A University of Cambridge study finds businesses limited by tight credit and declining loan approvals turning to online financing. For now, alternative finance platforms remain a small part of the mix in debt and equity markets, but they are growing by serving demand unmet by any traditional lenders.
Breaking New Ground: The Americas Alternative Finance Benchmarking Report is the first comprehensive study to focus on alternative financing in the Americas. The researchers focussed on P2P lending, crowdfunding, capturing an estimated 80 per cent of the visible market.
The online financing sector enjoyed explosive growth in 2015, with an annual increase of 212 per cent from $US11.68 billion to $US36.49 billion. The US alone accounted for 99 per cent of the value, but was still smaller than China. Marketplace P2P consumer lending was the largest market segment with $US25.74 billion accruing in 2015.
Alternative finance models for real estate scaled rapidly in the year under study, growing at 471.
Small and medium sized enterprises increasingly hit up the alternative platforms to finance growth, expansion, working and venture capital.
Institutional investors were not locked out of the growing US market. Between 2013 and 2015 they funded over 72 per cent of marketplace/P2P business loans and 53 per cent of marketplace/P2P consumer loans. The capital was sourced from ‘mutual funds, pension funds, hedge funds, family offices asset management firms and traditional banks.’
Cambridge University found significant gender effects, with women ‘dominating both the funding and fundraising sides of donation-based and reward-based crowdfunding models’. Female lenders and borrowers representing nearly 60 per cent of these marketplaces on average.
For now, the nascent industry remains under the radar of legislators. No consensus exists on regulations proposed by the SEC. Regulation may be unavoidable for the rapidly growing industry as it becomes increasingly mainstream. Cambridge University concludes that “industry will need to continue innovating in technology, credit risk modelling, user experience and customer service in order to compete and scale.”
Meanwhile, other research — this time by TransUnion — found FinTechs outpacing banks, credit unions and traditional finance companies in personal loans to prime and near prime consumers. Loans by Fintechs to these customers grew by 122 per cent over three quarters in 2015, totalling $US10.14 billion.