It’s been quite the month for alternative finance providers. New crowdfunding regulations, the AltFi Summit, encouraging words from Vince Cable, the extension of ISAs to include p2p lending and the promise of further exciting developments buried in the back of the Budget. Let’s stand back and take a look at the implications of all that has happened…
The p2p sector erupted yesterday in support of government’s decision to allow p2p lending within ISAs. You can get a taste of the response here. Timely research from RateSetter has discovered that nearly a third of people (31%), would put their savings into a p2p platform if they could do so through a NISA (new ISA). That figure jumps up to 70% for those people that have already used or are considering using a platform.
The reason for the manic excitement over the ISA news is that it will be a key factor in raising p2p lending into the mainstream as an attractive saving option for middle England. 88% of the British populace have either never heard of p2p, or have not considered using it. However, 32% of the fraction that are aware of p2p but have decided against it would reconsider if they could invest through a NISA.
“This is an unprecedented opportunity to breathe fresh life into a failing sector, by expanding the horizons of a new and innovative one, and the Government has not disappointed. By including P2P platforms in NISAs, we will be able to give cash-strapped retirees and young people struggling to get on the property latter the help they need.
“We have found the NISA-ability of P2P will be most popular among pre- and post-retirees in search of much-needed income and savvy, urban young professionals looking to consolidate their future. Savings security should not be a concern with them if they place their cash with a reputable P2P player. Therefore, this marks a sea-change in the way people save money in the UK.”
The AltFi Summit and Vince Cable
Much has been written now about the wildly successful AltFi Summit, and I do not intend to rehash past reports. It was a fantastic occasion for celebrating this bold and exciting industry. A summary of events in the Breakout Room at AltFi can be found here.
What is worth revisiting is the much-anticipated keynote speech delivered by the Secretary of Business, Innovation and Skills – Vince Cable. Whilst fielding questions, the Secretary set Twitter ablaze with the following line:
“I am keen to oblige banks to refer failed loan applicants to alternative finance providers.”
I do not think it a coincidence that buried in the back of yesterday’s Budget – the following line was found:
“2.234 SME Finance: help to match SMEs rejected for finance with alternative lenders
The government will launch a consultation shortly after Budget 2014 on whether, and if so, how, to legislate to help match SMEs rejected for finance with alternative lenders.”
Music to the ears of the seven major platforms behind the recently launched Alternative Business Funding portal. Indeed – you can read the reactions of Adam Tavener (pension led funding) and Louise Beaumont (Platform Black) here. How pleasing it is to see government taking notice of the Alternative Finance movement – and exploring a number of ways to aid in its progression.
Backlash at Crowdfunding Regulations
The regulations dished out by FCA pertaining to equity crowdfunding were met with a very different response. The now slightly worn out war cry of taking the “crowd out of crowdfunding” reverberated across the sector. The specific element of the regulation with which the various platforms took umbrage was the proposed 10% rule. This stated that inexperienced investors will now have to certify that they will not invest more than 10% of their portfolio in unlisted businesses.
It’s understandable that the platforms are against the move, but at face value the FCA’s logic for enacting the limit is no less comprehensible. 50-70% of startups fail in their first few years. What the platforms perhaps find most disappointing is that the proposed rule demonstrates a lack on confidence in their vetting processes. Yes, investing in startups is a risky business, but equity crowdfunding platforms generally have a high rejection rate and endeavor to list only the highest quality projects on their platforms. To go about business any other way would be to risk their reputation. There is no way that 50-70% of the startups listed on equity crowdfunding platforms fail – not even close. I therefore wonder if the 10% limit proposed by the FCA is a little too stringent.
Of course, not all the platforms rallied in anger against the regulations. We are now seeing an increasing number of crowdfunding platforms that tailor specifically to angel investors, either at the expense of the crowd or with the crowd involved as an afterthought. Angels Den, for example, matches inexperienced investors and Angel investors alike with entrepreneurs. If anything, the new regulations may give Angels Den a competitive edge in the crowdfunding space, because they’re not solely reliant on the contributions of the “crowd” to fund projects.
“We welcome the FCA’s regulatory approach and feel that it will prove to be beneficial to the longer term growth of the crowdfunding and peer-to-peer lending sector, as well as protecting the interests of investors. We share the view that promoting these types of platforms to certain types of investors is particularly important. We believe that it is crucial that all investors that use UK Bond Network have the knowledge and experience to understand the risks involved and our platform has been structured accordingly to reflect this view. This is something we have already placed a great deal of emphasis on and believe it should be standard.”
A final thought to leave you with: keep an eye on the rising number of aggregators in the alternative finance space. The crowdfunding sector in particular is acquiring a growing number of navigational tools. For example, the Crowdfunding Centre in the UK and CrowdFundFusion in the US seem to be doing largely similar things – pooling projects from a range of platforms into one place for investors’ browsing convenience. The Crowdfunding Centre is unique currently in its inclusion of equity and debt-based projects. (CF4ALL) - a crowdfunding search engine - is again similar. There are a great many more vehicles bidding to be the definitive one-stop-shop for project perusal.
We’ve also seen, as mentioned, the Alternative Business Funding portal emerge – a landing spot for SMEs that are rejected for bank funding. But the p2p and invoice finance sectors do not currently possess much in the way of aggregators, especially when compared to the crowdfunding space. I expect that to change in the near future.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.