Alternative finance is leading the way in the high growth market for financial services disruption, according to a new report.
In the past decade or so and particularly since the nadir of the financial crisis, new financial channels for companies, institutions and individuals to borrow or raise equity capital have spring up under the now somewhat ironic term ‘alternative finance’.
Today, just in the UK more than £10.6bn has been lent by P2P lenders, according to Altfi Data’s number crunching, whilst nearly £350m has been raised through crowdfunding platforms such as Seedrs and Crowdcube.
This disruption to markets once dominated by banks, or fintech as it is most often called, does not stop at alternative forms of financing with many other areas such as payments and insurance seeing massive innovation and investment but alternative finance firms are leading the valuation tables.
Over the past three years, global venture capital investment into fintech has risen by 4.7 times to $13.6bn in 2016. There are now 39 fintech companies valued at over $1bn a new report from advisory firm GB Bullhound found.
Of the 39 fintech unicorns, i.e those valued at $1bn and above, 16 are in the alternative finance space and three were created in 2016. Asia seems to be the ‘super-growth’ engine of the trend. Nine of the 16 companies in the sector valued at $1bn and above are headquartered in Asia while two of these firms, one in China and one in Hong Kong, launched in 2016. Somewhat in contrast the report found that Western companies are maturing with mergers and bankruptcy more and more likely to occur.
Source: GB Bullhound
With business models for Western alternative finance firms broadening out, the report concludes, the sector is looking “ripe for consolidation.”
“In Europe and the US, companies such as Zopa and SoFi have applied for banking licenses in order to be able to raise consumer deposits and thereby reduce their cost of capital,” the report said.
“Digital banks are also entering the Alternative Finance market, with banks such as Marcus (launched by Goldman Sachs in the US), Atom Bank and Oak North aggressively seeking to use their deposits base to compete with established Alternative Finance players,” it added.
This will be predicated on three trends: higher competition, a focus on proving the profitability and sustainability of business models and cautious investor sentiment.
“We also see traditional banks and financial institutions playing a more pivotal role in the development of the market, as alternative finance players seek to diversify their sources of capital towards bank funding, warehouse financing, wholesale loans, securitisation and credit facilities, in order to fund origination growth.”
Despite the effects of Brexit, the report adds that the UK continues to lead the way within Europe with three companies valued at over $1bn: Funding Circle, Paysafe and Transferwise,.
“We do not…[this] changing, given London’s prominence in financial services. We expect 2017 to be another year of resilience for fintech funding in Europe and we have already seen several high-profile capital raises announced: Funding Circle, iZettle, Atom Bank and Monzo.”
The firm tips two UK-based alternative finance providers as potential unicorns LendInvest and Prodigy Finance.
