Looking back to look forwards - An alternative year in perspective

  • neil_edwards.pngStatistics can sometimes convey a powerful message on their own, the Alternative Finance industry being a case to point.

    According to ‘NESTA’, the independent innovation charity, the UK sector grew by over 160 per cent in 2014 to £1.74 billion. More importantly, it is predicted to do even better in 2015 with a target figure of around £4.4 billion being proffered by those in the know.

    The equivalent number in 2012 was only £267 million, so this is an impressive performance by anyone’s standards, but of course, still small beer when compared to the traditional banks which, despite their challenges, retain over 90 per cent of business lending in the UK.

    We have seen the Government chipping away hard at the dominance of the ‘Big Four’ in 2014 – something that was confirmed by the Competition and Markets Authority's announcement in November of a formal enquiry into competition in the sector and the many nods of support that have been given to Alternative Finance during the year.

    The decision makers have clearly not failed to notice that the impact on the economy of this maturing sector has been a good one. For example, NESTA figures show that 70 per cent of the SMEs which borrowed through a P2P platform have subsequently recorded an increase in turnover; 53 per cent have created new jobs; and 63 per cent have managed to translate that growth through to the bottom line. Challenge that if you will.

    By George, he's (almost) got it

    In his Autumn Statement, Chancellor George Osborne provided at least four fillips for the industry.

    First, he announced the introduction of bad debt relief for those lending through P2P platforms – a request that ranked high on many industry wish lists.

    Second, he confirmed the possibility that a third class of ISAs might be created in 2015 to accommodate P2P investments. This will undoubtedly lead to more retail investors and financial planners embracing P2P as a viable asset class. As I highlighted in my October post though, while 63% of existing lenders say they will lend more when they can take advantage of an ISA wrapper, I remain of the view that later adopters will want to invest through P2P funds rather than directly through the platforms and it is unlikely to be a bonanza for all.

    Third, there is to be a review of the regulation that currently stands in the way of institutional lending through P2P platforms. The “crowd” is now represented by institutions on many platforms. This in itself is not a bad thing if it provides the liquidity to ensure the core purpose of the sector is delivered, namely access to finance for SMEs and consumers, and the values of the sector are retained.

    Last, but not least, George reaffirmed that banks will be mandated to open up access to their credit data and refer on any SMEs that they turn down for finance. Welcomed by many in the industry as a veritable waterfall of origination opportunities, I admit to a few misgivings. The industry needs to position itself as a first choice for borrowers, not the grateful recipients of those gristly bits of lunch the banks choose to leave on their plates. There is a reason that banks decline loans and it's not because they lack the capital to lend.

    While all this is going on though, is it not a paradox that the Government continues to support a Funding for Lending Scheme that has continued to disappoint? Q3 of 2014 showed a further drop in net lending to SMEs – down £0.128 billion. Nevertheless Mr Osborne is clearly determined to persevere judging by his decision to extend the Scheme for another year until January 29, 2016.

    The Chancellor has also announced that the Enterprise Capital Funds programme is to receive a further £400 million from Government to be distributed by the British Business Bank – a chunk of money that I can't help but feel would be better funnelled through a wider range of P2P business lenders if it is genuinely intended to reach a broad population of deserving SMEs rather than just a few highly targeted ones.

    But, these few niggles apart, surely no one can deny that any barriers to growth are being removed one by one.

    The bubble will continue to grow in 2015 - and burst for some

    A healthy industry guarantees a steady supply of new players and, with new entrants appearing on the scene all the time, inevitably a period of consolidation will come at some point.

    I suspect that by the time we ring in 2016 a number of the platforms currently recognised by the P2PFA will either have quietly disappeared, radically changed their strategies, or been acquired. Those that have raised outside investment have more run time than the others, but business models and marketing need to be beefed up considerably in many cases.

    Talking of outside investment, the pinnacle of the AltFin year was, of course, the Lending Club IPO, which endorsed the optimism of platform founders up and down the land. Markets will undoubtedly remain excited about the prospects of the sector and companies in this industry will continue to attract investment in 2015. One of the largest specialist investors, GLI Finance, now holds a portfolio of 16 investments, including such names as business loans provider, FundingKnight, the invoice trading company,Platform Black, and commercial property specialist, Proplend.

    There is talk too that the banks may be contemplating some moves of their own. Santander has already made one strategic link and even RBS, the bank still largely owned by UK taxpayers, is rumoured to have had cosy chats with at least one Altfin provider. Doubtless others will be thinking along similar lines – ‘if you can’t beat them join them’ is the adage that comes to mind.

    If there is any disappointment at all, it centres on SMEs’ stubborn lack of awareness of the range of new finance options that are available to them. The NESTA report describes awareness as “quite low”, with 60% of respondents professing to have no awareness at all. This shows that there is still a lot of work to do by the sector as a whole in 2015 and underlines the level of potential that still remains untapped.

    So, what with the prospect of an entirely different Government only a few months away, regulators frantically trying to keep up with all this innovation and uncertainty over the timing of higher UK interest rates, not to mention what might happen in the US, eurozone and China, we have an exciting year in prospect.

    Have a happy and very prosperous New Year.

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