I’ve laid out these pivotal questions below – and placing myself in the shoes of our interviewees have made a stab at answering each of them.
How will the banks respond to the peer-to-peer phenomenon?
There seems to be a general consensus that this could go one of three ways. Number one – the banks become hostile towards peer-to-peer lending as it begins to encroach on an increasingly large segment of would-be bank customers. Number two – the banks attempt to take on the platforms at their own game. In this instance a bank would either have to develop its own online platform using white-labeled technology, or acquire an existing peer-to-peer lender. Or Number three – the banks see peer-to-peer lending as complimentary to their services, and work out methods of collaborating with the various platforms.
What do I think? All signs point to option three. We’ve already seen a joint initiative forged between leading peer-to-business lender Funding Circle and the Spanish bank Santander. And there’s a clear appetite within the industry for further arrangements of this kind.
The US peer-to-peer lending space is ahead of the UK market in some respects. The amount of institutional capital deployed on most of the leading US platforms outweighs the amount of retail money roughly 4 to 1. US banks are responsible for a decent chunk of that 80%. It won’t be long before UK and European banks follow suit – purchasing loan assets originated by the leading debt-based platforms.
Where will the sector be in 2 years time?
There is a bit of an obsession among observers of the industry with predicting how much it will be worth in however many years time. But the obvious truth is that we cannot possibly know. What we do know is that many of the established providers are growing exponentially, that the proliferation of platforms hasn’t yet slowed, that some markets are growing faster than others and that there are a multitude of factors that could accelerate or stagnate the industry’s growth. To list but a few of these factors within the UK market, and in no great detail: P2P ISAs, mandatory bank referrals, a potential change of government, a rise in interest rates, international platform expansion, etc.
We’ve seen predicted figures soar as high as $1 trillion by 2025. But whilst these gaudy projections often grab the headlines – I think the more interesting answer to this question doesn’t concern what the industry will be worth numerically, but instead how it will be perceived. My hope is that in 2 years time, terms like “alternative finance”, “crowdfunding” and “peer-to-peer lending” will be much more entrenched within the public lexicon – and that the industry will be well on its way to realizing its full potential.
Will the equity crowdfunding sector earn its stripes?
The recent IPO of the twice-Ourcrowd-funded ReWalk Robotics was a landmark moment for the equity crowdfunding space. It’s the first time that an equity-based platform has been able to point to a measurable ROI – and pretty huge one at that. According to some AltFi Data calculations – OurCrowd participants in the ReWalk funding rounds have seen their original investment(s) multiply by 5.5x.
Chapel Down recently caused a stir by closing the largest campaign in the history of equity crowdfunding via the Seedrs platform. The record campaign attracted just shy of £4m. One of the primary reasons for its success is that Chapel Down is a listed company – in fact it is the only publicly traded company that has ever ventured down the equity crowdfunding road. That means that participating investors have some liquidity. After a certain amount of time they will be able to sell their shareholdings via the ICAP Securities & Derivatives Exchange.
The ReWalk and Chapel Down examples stand out within the equity crowdfunding space. They both have exit routes in place, and one has already generated a hefty sum of profit for its OurCrowd investors. But these campaigns are anomalous. No signs of profit or indeed of the return of principal have materialized elsewhere in the crowdfunding space, but there are certainly some crowdfunded businesses that have failed.
But this is by no means cause for doom and gloom. The ReWalk IPO is a quite remarkable occurrence in terms of how quickly it came to be realized. You’d expect a significant exit to take much longer to come together. And you’d also expect a number of the early-stage companies that go through a crowdfunding round to fail – that’s just the nature of early stage equity investment.
In other words, the jury is still out on equity crowdfunding. Will see a multitude of ReWalk-like exits in the next few years? Or will the failures outweigh the success stories?
One stumbling block for the industry could be that the vast majority of businesses list only two generic exit strategies when pitching to the crowd: a public listing or a trade sale. The industry needs to find new methods through which backers are able to realize their returns. Fortunately, a ray of hope springs to mind. Asset Match is an auction-based online exchange that caters specifically to private companies. Asset Match allows investors in such companies to trade away their shares to other investors. This innovative platform could play an important role in the development of the equity crowdfunding space. The more potential exit routes that crowdfunded businesses have at their disposal – the more ReWalk-like stories will start to emerge.
Will institutional capital push the retail investor to the periphery?
Last week we held the first of our AltFi Investor Workshops – where David de Koning from Funding Circle provided some insight into the weight of institutional capital deployed via the platform. In the UK – it’s roughly a 60:40 split in favour of retail money. Conversely, Funding Circle’s US subsidiary is 80% funded by institutional capital. That 80% figure holds true for most of the major US platforms (Prosper, Lending Club, SoFi, etc.). And whilst retail money outweighs institutional funding in the UK for now, it’s really the latter source of capital that is driving the sector’s growth.
The mounting tide of institutional money has led many to suggest that ordinary investors are going to be gradually phased out of the P2P process. I don’t buy that – for a number of reasons. The first is that the UK’s biggest platforms are positively giddy with excitement for the time when peer-to-peer ISAs first come into play. Tax breaks and governments initiatives like the mandatory bank referral scheme will massively engorge the bulk of retail capital at work on peer-to-peer platforms.
Perhaps more importantly, it would be a huge PR blow for the sector – which up to now has offered a fairer deal to thousands of ordinary investors – to devolve into the preserve of large scale organisations. As the space matures, some platforms will inevitably structure themselves to cater for bigger investors. Crossflow Payments – a receivables marketplace for banks and institutions – serves as a contemporary example of this.
But there will always be room for the retail investor somewhere in this space. It wasn’t so long ago that Lending Club and Prosper took steps to prevent their institutional investors from constantly snapping up the most attractive loans. Lending Club CEO Renaud Laplanche admitted to “a little bit of an imbalance” – which he was clearly keen to address. And returning finally to last week’s AltFi Investor Workshop – David de Koning also explained that Funding Circle will ultimately look to fund businesses in both the UK and the US through roughly a 50:50 split of retail and institutional capital. That seems a sensible target to me.
Will the industry go truly global?
You might well argue that it already has. The UK and US markets are by far the most sophisticated at present. The European market is just getting going – with a handful of promising outfits leading the way in peer-to-peer lending (Bondora, Pret d’Union), crowdfunding (Companisto, Innovestment) and invoice finance (Dansk Faktura Bors, Finexkap).
The Asian space is at once one of the most perplexing and most promising. The sheer size of the Chinese market has led to some truly gaudy numbers – and outrageous projections. But the market is crying out for tighter regulation. Since 2011 over 1,000 fraudulent platforms have been closed down.
Things are moving along steadily in Africa too. A pair of peer-to-peer lenders are active in the South African market. RainFin reportedly lists 18 new loans with a value of R 400,000 every day, while in July Lendico announced that it had reportedly received R3 billion ($285m) of loan demands since launching in South Africa four months earlier.
South America is perhaps the only continent that hasn’t yet been the beneficiary of much alternative finance activity. Having said that, there is a European outfit – Lendahand – that is facilitating lending to SMEs within emerging markets. One of those emerging markets is Colombia.
What are the new developments that we should watch out for?
The answer that I hear most frequently offered in response to this question is that we should look for the alternative finances space to continue its diversification so that an increasingly broad range of niches are covered up. To my mind there are two ways that this will happen.
The first is through the increased specialization of new entrants. At some point the proliferation of new platforms is going to slow down, but it hasn’t yet. The scope of the typical, newly launched platform has narrowed as the market has matured. Such specialization allows relative minnows to attempt to draw custom away from the more catchall incumbents. There are countless angles already being addressed by a myriad of early-stage alternative finance providers.
Diversification will also be achieved when the leading platforms start branching out from their original product sets. There are plenty of contemporary examples of this out there – i.e. Lending Club and Zopa entering the business lending space, or RateSetter offering mobile handset loans via GiffGaff.
Diversification is a less-often discussed but no less important part of the growth of the industry. And of course, the more niches that the alternative finance industry covers up – the more its already rapid statistical growth will accelerate.
Finally, I would also suggest that we’ll see a great many more securitizations over the next few years. We’ve already had a number of substantial loan-bundles sold off to major institutions by some of the biggest US peer-to-peer lenders. It’s a method through which the platforms are able to cater to the more substantial appetites of large corporations. Such companies are able to deploy capital into loan packages worth $100m plus – the sort of scale that they need in order to make a transaction worthwhile.
With institutional involvement on the rise in the UK, and the UK market standing as one of the world’s most sophisticated, it wouldn’t be a surprise if a major securitization takes place on British shores before long.