prompted the growth of marketplace-originated securitisation of alternative finance assets in the United States (US), although the pace of marketplace/P2P lending securitisations is (at the moment) decelerating and spreads are widening.
At the same time, leading alternative finance platforms are trying to attract more retail investors and diversify their funding base, for instance, by making it easier for online financial advisors to offer their loans. Changing SEC regulations in 2016 will also open up market participation to non-accredited investors and draw additional retail investment online. The Americas alternative finance market is going through a state of consolidation and transformation, dealing with new challenges in an uncertain macroeconomic environment, embracing institutionalisation and reconsidering its P2P and crowdsourcing roots. Online alternative finance continues to break new ground with market growth, product innovation, technological advancement, corporate partnerships, international expansion and regulatory recognition.
Breaking New Ground: The Americas Alternative Finance Benchmarking Report is the first comprehensive study of this fast-evolving online alternative finance market in the Americas. Focusing on marketplace/P2P lending and crowdfunding activities, the report captures an estimated 80 per cent of the visible online alternative finance market (by transaction volumes) in the Americas. This report aims to provide independent, robust, reliable and up-to-date aggregate-level alternative finance market data for the reference of academics, industry, business communities, policymakers, regulators and the general public.
Spanning eight months, this large-scale study was conducted by the Cambridge Centre for Alternative Finance, the University of Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation at the University of Chicago Booth School of Business (Chicago Booth), in partnership with KPMG and with the support of the CME Group Foundation, the Inter-American Development Bank (IDB), the Business Development Bank of Canada (BDC) and CPAmerica. Working with multiple leading industry research partners, the research team surveyed 257 online alternative finance platforms operating in the Americas, out of which, 178 were from the US and Canada.
Highlights of the report
Market size & growth
In 2015, the Americas online alternative finance industry grew to $36.49 billion, a 212 per cent annual increase from the $11.68 billion in 2014. Between 2013 and 2015, alternative finance platforms across the Americas have delivered over $50 billion in funding to individuals and businesses, with the US market contributing 99 per cent of the total funding volume. With $36.17 billion in total transaction volume in 2015, the US is the world's second largest online alternative finance market behind Mainland China. The US has the highest total online alternative finance market volume per capita in the world at $113.43 in 2015 (China's per capita volume is $74.54), far higher than the $5.82 achieved in Canada - the second highest in the Americas region. The Latin American and the Caribbean regional market is small in comparison, but it achieved a 130 per cent average growth rate over the last three years to reach $110.46 million in 2015, with Chile accounting for nearly half of that total.
Prevailing online alternative finance models in 2015
Marketplace/P2P consumer lending is the largest market segment in the Americas, with $25.74 billion accrued in 2015. Balance sheet consumer lending is in second place with $3.09 billion, followed by marketplace/P2P business lending at $2.62 billion in 2015. Reward-based crowdfunding reached $658.37 million in 2015, narrowly beating equity-based crowdfunding which registered $598.05 million in the Americas.
Real estate models are scaling rapidly
Already developed in the US, real estate alternative financing models (including real estate crowdfunding and marketplace/P2P lending) have generated just over $1.26 billion in the US for 2015. Real estate crowdfunding is also a fast-growing segment of the Latin American and the Caribbean market, generating $14.86 million of transaction volume in 2015 and a total of $19.37 million between 2013 and 2015. Across the Americas, the marketplace/P2P real estate lending model grew at a rate of 471 per cent over the three-year period.
Businesses are increasingly tapping alternative finance
In the US, between 2013 and 2015, online alternative finance platforms have facilitated over $10.81 billion worth of growth, expansion, working and venture capital to 268,524 small and medium enterprises (SMEs). In 2015 alone, online alternative business funding reached $6.88 billion in the US. In Latin America and the Caribbean, thanks to prevailing models such as marketplace/P2P business lending, over $120 million of business funding was facilitated by online alternative finance platforms over the last three years. In 2015, online alternative business lending reached $5.61 billion, which is equivalent to 1.26 per cent of all business lending from traditional sources in the US.
Entrenched institutionalisation in the US market
Between 2013 and 2015, over 72 per cent of marketplace/P2P business loans and 53 per cent of marketplace/P2P consumer loans were funded by institutional investors via online alternative finance platforms in the US. Furthermore, almost 83 per cent of the invoice trading model and 74 per cent of marketplace/P2P real estate loans were also funded by institutional investors, typically including mutual funds, pension funds, hedge funds, family offices, asset management firms and traditional banks. This level of institutionalisation stands in contrast to the UK market, where funding is primarily provided by retail investors. The dominance of retail investors relative to institutional investors on Latin American and Caribbean platforms, however, is very similar to the UK market.
Market participation by women is growing
Women seem to be dominating both the funding and fundraising sides of donation-based and reward-based crowdfunding models, representing approximately 60 per cent of these marketplaces on average. Around 42 per cent of the consumer borrowers and 24 per cent of the SME borrowers on marketplace/ P2P lending platforms are women. In contrast, our data suggests that 20 per cent of the lenders on marketplace/P2P consumer lending platforms and 9 per cent of lenders on marketplace/P2P business lending platforms are women. Women appear to be less engaged in equity-based crowdfunding, given only 12 per cent of the fundraisers and 13 per cent of investors in this segment are women.
No consensus on regulation
According to the survey, 51 per cent of US lending platforms and 43 per cent of equity platforms consider current regulations "adequate and appropriate". However, 34 per cent of equity platforms and 15 per cent of lending platforms see current regulation as too strict or excessive. 40 per cent of lending platforms and 49 per cent of equity platforms in the US, favor the new regulations proposed by the SEC, while around a third of both debt and equity platforms perceive proposed regulations negatively. In Latin America, over three quarters of surveyed platforms perceive there to be no specific regulations in their respective countries.
Looking at the market trends illustrated in this benchmarking report, we see a nascent, rapidly growing industry that is moving into the mainstream. This industry will need to continue innovating in technology, credit risk modelling, user experience and customer service in order to compete and scale. As the online alternative finance market in the Americas develops, we hope that this report - and successive reports in 2016 and beyond - will shed light on this diverse, dynamic and intriguing industry.