The online alternative finance market is still in its early stages. According to Grow Advisors research, the total market is only 0.7 percent of the potential global addressable market (approximately $11B loan originations through online platforms 2014, and Goldman Sachs has evaluated the addressable market to be $3.3T). The UK has been the leading market, where the FCA has had an important role to play in enabling the fast development of the industry.
SME lending is an important growth area for lending platforms. Banks have their capital restrictions and price for capital tied to higher risk loans that leaves a lot of room for other players. According to one comment in a panel, in the US over 80% of SME lending is outside banks, but in Europe it is almost the opposite, i.e. banks cover over 80%. This indicates that we can see much more development in Europe in this area. Funding Circle is now positioned as a significant player in SME online loans in Europe, starting from the UK and expanded through acquisitions to Germany and some other markets. Their representatives indicated that they plan more expansion in Europe.
Securitization of p2p loans is still in quite an early phase. There are some activities in that area and often sought from the investors position, but e.g. a panel at the event discussed the nature of the early phase market and how loans interest rates and securitization are not really yet in line. The volumes are still very low, which makes it more difficult to have a market price. The Government has also a role in this market, when they directly or through other Governmental (or EU) institutions also try to support SME lending market by, for example, offering guarantee programs.
The regulation discussion focused on the UK and the US market. Some panelists commented that the FCA has had a more positive impact on the market than the SEC, when it has been able to think about the ecosystem as a whole. At the same time, some others commented that the US approach is often open to interpretation, when participants in Europe often call for clear rulemaking. In the US also the existence of the federal and state level structure make the whole more complex. A UK platform representative commented that Title III in the US is meaningless, but in the end all parties don’t agree about that yet. Tax benefits and e.g. ISA for p2p and crowd investments in the UK are also important things in accelerating the market. Many parties see that there will be more requirements for the back offices of the platforms, for example in KYC, AML and reporting functions. This is the area where Crowd Valley also offers leading solutions for platforms and portal to meet their ongoing and long-term requirements.
In summary, many alternative finance and fintech events have started to repeat one another. They have the same stories about regulation, some known platforms and speculation, how new models can have a huge potential. But much less is talked, e.g. what is needed to develop the market, how this has impact on the value chains of financial services, what can the traditional finance companies act on, what are all technical and back office functions that are needed to develop new services, and especially what kind of dimensions and roles there are in the ecosystem. Now it is important that this new industry really starts to think about the next big steps, how to really get alternative and digital finance to a major role in the finance sector. It requires more ecosystem, business model and technology competence than most conferences offer today.
Jouko Ahvenainen is a serial-entrepreneur, Crowd Valley's Chairman and Co-founder of the Grow VC Group, a pioneer in new funding solutions, including equity p2p investments. He participated in changing US finance regulation, getting the Senate and President to allow crowdfunding and has worked with EU finance regulation. Jouko started his work with crowdfunding models in 2008. Jouko is a founder, partner and board member in several innovative digital finance companies, like Crowdbaron, Kapipal, Grow Advisors and Commoditarian. Jouko is also a member in the Transatlantic Economic Forum SME Access to finance group, and has been an advisor for US, European and Asian finance programs.