Alternative Finance: A sector in transition

18 February 2016

The 2015 University of Cambridge/ Nesta Alternative Finance report confirms strong growth across the sector. Going forward, we think growth will continue but expect the number of platforms to fall (100 is unsustainable). We also note fraud and failure are cited by the industry as being chief concerns which echoes our views - in particular we are actively working with platforms to review and test resilience to cyber threats.

Growth still strong

The UK market originated £3.2bn in 2015, up 83% YOY.

Whilst headline growth rates are slowing YOY growth was 160% in 2014) that's an inevitable consequence of the market getting bigger.

Perhaps a more meaningful observation is that absolute orgination accelerated throughout 2015 and is now running at c. £1bn per quarter.

AltFinance

Source: University of Cambridge/ Nesta: 2005 UK Alternative Finance Industry Report.

Real Estate an area of focus.

£700m of the £3.2bn originated was for real estate. This echoes our own experience - we note an increasing number of conventional (excuse the pun) bricks and mortar property companies take an interest in how they can marry their property origination capacity with the financing engines of P2P platforms.

Few barriers to entry: c.100 platforms now in the UK  

The average time from incorporation to trading for a P2P business is now just over a year. We estimate it costs £250,000 to build a platform. Perhaps it's no wonder then, that Nesta and the University of Cambridge were able to draw on some 94 platforms in the UK when compiling this report.

Our view is that is far too many.

100 platforms in our view is unsustainable. We expect UK platform numbers to fall markedly over the coming years. Those that have not written any business will disappear quietly. However the industry needs to stop and consider how it will administer the assets and liabilities originated by P2P platforms that then cease trading, and we have held discussions with the FCA on this topic.

The strong get stronger: The Big Four dominate.  

Not captured by the report is the fact that this is demonstrably an industry where network effects are at the fore. We estimate the big four (Funding Circle; Ratesetter; Zopa and Market Invoice) originated some two thirds of the entire UK AltFi debt market last year.

Fraud and Failure remain a concern.  

When polled on what might constrain sector growth, 56% of platforms cited a high profile collapse due to malpractice as a concern. 51% cited a cyber breach as a high/ very high risk. We would echo this sentiment  - we have now performed ethical hacking for 20 peer to peer platforms. Ultimately, AltFi offers a combination of high growth, confidential data and money that appeals to all the wrong people for some very obvious reasons.

We expect the AltFi sector to continue to grow strongly. However, fraud and failure exist in every industry and we shouldn't expect this sector to be any different in that regard. 

Contact me: Tel: +447803858721

Email: [email protected] 

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