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February 18, 2016updated 31 Aug 2016 5:20pm

Alt finance banks on P2P and crowdfunding for continued UK growth

News: Alternative finance continues to make progress despite slowdown.

By Charlotte Henry

New figures published by Cambridge University showed that peer-to-peer lending for SMEs is helping drive continued growth in the alternative finance market, despite an overall slowdown in the market.

The research found that the UK online alternative finance industry grew by 84% to £3.2bn in 2015, from £1.74bn in 2014. This is compared to year-on-year growth between 2013 and 2014 of 161%.

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 report said that "peer-to-peer lending remains the largest model by volume of the UK online alternative finance market." £1.49bn was lent to SMEs in the year, a 99% year-on-year growth rate, bringing the average growth rates for between 2013 and 2015 to 194%.

The sum lent via peer-to-peer lending is sizeable even if the £690m lent to the real estate sector is removed, with P2P lending accounting for £881m in 2015. In the consumer space, peer-to-peer lending hit £909m in 2015, up 66% from the £547m lent the year before.

The Cambridge University researchers estimate that peer-to-peer business lending, excluding real estate lending, provided the equivalent of 13.9% of new bank loans to small businesses in the UK in 2015, based on 2014 data from the British Bankers Association.

In 2015, 20,000 SMEs were funded via alternative finance channels, compared to 7,000 the year before. Total alternative business funding hit £2.2bn in 2015, compared to £1bn in 2014. Total alternative business lending was £1.82bn, which eqates to 3.43% of gross national banks’ lending to SMEs, according to 2014 data from the Bank of England

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Other key areas developing in the alternative finance market is crowdfunding, and equity crowdfunding. Donation-based crowdfunding grew the fastest amongst all the alternative finance models in 2015, boasting a 507% year-on-year growth rate, with £12m distributed. This is from the relatively small base of £2m in 2014.

The report also said that "equity-based crowdfunding is one of this year’s fastest growing models". It was by up by 295% to £332m, a significant leaps from the £84m in 2014.

The report also said that "reward-based crowdfunding, is taking hold in the UK with both national and overseas-based platforms growing fast in transaction volume and popularity." £42m was facilitated in this way during 2015, a 62% year-on-year growth rate.

Despite all the positives the research concludes that the biggest risk is platform fraud or malpractice. The potential of a collapse of one or more of the well-known platforms due to malpractice was seen as a high risk to growth by 57% of the platforms surveyed.

The report also highlight growing institutionalisation of the alternative finance market. Warren Mead, global co-lead at KPMG who were involved in the research said: "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?"

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