As 2018 draws to a close, the Alternative Finance revolution is showing no sign of losing momentum.
Witness the latest update from the P2P Finance Association. According to the trade body, new lending to businesses by its members totalled £750m in the second quarter of 2018. Net lending to SMEs came in at around £191m, exceeding by some way, the £60m figure attributed to High Street banks.
The P2PFA numbers represent only part of the picture, as the data only records activity by its own members. To assess the success of Alternative Finance in the round, you also have to factor in market lenders who are not Association members, plus the other AltFi models, including rewards and equity crowdfunding and (stepping in from left field) Initial Coin Offerings (ICOs) and Securitized Token Offerings (STOs).
And again, the story is of growth. The latest report by the Cambridge Judge Business School Centre for Alternative Finance – published in November 2018 – points to continued expansion, albeit with the differing growth trajectories in each of the main market segments. Drawing on data from 2017, the Cambridge Judge survey says £4.2bn was channelled to SMEs via market platforms, with 90% of that sum attributable to debt. Overall, businesses secured around £6bn in capital through Alternative Finance providers.
In other words, whether you look at reasonably current data provided by the P2PFA and others, or work your way through a learned and highly researched academic survey crunching more historic numbers, the story is the same. AltFi s playing a vital role in helping SMEs achieve their potential.
That’s not to say that everything in the garden has been rosy. Roll the clock back to the spring of 2018 and the collapse of a small P2P lender named Collateral provided a reminder that there have been (and doubtless will be) failures. But generally speaking, the major Alternative Finance models have proven robust.
ICOs And STOs.
The market has continued to evolve, however, and new models have emerged. Cast your mind back to the beginning of 2018 and there was huge excitement about the success of Initial Coin Offerings, or ICOs. These represented a variation on the rewards crowdfunding theme. Put simply, a business would offer digital tokens in return for cash and these tokens could be used to buy services from the issuer. For instance, an nvestor might buy tokens from a ‘cloud services’ startup. The money raised would bring the product to the market and at that point, the tokens could be used to buy access. But in addition – the crucial addition – the tokens were exchangeable as virtual currencies, allowing the original holders to sell up and cash in.
ICOs are still popular with some technology startups, but an alternative model has come into play. Securitized Tokens are linked to assets owned by the fundraising company – for instance intellectual property. This provides investors with greater security. We will probably hear more about investment funds offering Securitized Tokens through the course of 2018.
2018 was the year that Open Banking became a reality. Open Banking is based on a set of software standards that allow one financial institution to access the account details of another (say, a High Street bank) with the customer’s permission. The arrival of Open Banking means that an Alternative Finance provider can access bank account information belonging to, say, a potential borrower and offer a faster and more accurate decision on whether to grant a loan and at what interest rate. Zopa, Lending Works, Funding Circle and Ratesetter were among the first to express an interest.
Traditional and Alternative Collaboration
Indeed, one of the trends that we might see in 2019, is a closer relationship between Traditional and Alternative finance. For instance, in August of this year, Barclays took a stake in invoice trading platform, Market Invoice, with a view to rolling out the fintech company’s services to its SME clients. There is clearly scope for a broad swathe of relationships between financial services providers, particularly when their offers are complementary.
Equally, there is continuing scope for further institutional investment via equity crowdfunding and market lending platforms, with funds committing capital alongside individuals.
One thing we can be certain of is that the market will change as new models are developed, new technologies introduced and new collaborations forged.
But it is also true that specialist platforms will continue to play an important role in matching investors with businesses. There are many generalist P2P platforms, lending to businesses and consumers. But there are also specialists in certain kinds of loans, such as property. In the case of The Route – Finance, the focus is special situations lending for SME businesses.
The broad range of options available to SMEs has ensured that Alternative Finance has played an increasing role in business finance through 2018. The Route expects to see that trend continuing next year.