And how better to do that than to amalgamate the findings of the dozens of alternative finance-focused micro surveys that have been undertaken in the past 12 months. A quick scan of AltFi News yields around 20 different research-related updates. By flicking through this collection, may we discern and distill any trends for the year of 2014?
To my mind there have been – broadly speaking – four types of survey:
Those that expose an external problem for alternative finance platforms need to address.
Those which suggest that alternative finance providers are capable of addressing such problems.
Those that demonstrate that the alternative finance industry is already providing a viable solution.
Inward-facing industry insight.
Unearthing issues through research, particularly when those issues relate in some way to access to finance for small businesses, has been all the rage in 2014.
We learned in October,courtesy of Hilton-Baird Financial, that exactly half of the nation’s small businesses deemed the level of funding support then available to them to be insufficient. That situation seems to have had a knock-on effect whereby businesses are looking inwardly in order to fund growth. A September survey from Bibby Financial confirmed that 9 in 10 Scottish SMEs were not looking for external funding in the near future, in spite of the fact that over half (54%) were planning investments into their businesses over the coming months. 72% of these business owners indicated that they will be using their own money to fund the investments.
Aviva’s bi-annual survey of 1,500 businesses shed some light as to why this situation prevails. The poll revealed that roughly a third of SMEs do not understand what alternative finance is, and yet another third had never heard of it at all.
Alternative finance providers need to be stay informed as to how their prospective users feel about the banks. And that need has been reflected in the past year’s polls.
We learned that the smaller the business, the lower the regard in which they typically hold the banks. That despite significant inroads from peer-to-peer lenders, 75% of Brits prefer to initially approach their high street bank for loans of £10k or less. Loyalty (even of the misplaced variety) takes a long time to erode, in spite of the fact that the average British citizen carries credit card debts of £4,500 – which can take up to 17 years to pay off. RateSetter released research suggesting that the FSCS scheme has become somewhat outdated – with over 52% of people feeling that the £85k cover does not justify rock-bottom interest rates.
Even some of the most senior figures from within world of banking recognize that the financial services industry needs to adapt to the times. Of the 198 senior banking professionals from around the world surveyed by Temenos, 77% blamed inflexible legacy systems for the bulk of their problems, and 67% expected IT spending to rise dramatically in the near future.
It’s no surprise that the banks are actively seeking a boost to their technology systems. We received report after report in 2014 about the nationwide drop off in small business finance as a result of inactivity from the traditional lenders. The Funding for Lending Scheme numbers served as a particularly apt and regular reflection of the ever-worsening state of bank and building society engagement with the SME sector.
But what we also saw in 2014 was rampant growth amongst the alternative business funders. Indeed, so impressive was the growth rate of the alternative finance space that by the close of November the many different providers were closing up the FLS small business funding gap entirely. The Q3 figures showed that FLS lending to SMEs fell by £128m. Over that same period of time, the UK alternative funders supplied UK businesses with a whopping £268m. Not only did the platforms fill in the small business funding gap, they in fact reversed a long-standing trend by providing £140m of new funds.
Of course, a year’s worth of surveys highlighting problems wouldn’t be much good if there were no studies conveying how the many platforms might represent a solution of sorts. And, as chance would have it, there were many of these published too.
A Wellesley & Co. backed survey from May revealed that 44% of people would invest in P2P lending if the platforms provided better interest rates than those currently on offer at the banks. In answer to that survey, the recognized industry spokesman Cormac Leech – from boutique investment bank Liberum – demonstrated that peer-to-peer yields are indeed meaningfully better than the rates returned by a host of traditional investment products.
RateSetter – rarely caught without a survey or two in the works – probed the minds of MoneyWeek’s readership and found attitudes towards the peer-to-peer lending industry to be generally positive. In answer to the question “Will P2P become a credible challenger to the high street banks?”, 82% of respondents answered yes. Admittedly readers of MoneyWeek will be generally more clued in on innovation within the financial services sector than most, but it’s encouraging to see such optimism from external industry observers.
We were also informed via survey about a number of pleasing developments within the SME space – developments that may be in part attributed to the success of the alternative finance sector.
77% of UK SMEs were reportedly making a profit in Q3 2014, up from 69% in the same quarter in the previous year. Confidence also appears to be returning the minds of the nation’s small business owners. A Liberis-commissioned polling of 1,000 SMEs from only last week revealed that 40% of respondents will be seeking funding in 2015 – and that of those businesses 31% will be knocking on the doors of alternative lenders.
A survey from much earlier in the year echoed those sentiments – stating that 71% of SMEs felt confident in their ability to raise finance as and when required. The implication – provided in the form of a Louise Beaumont (then of Platform Black, now of GLI Finance) quote – was that alternative finance providers were directly responsible for the creation of such buoyancy.
And finally, if the industry is to continue its success – and there’s no doubt that 2014 has been a year of tremendous accomplishment – there has to be some degree of internal reflection. This final group of surveys outlines both the challenges and opportunities that will face the platforms as they move forward.
Kicking off with a fast-looming opportunity – peer-to-peer ISAs – RateSetter found in October that 61% of Brits were struggling to achieve even half-decent interest rates, and that 39% cited ISAs as their choice method of saving. The consumer lending platform also provided insight as to the most frequent uses of RateSetter loans, and into geographical hotspots in lending activity – handy granular detail for any up-and-coming consumer lending outfit.
Liberum released some telling figures about public awareness in September – revealing that 65% of UK adults remain unaware of the existence of P2P lending. The quarterly consumer survey also indicated that 88% of existing peer-to-peer lenders consider regulation as the crucial factor in making the sector more appealing to the public. That in fact flies somewhat in the face of a LendInvest survey from earlier in the year, which found that 78% of 2,000 respondents felt that it made no difference to them whether the sector was regulated or not.
Raising nationwide awareness of the alternative finance sector is surely the primary preoccupation for many of the industry’s most established players. Conflicting results such as the Liberum and LendInvest surveys illustrate the complexity of the task at hand.
Ending on an outlier, a Cognizant study of 701 US peer-to-peer lenders and borrowers found branch availability to be the single most desired platform feature for 43% of borrowers. Perplexing, as the lack of an extensive physical infrastructure is one of the core reasons that peer-to-peer platforms are capable of offering such stellar interest rates.
I’d tie this point back into an insight that was offered by a business owner named Paul Mitchell at Tonic Capital’sroundtable discussion several weeks ago. For Paul, a personal touch is an important part of doing business with a finance provider. He likes to be able to meet and converse with a representative from whichever company is going to be funding his business. When Perry Burns of Working Capital Partners made the point that there’s a direct relationship between that kind of one-on-one attention and the cost of finance, Mr. Mitchell indicated that he is more than happy to pay for quality customer service.
For many of the largest UK platforms, volumes are constrained only by borrower demand. They often have an excess of capital queuing up to be deployed. Bearing this, the Cognizant study and Mr. Mitchell’s comments in mind, could 2015 be the year in which the platforms adopt a more personal approach with their borrowers?