The Cambridge Centre for Alternative Finance (CCAF) and the Polsky Center for Entrepreneurship and Innovation and Booth School of Business Booth School of Business at the University of Chicago have revisited the alternative finance market once again with a benchmark study. The research which covers the United States, Canada, Latin America and the Caribbean (LAC) showed continued growth in alternative finance across the region as total market volume rose to $35.2 billion in 2016 – an increase of 23% versus year prior. The report noted that the prior Americas benchmarking report had been adjusted down due to changes in the research methodology. While total volume grew the pace of growth and entry of new platforms both slowed during the year.
The 2017 Americas Alternative Financing Industry Report: Hitting Stride will be formerly presented at an event held at Chicago’s CME Group on May 25th. The Inter-American Development Bank and the CME Group Foundation were both sponsors of the research.
According to the report, the alternative finance industry “has hit a stride” as it continued to evolve at various rates in the regions covered.
“An array of crowdfunding, marketplace/peer-to-peer (P2P) lending and other online alternative finance platforms have emerged that use technological innovations to change the way people, businesses and institutions access and invest money. Furthermore, more than 200,000 businesses turned to online alternative sources of funding across the Americas last year,” stated Randall S. Kroszner, Norman R. Bobins Professor of Economics at the University of Chicago Booth School of Business and Faculty Advisor for the report.
Tania Ziegler, Senior Research Manager at the Cambridge Centre for Alternative Finance, added;
“This report highlights an alternative finance environment that has hit stride – having achieved a steady pace of growth that denotes a competency more akin to traditional players. With platforms from the US driving volume, and Latin American platforms achieving triple digit growth, 2016 has proven that alternative finance in the Americas is becoming a staple channel for consumers, entrepreneurs and small businesses in need of finance.”
The research found that the United States continues to be one of the world’s top markets for Fintech including online alternative finance channels and instruments. The 2016 US market volume of $34.5 billion marked a 22% year-on-year increase from 2015. The US sector was dominated by online lending both Marketplace and Balance sheet iterations.
LAC alternative finance markets grew by 209% to $342.1 million in 2016. LAC, collectively as a regional market, surpassed Canada’s national market in 2016. The growth was mainly led by high volume markets in Mexico, Chile, and Brazil.
Canada’s alternative finance market increased 62% to $334.5 million driven by both organic growth and expanded survey coverage included in the research.
Among the key findings of the report:
- The US, Marketplace/P2P Consumer Lending continued to account for the largest share of market volume with $21 billion recorded in the US in 2016 (up 17%).
- Balance Sheet Business Lending became the second largest model in the US in 2016 with $6 billion originated, surpassing Balance Sheet Consumer Lending which had $3 billion.
- Equity crowdfunding in the US, not including real estate, declined marginally in 2016 versus 2015.
- As of 2017, the report tracked 105 platforms that can be verified explicitly as becoming inactive in the past three years with 79 in theUS, 7 in Canada and 18 in LAC
- For LAC, Marketplace/P2P Business Lending remained the largest alternative finance market segment with $188.5 million registered in 2016, an increasing of 239% over 2015.
- In Canada, Donation-based Crowdfunding remained the top alternative finance model with $105.9 million, but balance sheet business lending became a close second, rising at a rate of 282% to $103.3 million in 2016.
- Reward-based Crowdfunding declined during the year
- Following changes to US regulatory policy in 2016, emerging Reg CF-enabled platforms made a big mark in Revenue-Sharing/Profit-Sharing Crowdfunding, with $28.5 million in total funding to businesses last year.
- Self-reported risk perceptions of the alternative finance industry pointed to concerns about cyber-security breach. Seventy-six percent of platform operators believe there is medium to very high risk of cyber-security breach.
Raghavendra Rau, Director of Research at the Cambridge Centre for Alternative Finance, called the US one of the world’s most advanced market for alternative finance.
“Continued innovation, coupled with growing demand from consumers, businesses and institutional investors, led to a sustained increase in the total US volume to $34.5 billion in 2016, a 22% increase from the previous year,” said Rau. “Our subtitle for the Hitting Stride – attests to outcomes produced by this innovation.”
E.J. Reedy, Director at the Polsky Center for Entrepreneurship and Innovation at the University of Chicago, said alternative finance and Fintech in general was critical to the evolution of finance;
“Alternative finance is a critical component of FinTech and Finance, more generally, and given the rapid pace of change that it is undergoing, we are pleased to continue our partnership with the Cambridge Centre for Alternative Finance on the current year’s report.”
David M. Wong, Senior Director, Innovation & Acceleration Lab at CME Group, commented on the role institutional trust plays in the evolving field of Alternative Finance;
“People now view peers as having an equal level of credibility as experts. Whether P2P markets reach or exceed the size of the incumbent market platforms (ala Uber and Airbnb), or not, they are driving rapid innovation and new dimensions of competition across industries.”
Juan Antonio Ketterer, Division Chief of Capital Markets and Financial Institutions at the Inter-American Development Bank, said the second iteration of the Americas benchmarking report confirms that alternative finance was strong in LAC.
“The study shows how alternative finance is increasing in an uttermost relevant niche: business lending, accounting for 63% of the total origination volume for 2016. These and other useful data and analysis from this study bring out the relevance of these entrants to the financial system in the region and the magnitude of their disruption, attending to previously unbanked and underbanked economic agents.”
The authors of the report believe credible research is vital to inform policy makers on the evolving alternative finance market. Providing data and insight can help craft thoughtful ecosystems to foster a positive and inclusive financial ecosystem in all markets.
The report is embedded below.