FinTech: Alternative Finance

Peer to peer lending has turned back the clock a few hundred years by swerving the banks as only FinTech seems able to do.  Cutting out the middleman is something new financial technology companies have down to art form.  P2P lending, a new cutting edge business model has taken a page out of the history books and developed a platform for individuals to lend their cash directly to borrowers.  Originating from the UK the industry main players include Funding Circle, RateSetter and Zopa.  Most of the eye opening growth has happened in the last five years with Zopa approaching their fist £1bn in loans this year.

With interest rates at an all time low savers have in some cases struggled to keep their bank savings rising at the same rate as inflation whilst P2P lending platforms often offer lenders rates up to 10%.  Although banks offer more security and are regulated to insure savers up to £85,000, mainstream P2P lenders have low default rates and funds in place to compensate lenders on such occasions. With such a long run of competitive success there may have developed a false sense of security and savers must be aware that there is significant risk.  With the impending rise of interest rates Peer to Peer lending will be truly tested, as yet it is an unproved business model in terms of our rising and falling economy.

Crowdfunding accounts for a smaller part of the alternative finance sector but has some of the fasting growing figures seen in recent years.  With SME lending from banks almost grinding to a halt crowdfunding has provided businesses and investors a platform to connect.  Startups needing to sell shares in their new businesses can use equity crowdfunding sites to raise funds.  With their business proposal and a brief bio, founders set a time limit of usually between 60 and 90 days to raise a set amount in full. If the targeted amount is not achieved during this time then in most cases no money changes hands and the campaign is unsuccessful. Also originating in the UK the main players are frequently cited in the media with many interesting campaigns successfully launching new businesses during a time of austerity.  Seedrs, Syndicate Rooms and CrowdCube once seen as a quirky economic experiment are starting to attract larger businesses and institutions have now raised on, funded and set up their own platforms.  Syndicate Rooms only offer investments already backed by experienced investors which can in effect offer confidence to the many inexperienced investors now buying shares on equity crowdfunding websites.

FinTech has continued to offer new services across the financial markets and alternative finance has consolidated itself as the leading industry within the sector over the last five years.  As P2P and equity crowdfunding edges closer to the mainstream with impressive growth figures, this market is yet to weather the inevitable downturns yet to come.  With interest rates on course to rise in 2016 the changing global economy will come with new challenges for these platforms during which time there will mostly likely be higher defaults on loans and new startups will be working against the usual difficulties associated inflation.  In a bid to keep SMEs moving forward the UK government has supported both small business and FinTech with tax breaks and flexible regulations that have encouraged a competitive environment.  Alternative finance has carved out a distinct foothold within the financial market sector with P2P business lending proving itself to be attracting the most attention and now an asset class of its own.



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