The UK online alternative finance market grew by 43% in 2016, according to new research from the University of Cambridge.
The value of the market last year reached £4.6bn, from £3.2bn the previous year, as alternative finance became an increasingly important source of funding for start-ups and smaller businesses.
Nearly three quarters of the total was for startups and smaller firms, up 50% from the previous year, says the fourth annual UK Alternative Finance Industry Report. The report, Entrenching Innovation, is produced by the Cambridge Centre for Alternative Finance (CCAF), based at the university’s Judge Business School.
“Online alternative finance has become an ever more established component of the UK financial landscape,” says Bryan Zhang, executive director of the CCAF, in a foreword to the report. “With equity-based crowdfunding now accounting for 17% of all seed and venture stage equity investment in the UK, and peer-to-peer business lending providing an equivalent of 15% of all new loans lent to small businesses by UK banks, alternative finance has entered the mainstream and is likely here to stay.”
As part of its research, the CCAF surveyed more than 8,300 investors and lenders of online alternative finance, as well as 77 crowdfunding and peer-to-peer platforms in the UK. Based on its findings, the CCAF has provided input to the Financial Conduct Authority (FCA), which is currently reviewing its regulatory regime for crowdfunding in the UK.
Peer-to-peer business lending was the largest market segment in 2016, growing by 36% to reach £1.23bn, followed by peer-to-peer consumer lending at £1.17bn (up 47%) and peer-to-peer property lending at £1.15bn (up 88%), as the market diversifies.
These market categories were followed by invoice trading at £452m, equity-based crowdfunding at £272m, real estate crowdfunding at £71m and reward-based crowdfunding at £48m.
There are signs that the market is consolidating, with the five largest alternative finance platforms accounting for 64% of total market volume in 2016, few new entrants into the market, and more than 35 UK online alternative finance platforms becoming inactive through merger or closing down.
Meanwhile, the trend towards greater involvement in alternative finance by established financial institutions continued, with funding from institutional investors such as pension funds, asset managers and banks accounting for 34% of peer-to-peer property lending, 28% of peer-to-peer business lending and 32% of peer-to-peer consumer lending.
“As market consolidation accelerates there is greater pressure on alternative finance platforms to distinguish themselves through better services and more innovative products, whilst simultaneously responding to emerging regulatory and supervisory demands,” Zhang said.