UK Alternative Finance Back on Song?
September 2016 was a record month for UK Alternative Finance origination volume, according to the Liberum AltFi Volume Index. Over the past few months we have written extensively about the stagnation in growth of UK alternative finance origination. As can be seen from the chart in figure 1, since September 2015, monthly origination has been more or less unchanged. Until now that is, as September 2016 has delivered a record breaking £364m origination. This represents 30% growth versus September 2015 and eclipses the previous high seen in March 2016 by some £18.5m. The feat is particularly impressive given that March origination was driven in large part by a glut in real estate backed lending that was pulled forward ahead of changes to UK property transaction taxes that came into force in April. After that temporary boost, the industry has had to battle the headwinds caused by Lending Club’s travails and Brexit.
So what has driven the industry’s spectacular performance in September? After a lot of analysis of the figures and loan tapes, AltFi Data attributes it to several factors. The uptick in origination can be seen across the board. Indeed the largest four platforms – Funding Circle, Zopa, RateSetter and MarketInvoice – each posted record months. Interestingly, institutional volumes do not appear to be the driver:
- 46% of Funding Circle’s September origination came from whole loans, which are favoured by institutions, but this is lower than the high of 60% in March 2016.
- Similarly, 50% of Zopa’s origination was not covered by Safeguard (favoured by institutions), down from a high of 60% in February 2016.
- 98.5% of RateSetter’s origination was covered by its Provision Fund, indicating that institutional money still makes up a small portion of its overall lending.
Seasonality could be a major factor. For the past three years, September has seen either the highest or second highest industry origination total of any month in each year. This can be seen clearly in Figure 1, where each September’s origination is highlighted in red.
Figure 1: UK Alternative Finance monthly origination (Month of September shown in red)
We spoke to the three largest platforms to try to get some more colour on the reasons for the uptick in volume.
Funding Circle set a new industry record with £75.2m originated during the month. In doing so, the platform sailed through the £1.5bn cumulative volume milestone. Co-Founder and UK Managing Director James Meekings told us:
“Whilst this is typically one of our strongest periods of growth in the year, it's fantastic to see huge demand for fast, flexible finance, particularly following the EU referendum in June. Small business isn't small; it accounts for half of our GDP and 60% of private sector employment. Ensuring small business owners can access finance quickly and at a time to suit them is crucial to the success of our economy.”
“After a period of consolidation over the last 9 months, during which we have invested in our infrastructure, people and regulatory processes, we are now beginning to see some solid volume coming through, which we hope to build on in the next 6-9 months. We are slowly but surely putting down strong roots – the focus is on quality as much as quantity.”
Zopa took third spot for the month with a new record of £67.8m in origination, bettering its previous best by some £10.6m. The platform’s CEO Jaidev Janardana had this to say, when asked about the reasons behind the stellar performance:
“For Zopa, there are a number of factors that make September a record month (and expect the momentum to carry on for October as well). No single silver bullet:
1.September and October are historically strong months for consumer lending and thus for us. You can see that in our data over the last few years
2.We landed a couple of important improvements in conversion through UX improvements and improved verification rather than credit changes. This is driving higher volumes
3.We have had some success in new marketing channels
We still remain watchful for any signs of consumer credit worsening post Brexit. The news is all positive as of now, we will remain watchful at least till Article 50 is triggered and we understand consumer and business reaction."
September also marked the end of the 3rd quarter and the record month propelled the quarter to record origination levels with £943m of financing originated over the quarter, tantalisingly close to the £1bn mark. This is a 12% increase on the 3rd quarter of 2015 and marks a return to the upward trend after a down quarter in 2Q15.
Figure 2: UK Alternative finance quarterly origination
- Saving Stream with £25m in origination, narrowly beating its March 2016 total of £24.9m.
- MoneyThing with £4.3m of loans originated, its seventh consecutive record month.
But it's not all good news. Origination from the equity crowdfunding platforms within the Liberum AltFi Volume Index does not appear to have picked up, with just £1.8m originated in September, the lowest total since October 2014. The overall trend does not paint a pretty picture either, as can be seen from figure 3. Our hypothesis is that the Brexit effect has been more pronounced in the riskier equity arena.
Figure 3: Monthly equity crowdfunding volumes
Origination volume is often seen as a measure of how well the industry is performing. However, there are much more important metrics that also need to be factored into that equation. The old adage that it is “very easy to lend money but much harder to get it back” remains true. Similarly, origination volume is a blunt metric – it can show a distorted picture if the loan length of platforms is not similar. We saw this sort of thing happening at Lending Club where capital was sometimes recycled, boosting origination volume. More data on UK marketplace lending is available to subscribers of AltFi Data Analytics, including metrics such as bad debt, principal outstanding and net lending for the UK’s four largest platforms. Check it out and get in touch if you are interested in becoming a subscriber.