2014 has turned out to be a seminal year for the Alternative Finance industry, underlined by the points made by George Osborne in his Autumn Statement last week. Bad debt relief on investments made through Peer to Peer (P2P) platforms; potential ISA eligibility and a withholding regime for Income Tax applied across P2P platforms, together with the news that there will be a review of the regulation currently standing in the way of institutional lending through P2P platforms, should mean we can look forward to the already impressive upwards trajectory of the sector continuing in 2015.
We looked back to the Nesta ‘Understanding Alternative Finance’ research undertaken earlier this year and have given our view on their forecasts and how we think the market could be looking this time next year.
- “The UK alternative market finance market will continue to grow to around £4.4bn in 2015”
With the market for all types of alternative finance, including consumer finance and equity, expected to finish this year at just short of £2bn – up 160 per cent – on 2013, there is nothing in the way of further stellar growth. £4.4bn seems eminently achievable. We only have to look across the pond where the largest player, Lending Club (who is due to IPO this week at a value close to $6.5bn), has just gone through the $6bn barrier on its own – a near three-fold increase on the previous year.
- “More than half of P2P Business Lenders plan to lend more in 2015 than in 2014”
That’s encouraging news, nothing cements a new concept such as P2P lending more than existing users coming back for seconds and thirds. What excites us more, is the number of lenders that don’t even know about P2P lending and we have yet to engage with.
- Awareness and usage of Alternative Finance will increase –42 per cent of respondents were “unaware” of any type of Alternative Finance
We are seeing significant ‘above the line’ campaigns now being run by the likes of Ratesetter, CrowdCube and FundingCircle and these will all help to raise public awareness and understanding of new forms of finance and investment. These, combined with the Government initiatives, that will hopefully survive the election and see the light of day in 2015, will see alternative finance rise in the consciousness of investors and borrowers. Collectively, we are on the cusp of dropping the ‘alternative’ label and being regarded as mainstream. P2P lending will become the best and most efficient way to borrow money in 2015.
- There are a range of different models within the umbrella term ‘Alternative Finance’, of which P2P has seen the highest growth rate between 2012-2014, can this be sustained through 2015?
The leading players are rapidly achieving mass market status; other platforms, like Proplend, are succeeding in targeting and growing their niches, and new platforms are coming to the market continuously.
It would be foolish to mistake platform volume in isolation as the sign of platform success over the quality of returns and risk offered to lenders. There will be winners and losers and not every platform that comes to the market will survive. Whether Government initiatives like ISAs and British Business Bank investment will continue to democratise the market or create polarisation to the advantage of the big players, remains to be seen.
I hope the Government remembers the problems that were caused with banking being concentrated on the Big 4 and doesn’t, knowingly or otherwise, facilitate the same happening in alternative finance. We need a diverse, healthy sector providing wide choice to businesses and consumers across short-term, medium-term and long-term money.
- 56 per cent of respondents thought that alternative finance was risky. How will P2P platforms add reassurance?
Those 56 per cent are correct, it is risky! What you need to consider is the risk reward of the opportunities that platforms offer and what their due diligence / underwriting process is.
Crowdfunding is an equity play quite often to start-up businesses; 8 out of 10 start-ups fail and when you are only investing £50, how much real due diligence will an individual investor really conduct when making that decision? They will be swayed by the brand over the economics.
In P2P consumer and SME lending, platforms are buying big data and running it through their algorithms to credit score a borrower; after that, risk is offset by mass diversification and a ‘provision fund’ if it all goes wrong. P2P loans supported by traditional collateral such as a property massively decrease the risk of the lender losing all their money, as there is a physical property asset which can be sold if necessary.
But just because there is an asset, property or otherwise, supporting a loan, the platform still needs to have a solid underwriting / credit process in place. Property still requires a certain amount of manual underwriting and sometimes this is a good common sense road-bump. Platforms will live and die not by their volume but by the quality of the loans they offer – they must spend time and resources on this.
- Will ISA eligibility be extended to include P2P lending and what impact will it have on the P2P market?
The Autumn Statement re-affirmed the Government’s commitment to ISA eligibility, so we have to take whatever reassurance we can from that for the time being. The Government is still consulting on how technically ISAs will work and there seems little prospect of this exercise being completed in line for a launch in April 2015, which was the original target announced in the main Budget. The outcome of the election has to throw some element of doubt on all programmes that remain work-in-progress.
As far as the impact that ISA money could have, if P2P could make a 5 per cent inroad to the current c£40bn that comes to the ISA market annually, this could double the whole P2P market volume overnight. This is retail money acting with institutional impact. The growing acceptance of P2P as an efficient, safe and rewarding form of investing will hopefully create an unstoppable momentum.
Find out more about P2P Lending in our infographic.