The country’s increasingly crowded market for alternative finance is absolutely booming. It seems every entrepreneur and their mum is raising money through crowdfunding and few days go by without a new peer-to-peer lending platform springing up.
The innovation charity Nesta published its latest annual report on the sector today and the figures certainly paint a picture of a sector that’s on the up. The report, produced in partnership with Cambridge’s Judge Business School, found that the alternative finance market grew by 84% last year to £3.2bn – pretty astonishing considering that figure was just £666m in 2013. More than one million people lent, invested or donated money through alternative finance platforms to more than 250,000 recipients.
The largest single form of alternative finance was peer-to-peer lending, which leant a total of £2.4bn worth of loans to businesses and consumers. Next was Equity crowdfunding, where investors buy small shares in private companies. That soared by a whopping 295% to £332m. ‘2015 has seen another year of remarkable growth for AlternativeFinance in the UK,’ said Nesta’s executive director of policy and research Stian Westlake. ‘Little more than a collection of plucky startups just six years ago, the sector now does £3.2 billion of business a year.’
Not everything is hunky dory though. After it skyrocketed by 161% in 2014, the sector's growth almost halved last year. And both peer-to-peer and crowdfunding have seen their share of controversy. Last week former City regulator Lord Turner warned that the ‘losses which will emerge from peer-to-peer lending over the next five to 10 years will make the worst bankers look like lending geniuses.’ Automating the underwriting process could only go so far he suggested in an interview with the BBC.
Meanwhile the high-profile collapse of crowdfunded claims management business Rebus raised some eyebrows too. The firm had raised £800,000 last year, making it one of the biggest crowdfunding failures to date. Losses are an inevitable part of investing in private start-ups but the noise the collapse has generated is unhelpful for the industry and has emboldened those who want to see tighter regulation.
Some are also disappointed that alternative finance has lost some of the ethical credentials it was supposedly imbued with in the early days. Schemes that began for some as a way to cut out the ‘bloody bankers’ are fast turning into a mainstream form of finance. According to Nesta’s research, 25% of all ‘P2P’ loans last year were actually backed by banks.
#These challenges should not be glossed over and the innovators behind these platforms still have a lot of work to do in persuading people that they are the future. While it may be going through its awkward teenage years it seems likely that ‘alternative finance’ may not be deserving of that name for all that much longer.