The growth posted by Britain’s alternative finance sector is, by any standards, remarkable. A report published today by innovation group Nesta and the University of Cambridge says the sector will be worth £1.74 billion by the end of the year – representing 161% growth on 2013. And by the end of 2014, the report reckons, the figure will have reached £4.4 billion. At this rate, the term alternative finance is going to look horribly out of date – this is increasingly a mainstream industry. Almost 60% of consumers now say they know about alternative finance, the report concludes, while one in seven Britons have used an alternative finance platform to seek, lend or donate funds. Amongst small and medium-sized enterprises, 44% are familiar with at least one type of alternative finances. The industry also has the official seal of approval these days. Since earlier this year it has been regulated by the Financial Conduct Authority, the watchdog that polices other financial services, which has given it greater credibility. And from next year, many alternative finance products will become eligible for inclusion in investors’ individual savings accounts (Isas), the tax-free shelters that every adult in the UK is entitled to use. Some areas of alternative finance are growing even faster than the headline rate. Peer-to-peer business lending, for example, is up by 250% to £750 million this year and has overtaken peer-to-peer consumer lending as the largest sector of the industry. Equity crowdfunding is up 410%, albeit from a low base, with £84 million worth of transactions completed this year. We’re also seeing good growth in invoice trading, where deal volumes are up by 174%. Liam Collins, one of the authors of the Nesta/University of Cambridge report, says that alternative finance providers have come of age over the past couple of years, exploiting the funding constraints being felt by the banks to expand their market share. “These findings shed light on a growing movement that is revolutionising banking, investing and giving by using technology to simplify the links between those who want to invest money and those who need it,” Collins says. “With bank lending to small and medium-sized enterprises down again this quarter, it’s no wonder that alternative finance is fast becoming an important source of funding for individuals, businesses and organisations who struggle to access finance elsewhere.” Not that we should think of the industry as a funder of last resort. An important factor in its success has been innovation, with new types of platform emerging almost constantly. A growing number of platforms are now working on new debt-based securities, for example, enabling businesses to raise money in a completely new way. Others are pioneering community shares and pension-led funding. This is an exciting moment for the UK’s alternative finance sector which can make a genuine claim to be a world leader. Having begun as a technology-driven investment for a handful of brave and pioneering investors, it now represents a serious threat to the established players in financial services.
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