In 2015 the UK online alternative finance sector grew 84%, facilitating £3.2 billion in investments, loans and donations, according to a joint report published today by the Cambridge Centre for Alternative Finance at the University of Cambridge and UK innovation foundation Nesta, in partnership with KPMG and with the support of CME Group Foundation.
This is a significant increase in volume, but growth of the online alternative finance market is slowing down, with the annual growth in 2014/2015 being nearly half the 161% growth from 2013/14. “Although the absolute year-on-year growth rate is slowing down,” the report said, “the alternative finance industry still recorded substantive expansion across almost all models.”
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 P2P (peer-to-peer) loans are now funded by institutional investors, including traditional banks and government through organisations such as the British Business Bank.
Pushing Boundaries - 2015 UK Alternative Finance is the latest in an annual series of reports from the University of Cambridge Judge Business and Nesta, which track the size and development of online alternative finance, such as P2P lending and crowdfunding, in the UK.
Increased share of the market for business finance: in 2015 it is estimated that online alternative finance platforms provided the equivalent of over 3% of all lending to SMEs (small and medium-sized enterprises) in the UK. For small businesses - those with a turnover of less than £1 million a year - P2P platforms provided an amount lending equivalent of 13% of all new bank loans.
Institutionalisation is taking off: 2015 saw increased involvement from institutional investors in the online alternative finance market. The report shows that 32% of loans in P2P consumer lending and 26% of P2P business lending were funded by institutional investors.
Donation-based crowdfunding is the fastest growing model: although starting from a relatively small base (£2 million), donation-based crowdfunding is the fastest growing model in the 2015 study, up by 500% to £12 million.
Real estate is 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 equity market is growing fast: the second fastest growing area of the alternative finance market is equity-based crowdfunding, up by 295% - from £84 million raised in 2014, to £332m in 2015. Excluding real estate crowdfunding, in 2014/2015 the equity-based crowdfunding sector contributed to £245 million worth of venture financing in 2015 – equivalent to over 15% of total UK seed and venture equity investment.
The industry is generally satisfied with current regulation: when asked what they thought of existing regulation, more than 90% of P2P lending and equity-based crowdfunding platforms stated that they thought the current level was appropriate.
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% of P2P lending and equity-based crowdfunding platforms cited the potential collapse of one or more of the well-known industry player due to fraud or malpractice.
Warren Mead, Global co-lead of Fintech at KPMG, said:“After years of pushing boundaries, 2016 will be the year where ‘alternative’ financial options finally join the ranks of the mainstream. From the recognition of regulators, to industry pioneers being bestowed with New Year’s Honours: it’s clear the market has come of age as an integral part of the lending landscape."
“But while this evolution gives the industry the platform to grow, it also brings its own set of challenges. Being part of the financial establishment doesn’t sit well with its original social purpose. Incumbents are also playing catch up with their own digital investment, and are closing in on the disrupters’ lead. Meanwhile, platform failures within these growing networks are inevitable. So the question is, will the hard won enthusiasm for these platforms start to wane?”
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. The Cambridge Centre for Alternative Finance is proud to shed light on this fascinating and dynamic industry, to help inform policymakers, regulators and the general public about how these areas of finance are increasingly becoming part of our everyday economic life.”
Stian Westlake, Nesta’s Executive Director of Policy & Research said: “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. But, as Nesta’s continuing research into the industry has found, the ability of platforms to harness the power of the crowd to connect savers, borrowers and businesses has been powerful. We look forward to seeing how the sector advances and changes again in the year ahead.”
Jim Oliff, Chairman of CME Group Foundation, said : “Today’s research offers a detailed snapshot of how the emerging alternative finance sector in the U.K is driving growth and creating opportunities for business and individuals alike. The Foundation has a long track record of supporting cutting edge research initiatives relevant to the financial industry which uncover and promote future trends to help move the sector forward.”
The report was led by Bryan Zhang, a Director of Cambridge Centre for Alternative Finance, and Peter Baeck, Principal Researcher at Nesta. It has been supported in part by funding from audit, tax and advisory service KPMG and CME Group Foundation, the foundation affiliated with CME Group, the world’s leading and most diverse derivatives marketplace.
Notes to editors
Pushing Boundaries is a joint research project between Cambridge Centre for Alternative Finance and Nesta, in partnership with KPMG and with the support of CME Group Foundation. The report is one of five reports to be authored by the Cambridge Centre for Alternative Finance and funded by KPMG and CME Group Foundation. Nesta has received no funding from either organisation for its contribution to the report.
For press enquiries please contact:
University of Cambridge Judge Business School: Charles
T: +44 7912 162279 / +44 (0)1223 339608
Nesta: Matthew Hull
T: +44 7969 574626 / +44 (0)20 7438 2543
KPMG: Erfan Hussain
T: +44 (0)7768 043 447
CME Group: Felicity Press
T: +44 7525 639434 / +44 (0)20 3379 3831
About Cambridge Centre for Alternative Finance
The Cambridge Centre for Alternative Finance is an international interdisciplinary academic research institute dedicated to the study of alternative finance, which includes financial channels and instruments that emerge outside of the traditional financial system. Examples of alternative channels are online “marketplaces” such as equity- and reward-based crowd funding, peer-to-peer consumer/business lending, and third-party payment platforms.
Nesta is the UK's innovation foundation. We help people and organisations bring great ideas to life. We do this by providing investments and grants and mobilising research, networks and skills. We are an independent charity and our work is enabled by an endowment from the National Lottery. Nesta's work on innovation in finance focuses on understanding and measuring new innovative ways to raise funding for individuals, projects and businesses. Nesta is a registered charity in England and Wales 1144091 and Scotland SC042833.
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a
revenue of £1.96 billion in the year ended September 2015. KPMG is a global
network of professional firms providing Audit, Tax, and Advisory services. It
operates in 155 countries and has 174,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
About CME Group Foundation
CME Group Foundation works to advance the economy by supporting education from cradle to career. The Foundation partners with universities, school districts, charter networks and nonprofit organizations that work to ensure at risk young children are prepared for kindergarten; provide effective K-12 education that prepares disadvantaged students for success in college and career; prepare university students for careers in financial services and risk management; and conduct academic research in areas that advance derivatives knowledge and best practices. The Foundation was created in 2008 and endowed with a gift of $16 million from the Chicago Mercantile Exchange Trust, which was established by CME in 1969 under the direction of its then chairman, Leo Melamed, to provide financial protection to customers in the event a CME member firm became insolvent or unable to meet its obligations to its customers.