The 2nd European Alternative Finance Industry Report
Bryan Zhang, Robert Wardrop, Tania Ziegler, Alexis Lui, John Burton, Alexander James & Kieran Garvey.
This report presents the research findings from the 2nd Annual European Alternative Finance Industry Survey, which aims to systematically track and comprehensively benchmark the growth and development of the pan-European crowdfunding and peer-to-peer lending markets in 2015. This research was carried out by the Cambridge Centre for Alternative Finance at the University of Cambridge Judge Business School, with the support of 17 major European industry associations and research partners, in partnership with KPMG and supported by CME Group Foundation.
Building on the success of the preceding benchmarking report, Moving Mainstream, this study gathered data from 367 crowdfunding, peer-to-peer lending and other online alternative finance intermediaries from across 32 countries in geographic Europe, out of which 273 platforms are currently operating outside of the United Kingdom. Utilising this unprecedented industry dataset, which captures an estimated 90% of the visible market, we hope to shed some light on the state of online alternative finance in Europe.
This study shows that the total European online alternative finance market, which includes crowdfunding, peer-to-peer lending and other activities, grew by 92% to reach €5,431m in 2015. Excluding the United Kingdom, the largest market by a considerable margin, the European online alternative finance industry grew 72% from €594m in 2014 to €1,019m in 2015. Although the absolute year-on-year growth rate slowed by 10% (the growth rate between 2013-14 was 82%), the industry is still sustaining momentum with substantive expansion in transaction volumes recorded across almost all online alternative finance models.
Looking beyond the total market size, highlights from the report include the following:
- France, Germany and the Netherlands are the top three countries for online alternative finance by market volume in Europe, excluding the United Kingdom. The French market reached €319m in 2015, followed by Germany (€249m), the Netherlands (€111m), Finland (€64m), Spain (€50m), Belgium (€37m) and Italy (€32m). The Nordic countries collectively pulled in €104m, while Eastern & Central European countries registered a total of €89m. The UK still dominated the European online alternative finance landscape, increasing its overall market share of Europe to 81% in 2015 with €4,412m.
- Estonia ranked first for alternative finance volume per capita with €24 followed by Finland (€12) and Monaco (€10) outside of the United Kingdom. Estonia was also ranked first by market volume per capita in 2014 (€17). This year, Latvia (€7.68) and the Netherlands (€6.53) ranked 4th and 5th respectively, replacing Sweden and France in the top five.
- Peer-to-peer consumer lending is the largest market segment of alternative finance, with €366m recorded for 2015 in Europe. Peer-to-peer business lending is the second largest segment with €212m, with equity-based crowdfunding in third with €159m and reward-based crowdfunding, forth, with €139m in 2015. However, invoice trading is the fastest-growing alternative finance model in Europe registering €81m in 2015, up significantly from the low base of just €7m in 2014.
- Online alternative business funding increased considerably, with €536m raised for over 9,400 start-ups and SMEs across Europe in 2015, up 167% year-on-year from the total of €201m in 2014. Total debt-based funding for SMEs reached €349m in 2015 with 156% year-on-year growth, driven largely by the growth of peer-to-peer business lending. Equity-based crowdfunding increased by 93% year-on-year to reach €159m in 2015.
- Institutionalisation took off in mainland Europe in 2015 with 26% of peer-to-peer consumer lending and 24% of peer-to-peer business lending funded by institutions such as pension funds, mutual funds, asset management firms and banks. 8% of the investment in equity-based crowdfunding was also funded by institutional investors such as venture capital firms, angels, family offices or funds. Excluding the UK, 44% of the surveyed European platforms reported some level of institutional funding in 2015 and just under 30% of peer-to-peer consumer lending platforms reported having a majority institutional shareholder (e.g. a VC, corporate or a bank).
- There is now a high degree of automation in peer-to-peer lending with 82% of consumer loans, 78% of traded invoices (i.e. receivables) and 38% of business loans now funded by automatic selection or automatic bidding processes on European alternative finance platforms.
- The average deal size in equity-based crowdfunding is now approximately €459,000, in contrast to just under €100,000 for peer-to-peer business loans and just under €10,000 for peer-to-peer consumer loans. Real-estate crowdfunding has the second largest average deal size with approximately €370,000, – a new model recorded in 2015.
- Donation-based and reward-based crowdfunding models have the highest levels of female participation. 54% of the fundraisers in donation-based crowdfunding are women. 40% of the fundraisers and 45% of the backers in reward-based crowdfunding are also women. In contrast, only 17% of the fundraisers in equity-based crowdfunding and 12% of SME borrowers in peer-to-peer business lending are women. However, 44% of the individual borrowers and 23% of the lenders in peer-to-peer consumer lending were women.
- Across Europe, perceptions of existing national regulations in alternative finance are divided. 38% of surveyed platforms felt their national regulations for crowdfunding and peer-to-peer lending were adequate and appropriate. Nevertheless, 28% of surveyed platforms perceived their national regulations to be excessive and too strict, with a further 10% stating that current regulations were too relaxed. When it came to proposed national regulations, however, 47% of the surveyed platforms perceived them as adequate and appropriate.
- The biggest risks perceived by the alternative finance industry are increasing loan defaults or business failure rates, fraudulent activities or the collapse of platforms due to malpractice. Our survey asked platforms what they saw as the most detrimental risks to the future growth of the alternative finance industry. 42% of the surveyed platforms indicated that a ‘notable increase in default rates (for loans) or business failure (for equity deals)’ are either ‘very high risk’ or ‘high risk’. 46% of the surveyed platforms perceive ‘platform collapse due to malpractice’ as being ‘very high risk’ or ‘high risk’, whilst 40% of the platforms viewed ‘fraud involving one or more high-profile campaigns, deals or loans’ as either being ‘very high risk’ or ‘high risk’.
The Cambridge Centre for Alternative Finance has recently published a number of reports covering markets in the Americas, the Asia-Pacific region and the UK. It is evident from our regional studies that the global online alternative finance market is going through testing times. As the market develops and matures, competition will no doubt intensify, both within the industry and from financial incumbents. Continuing uncertainties within macro-economic conditions and the challenges to acquiring high-quality borrowers and deal-flow are likely to increase over time, while the cost of capital is likely to rise even amid increasing institutionalisation. Alternative finance platforms’ credit scoring capabilities, robustness of underwriting and due diligence processes are likely to come under increased scrutiny from investors and regulators alike. The development and adjustment of regulatory regimes are likely to continue in many jurisdictions across Europe, adding uncertainty in the short-term, but may also offer potential, longer-term stability.
Nevertheless, compared with the current market sizes of the UK, US and China, the European alternative finance market should have ample room for continued growth and expansion over the coming years. Assuming a conservative year-on-year growth rate of 50%, we can still expect the overall European online alternative finance market (including the UK) to grow to around €8bn in 2016. The challenge for the industry then, is perhaps less that of chasing short-term growth, but rather of pursuing long-term resilience and sustainability. If the industry can maintain an emphasis on creative innovation, keep promoting financial inclusion and transparency, increase overall capabilities in credit risk scoring and control, continue providing great customer service and following best practices, then it should be able to sustain momentum through achieving sustainability.