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Hitting Stride

The 2nd Americas Alternative Finance Industry Report

Tania Ziegler, E.J. Reedy, Annie Le, Bryan Zhang, Randall S. Kroszner and Kieran Garvey

The Cambridge Centre for Alternative Finance at Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation at the University of Chicago jointly publish the 2017 Americas Alternative Finance Industry Report. The study shows the online alternative finance market continued to grow in the United States, Canada, Latin America and the Caribbean in 2016 to reach $35.2 billion. The report is supported by CME Group Foundation and the Inter-American Development Bank.

Highlights of the report

Market size and growth

  • The alternative finance market continued to grow across the United States (US), Canada and Latin America and the Caribbean (LAC) in 2016 to a total market volume of $35.2 billion. The 23 per cent increase from last year was driven by growth across all regions and most market segments of the Americas.
  • The US continues to be one of the world’s top markets for advanced, technology-enabled, online alternative finance channels and instruments. The 2016 US market volume of $34.5 billion marked a 22 per cent year-on-year increase from 2015.
  • Rapid organic growth led LAC alternative finance markets to grow by 209 per cent to $342.1 million in 2016. LAC, collectively as a regional market, surpassed Canada’s national market in 2016, led by high volume markets in Mexico, Chile and Brazil.
  • Canada’s alternative finance market grew to $334.5 million, a 62 per cent year-on-year increase from 2015.

Prevailing online alternative finance models

  • Looking at the US, Marketplace/ P2P Consumer Lending continued to account for the largest share of market volume with $21 billion recorded in the US in 2016 (up 17 per cent). Balance Sheet Business Lending became the second largest model in the US in 2016 with $6 billion originated, surpassing Balance Sheet Consumer Lending which had $3 billion.
  • For LAC, Marketplace/P2P Business Lending remained the largest alternative finance market segment with $188.5 million registered in 2016, an increasing of 239 per cent over 2015.
  • In Canada, Donation-based Crowd- funding remained the top alternative finance model with $105.9 million, but Balance Sheet Business Lending rose at a rate of 282 per cent to $103.3 million in 2016.

Businesses tapping alternative finance

  • An estimated 218,188 businesses raised funds across the Americas from online alternative finance channels in 2016, led by the US (143,344), but with business users increasingly common in LAC (67,499).
  • A total of $9.2 billion in alternative business funding was raised in 2016, which is distributed largely to the US ($8.8 billion) and to a lesser extent to LAC ($233.8 million), and Canada ($169.7 million).
  • The emerging RegCF-enabled platforms are a key component of Equity-based Crowdfunding in the US. However, with many not emerging until late 2016, Equity-based Crowdfunding remained at year- on-year and reached $569.5 million. Revenue-Sharing/Pro t-Sharing Crowdfunding, also enabled by recent changes, emerged with $28.5 million in total funding to businesses.
  • Over two-thirds (71 per cent) of LAC online alternative business finance came from Chile ($97.1 million) and Mexico ($69.5 million). Chile led in debt-based finance ($92.9 million) and non-investment-based business finance ($2.8 million). Mexico led in equity-based business finance ($4.9 million).

Market dynamics

  • In 2016, approximately $19 billion,
or 55 per cent of the total US alternative finance volume, was provided by institutional investors, up in real terms from 2015 from $17.3 billion but down in relative contribution from 66 per cent.
  • The number of newly incorporated platforms continued to decrease in 2016.
  • In LAC, 52 per cent of surveyed platforms reported that they have introduced "significant new product or service" in 2016. In the US, 44 per cent of surveyed platforms reported introduction of significant new products or services in 2016.

Regulation

  • In the Americas, equity-based platforms are divided between those who view the existing regulations as excessive and too strict (36 per cent) and those who regard current regulations as adequate and appropriate (36 per cent).
  • Most platforms on both the equity side (59 per cent) and debt side (36 per cent) seem to agree that the proposed national regulations of their respective jurisdictions are adequate and appropriate.
  • State-level regulations in the US were perceived differently by debt-based and equity-based platforms. Fifty-one percent of debt-based platforms and 55 per cent of equity-based platforms found existing state regulations to be adequate. However, accounts of excessive regulation rise from 18 per cent in debt-based platforms to 41 per cent in equity platforms at the state level.

Risks

  • Self-reported risk perceptions of the alternative finance industry are surprisingly similar across markets in the Americas, with the largest reported risk being cyber-security breach. Seventy-six percent of platform operators believe there is medium to very high risk of cyber-security breach.
  • The "collapse of one or more well-known platforms due to mal- practice" ranked second highest in perceived risks to platforms, likely reflecting some of the repercussions of high-pro le incidents within the industry in the last 12 months. Sixty-nine percent of platforms viewed this as a medium to very high risk.
  • "Fraud" and "notable increase in default or business failure" were both regarded by 64 per cent of surveyed plat- forms to be medium to very-high risk.
  • Looking at the market trends illustrated in this industry report, we see a fledgling industry that is growing up fast, and experiencing both pleasures and pains associated with adultescence. We hope this report will provide value to the industry and market data to inform evidence-based policymaking and regulations.

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