The rise and rise of alternative finance

The big news for March has undoubtedly been the explosive rise in the value of the alternative lending market. The massive IPOs of alternative finance providers Lending Club (valued at £6 billion) and OnDeck (valued at £0.88 billion) at the close of 2014 set the scene for 2015. The first two months of this year saw major investment in the market – £230 million to be precise. According to TechCrunch’s “CrunchBase” data, that’s already more than double the highest totals seen in any previous quarter.

Experts are now confidently estimating that the lending industry market is on course to reach a mind-boggling value of approximately £700 billion. So, what has caused this stampede of venture capitalists with chequebooks poised into the alternative finance space? Stuart Ellman, a managing partner with the New York venture capital firm RRE, told TechCrunch journalist Christine Magee: “The reason these alternative lending platforms are coming up is that platform lending is simply more efficient for both the borrower and the lender.”

The AltFi lenders look and act quite different than the traditional banks...

It seems that the sector, which began life as a technology-enabled alternative finance resource for SMEs who were struggling to secure capital from big banks, are bringing in fast, simple and transparent solutions at exactly the right time. As big banks are dealing with the aftermath of the global economic recession, they have also been hamstrung by a complex new regulatory framework necessitated by the meltdown itself.

As Ellman put it:

“The borrowing business is able to find loans that they otherwise weren’t able to get – either due to the banking crisis or from the banks tightening up their lending process – and lenders have the ability to do their diligence, see the risk and the interest rates, and make the loans they want to on an a la carte basis.”

Lending Club is a pioneer of P2P lending and, along with Prosper, set the stage for boom in the lending marketplace. Technology-savvy outfits like this are, quite simply, impressing investors profoundly.

The latest generation of fintech is all about verticals, in fact, within the student loan marketplace, SoFipersuaded investors (led by Third Point) that its technology-enabled solution was worth a massive $200 million during a funding round in January. DriverUp, the first alternative finance firm to bring marketplace tech to the automotive lending market, secured a $50 million Series A investment earlier this month.

Before DriverUp, this market had operated in a thoroughly traditional mode for more than three decades. Its CEO, Sam Ellis, explains its appeal: “Auto loans as an asset class — different than real estate, gold, treasuries, bonds and stocks — historically have performed well and held up well through the recession. If you’re a high net worth individual or some sort of investment fund, you want options and you want attractive risk-adjusted returns.”

The traditional big banks are increasingly challenged on the speed, simplicity and transparency of their financial products.

Ellis believes that in the post-recession world, investors are more concerned than ever before to know where their money is going and how it will fare if another financial downturn strikes. Put simply, they want more data and more transparency – and marketplace platforms give them both in spades, enabling them to do their own analyses before any investment deal is inked.

One thing that alternative lenders agree on, whatever their particular vertical happens to be, is this: this industry, with its tech-savvy platforms and ease-of-use, will only grow stronger and bigger from here.

Written on in News