Benchmarking Study Tallies $304.5 Billion in Alternative Finance Transaction Volumes During 2018
The Cambridge Centre for Alternative Finance (CCAF), part of the University of Cambridge Judge Business School, has published the single most comprehensive report on the evolution of alternative finance. The benchmarking report provides unique detail and insight into the changing landscape of Fintech and digital finance.
The CCAF benchmarking report was supported by Invesco, the Inter-American Development Bank, IDB Invest (the private sector institution of the IDB Group) and CME Group.
CCAF incorporated data from approximately 1220 different firms representing the largest data-set every collected covering Fintech. The areas of alternative finance include peer to peer (marketplace) lending, balance sheet lending, debt-based securities, invoice trading and equity crowdfunding. CCAF noted an increase in the number of firms operating in multiple jurisdictions as the sector matures and adapts.
It is interesting to note that global transaction volumes declined from 2017 ($419 billion) but this was largely due to a rapid shift in China – the largest alternative finance market in the world. Excluding China, global transaction volume grew by 48% in 2018.
The top three markets reflect prior years:
- China – $215.37 billion
- United States – $61 billion
- United Kingdom – $10.4 billion
As covered by the report, four other countries topped the $1 billion threshold of alternative finance market volume in 2018:
- the Netherlands – $1.8billion
- Indonesia – $1.45 billion
- Germany – $1.27 billion
- Australia – $1.16 billion
- Japan – $1.07 billion
- For the first time, Latin America and the Caribbean (LAC) also surpassed this threshold, as a region – $1.81 billion
- Latvia and Estonia ranked third and fourth respectively in terms of per capita penetration but were 24th and 29th in terms of total volumes.
The findings suggest that higher alternative finance volumes per capita are associated with higher economic development, higher levels of perceived regulation adequacy, as well as higher levels of social trust in the society.
Excluding the Chinese outlier, CCAF believes that while the alternative finance industry maintains healthy growth in almost all markets it is not yet fulfilling its promise of democratizing access to finance.
Institutional money is gaining in importance. Overall, $162 billion of alternative finance volumes directly stem from funding provided by institutional investors such as banks, pension funds, mutual funds and family offices.
Dr. Robert Wardrop, co-founder and Director of the CCAF, commented on the report:
“This global report sheds light on the evolving landscape and market dynamics of the online alternative finance industry which are now providing substantial sources of funding for consumers, start-ups, small and medium sized enterprises, and industrial verticals ranging from the manufacturing sector to creative industries. The number of participating firms and their geographical spread means that this benchmarking research provides the most robust and globally comparative database currently available.”
Dave Dowsett, Global Head of Technology Strategy, Emerging Technology & Intentional Innovation at Invesco, said that it is important to keep a pulse on how financial services are changing and the ways alternative finance is being adopted worldwide.
“This report and the research efforts of the Cambridge Centre for Alternative Finance helps to support the evolution and measurement of financial models around the globe,” Dowsett stated.
Juan Antonio Ketterer, Connectivity, Markets, and Finance Division Chief at the Inter-American Development Bank, said the report provided a worldwide context for LAC:
“We are excited to see how, for 2018, the region’s origination passed the $1 billion mark, with a total volume of $1.81 billion and the largest year-to-year growth rate for any region: 173%. The Fintech LAC ecosystem is key for financial inclusion and financing our Micro, Small, and Medium Enterprises, as the study shows.”
Crowdfund Insider contacted CCAF for some additional perspective on the benchmarking report. We spoke to report authors Dr. Rotem Shneor, an associate professor at the University of Agder’s School of Business and Law, and Tania Ziegler, Head of Global Benchmarking at CCAF.
As this is the first time CCAF has published a global report, we asked what are the takeaways on alternative finance development in the various regions covered.
Shneor explained:
“The global approach was a long time coming. It shows both commonalities and differences across regions. Such a view is important for examining some core assumptions about the role played by alternative finance. First, when considering whether the internet really neutralizes geography in online services, we find mixed evidence. Non-investment models are much more international when it comes to individual backers, whereas investment models are less international due to regulatory heterogeneity and greater concerns for investor protection as well as financial reporting. However, investment models (such as P2P Lending or Equity Crowdfunding) are international to the extent that they attract international institutional investors that have better capacities to overcome compliance and reporting issues across jurisdictions. Also, when considering whether alternative finance really democratizes finance, we again find mixed results. Heavy dependency on institutional investors and concentration in developing economies limits the scope of providing new financial opportunities to regions and groups that need it the most. Having said that, the industry is still at a growth stage and balances survival consideration with mission fulfillment. Hence, both aspects of revolutionizing finance are evident, but whether they become the main or side story in the future remains to be seen.”
Ziegler said that moving to a global study was inevitable and they remain grateful to Invesco, IDB and the CME Group for supporting the research. Ziegler explained that as researchers it is critical not only to understand the individual context of a market but also to be able to readily compare these marketplaces in a standardized manner.
“The report is based upon our Global survey, which allowed for all participants to share their activities in all of their operating markets, not just their headquarter country. This has given us a much richer data set and one that allows us to truly capture the international scope of alternative finance,” said Ziegler. “When we look at how the industry is evolving on a global scale, we certainly note many key similarities and distinctions.”
Ziegler commented on Latin America and the Caribbean (LAC) markets as experiencing exponential growth that has been dominated by small-business focused finance.
“Unlike the rest of the world, which is heavily dominated by consumer credit, this SME-Access to Finance mandate sticks out. This has resulted in LAC being the fastest-growing region.”
In Europe, a significant number of firms are operating in more than one jurisdiction, largely due to the ability to passport financial regulation, Ziegler said.
“With incoming EU-wide harmonized crowdfunding regulation, we suspect that strengthened cross-border activity will continue. This is certainly one of the hallmark findings from our study. Regulatory readiness drives activity in Europe to a larger extent than in all other regions.”
In Africa, though volumes are predominantly driven by international platforms, Fintech hubs within the region are emerging. This is especially the case in East Africa, thanks to more openness from policymakers and regulators when reviewing Fintech-friendly frameworks. Domestic African platforms are also more likely to explore synergies with telecom or mobile-based fintech activities for facilitating payment requirements unique to this region, Ziegler explained.
Turning to the Asia-Pacific region, she said that alternative finance is emerging in a larger number of countries, with several already surpassing the $1 billion dollar milestone.
“This has been driven predominantly by domestic debt needs, with those countries passing the billion dollar threshold including Indonesia, Australia, Japan, Korea and Singapore.,” Ziegler added.
She said that North America is marked significantly by the dominance of consumer credit platforms, with an emphasis on institutional investment and emerging securitization models. Due to the relatively mature nature of the US market, platforms exhibit higher levels of debt-product diversification.
We asked how to interpret China, once the hottest P2P lending market, new regulations have effectively shutdown this sector of Fintech.
Ziegler said it is accurate to describe the P2P Lending industry in China as in fast decline, though the caveat is that version 2.0 will certainly emerge from the rubble. Though China’s lending volume has seen significant decline in 2018 and will certainly fall further in 2019, it is worth noting that the market still makeup more than 95% of China’s alternative finance volumes in 2018.
“Our understanding is that government action was concerned with eliminating dubious operations rather than eliminating the industry. Unfortunately, the crack-down also impacted a number of well-managed platforms and has shown us that a lack of guidance on proper wind-down plans can be very damaging to the stakeholders left in the aftermath. A number of retail investors and well-intentioned borrowers were left holding the bag and this has sown a lot of distrust in the industry. Recovery will certainly need to rebuild that social trust,” Zieglar clarified. “The industry provided important and much-needed finance to individuals and businesses in China, and the elimination of this industry could lead to an obvious market gap. As such, subsequent regulatory shift will be towards more responsible and sustainable operations under one regulatory regime or the other. – rather an elimination of an industry answering an obvious market gap. Additionally, we are noting that a number of lending solutions that are filling the gap left by the demise of P2P Lending are BigTech or quasi BigTech examples. This is certainly a space worth keeping an eye on.”
Crowdfund Insider has discerned anecdotal evidence that a growing number of platforms are leveraging existing touch-points to provide more services. We asked if this was a definitative trend.
“This is unclear,” said Shneor. “Most platforms are concerned with streamlining and efficiencies rather than expansion of product lines. This may be because margins are tight and scale is costly to achieve. For the time being, it seems that extra services are aimed at boosting the income base rather than improving customer experience. The industry as a whole is still at the growth stage in almost all countries, hence competition is not a major driver for service expansion either. As long as the industry maintains its double and triple-digit growth, platforms are likely to be oriented towards scale rather than scope.”
The most obvious question is in regards to the ongoing COVID-19 pandemic. How do you interpret a report like this that is backward-looking in a world that is being fundamentally altered by the Coronavirus.
Ziegler said it is important to know where you came from in order to understand where you are going. This report, and the historical data on this industry more broadly, provide signposts as to the general development trajectories of firms when faced with COVID-19, and where strengths and weakness may lie.
“In the first instance, we have seen consumer-focused lending take a leading role globally. Given the largesse of P2P and Balance Sheet consumer lending, alternative finance platforms have been able to successfully service consumer stakeholders, a group that will certainly be greatly impacted by COVID-19. Ensuring continued access to credit will determine how significant an impact is felt by these stakeholders in the aftermath of this pandemic and we can learn a lot about how firms have already engaged with consumers to deliver credit where needs were previously unmet,” Ziegler stated. “With enhanced internationalization and cross-border activity on the rise, digital platforms may be able to adjust their operations to navigate where the virus has hit heaviest and use international activities to support or circumvent potential pain-points. This will certainly inform firm readiness and operational flexibility.”
Finally, Ziegler said the report indicates how regulation can affect the development of the Fintech arena. Policymakers and financial regulators will be reflecting on how best to insulate their financial markets from further Coronavirus fall-out. How they include, or exclude, alternative finance models will certainly impact not only the ability for the industry to withstand this pandemic, but also how stakeholders reliant on alternative finance proceed. There is certainly a role that Fintech can play in inoculating financial markets, but this can only happen with open and inclusive regulation and policymaking.
“It is hard to forget that, to a great extent, this industry arose from the financial crash in 2008,” Ziegler said. “These firms have, in theory, built their models in reaction to the last financial crisis, though most have not yet been tested with a full credit cycle. The COVID-19 pandemic certainly goes beyond a typical financial crisis, as this exogenous enemy certainly was not anticipated and goes beyond the normal measures of a financial slow-down. We believe that we can learn from our past, to inform our future. This study, and subsequent research that the CCAF will conduct, should provide the industry, regulators/policymakers and other key stakeholders with a clear assessment on how the sector has reacted. The COVID-19 situation is a unique one and no-one really knows the long-term impact of it yet. By coupling our longitudinal data with upcoming research initiatives, we can begin to test the resiliency of this market and provide clear, evidence-based assessments on how the sector will continue to develop.”
It is studies like this that help us to record the achievements of this emerging industry, as well as monitor its development trajectories said Shneor.