By Manos Schizas, senior economic analyst, ACCA
The future certainly looks bright for alternative finance providers. The last three years have seen the birth of a plethora of new online (and some offline) platforms allowing businesses to bypass traditional banks and venture capitalists and source various forms of peer-to-peer funding instead. A business can now get peer-to-peer loans, equity, donations, and even fx hedging and insurance online, and who can say what will become available next?
It’s certainly encouraging to see the UK at the forefront of this innovative industry. The typical alternative finance provider (if such a thing exists) is born when some bright sparks, boasting a pool of tremendous and diverse tech and financial know-how between them, decide to leave the world of investment banking or the Big Four behind and pour their life savings into a new way of funding businesses.
It’s heart-warming stuff, but for the industry as a whole there are growing pains as well. The dynamism and diversity of these new industries has caught regulators around the world by surprise and the regulatory reaction could be equally clumsy following a high-profile failure. No two platforms are regulated in exactly the same way, and it’s hard to know how one would be regulated just by looking at their business model. Once you try to think beyond the UK border, the situation becomes almost hopeless.
Then there is uncertainty about the future. For now, for example, the FSA may believe that crowdfunding should be a sophisticated investor’s game, but it’s unlikely to step in to stop Joe Public from investing £10 or even £1,000 in a startup. This could change.
Peer-to-peer and crowdfunding platforms are particularly worth watching. These are industries with relatively low barriers to entry and they’ve been benefitting from the best possible climate over the last three years: mistrust of the banks and the financial system, rock-bottom interest rates, interest from venture capitalists and now government support too. If a recovery finally materialises in a couple of years, not all business models will remain viable. Take p2p loans for instance – like microfinance intermediaries before them, some lenders are boasting relatively low default rates, but this partly reflects the fact that they are young, their market is still unsaturated, and credit takes time to turn sour. Some are preparing for the end of the honeymoon period by providing a level of insurance for participating savers. Others are not.
Other developments are afoot that could change the landscape dramatically. Consider invoice auctioning sites, for instance, such as Marketinvoice or Platform Black. They are innovative, effective and a resounding success overall. Fast forward to ten years from now, when the majority of businesses in the UK will e-invoice each other and consumers, and it may be possible to set up an invoice auction on eBay, or any number of other platforms in seconds. Some invoice auctioning platform will thrive in this new world, but others may not be able to handle the competition.
My point is that sooner or later, the UK will see one of many high-profile failures among the alternative finance providers. This is normal and will probably lead to a healthy shakeout; but the way in which regulators and investors react could define the fortunes of these industries for years to come.
The incumbents know this and are already organising themselves into associations. Their main concern is regulation of the sector – partly out of a genuine concern for their industry’s continued viability and partly, the cynic within me thinks, in order to keep newcomers out. Others will also be watching; if I were in charge of a high-street bank, I’d be waiting for the shakeout so I could buy the surviving platforms from their founders and VC investors for pennies.
In the end, everything will hinge on how these platforms add value. Information, collateral, control and risk – these are the raw materials of access to finance; are the new funding providers sourcing, using or combining them in an innovative way? If they are, then although individual platforms may perish their industries will live on.