A Closer Look at the US Alternative Finance Market

Last month, the Cambridge Centre for Alternative Finance (CCAF) published their annual report on alternative finance covering the Americas. “Reaching New Heights” covered online alternative finance data in North, South, and Central America as well as the Caribbean. CI wrote about the report when it first came out but we wanted to take a closer look at the data regarding the US as provided by CCAF

First of all, during 2017 the Americas generated $44.3 billion in total alternative finance during the year. An increase of 26% versus 2016. The bulk of this amount came from the US at $42.81 billion or 97%.

CCAF states that the US is one of the most advanced markets for alternative finance in the world.

“In 2017 the total volume of the market rose 24% compared to 2016, reaching $42.8 billion. Overall, from 2013-2017, the market grew at an average of 88.5% each year. Over these five years, the USA Market accounted for a total of $121.7 billion.”

While the US market may be very advanced the number of platforms actually contracted during 2017.

CCAF reported that 48 platforms either pivoted away from alternative finance or shut down. CCAF gave the concrete example of equity crowdfunding – a sector of Fintech that has always been targeted for outsized growth. CCAF said that a handful of equity crowdfunding sites moved away from the sector to become “entirely private placement.”

Online lending changed as well with some lenders merging or being acquired by existing firms as the sector matured.

Online consumer lending was the largest segment of alternative finance segregated as follows:

  • Balance Sheet Consumer Lending model accounting for $15.2 billion (or 35.5% of the USA market share)
  • Marketplace/ P2P Consumer Lending accounting for $14.7 billion (or 34.3% of the USA market share)

Marketplace/P2P Consumer Lending exhibited the most severe contraction of any model in the US, dropping by 30%. In 2016, this segment generated $21 billion. During 2017, that number tanked to $14.7 billion.

Online business lending was the next largest segment.

CCAF states that in 2017, 130,264 businesses across the US raised about $10.1 billion through online alternative finance platforms. This amount represents 24% of all US market volume and an increase of 14.8% versus the year prior. Although the number increased the actual number of businesses using online lending declined by 9%.

Investment crowdfunding (equity crowdfunding) represented 12% of the total amount of US alternative finance. The total for 2017 was measured at $236 million – a significant decline of 57% versus 2016 when CCAF reported $549 million.

So where is the growth?

Balance Sheet Consumer Lending generated $15.2 billion in 2017 compared to the $2.9 billion it raised in 2016, a growth rate of 417%. Balance sheet lending is easily topping P2P/marketplace lending models.

Marketplace/P2P Business Lending grew by 9% in 2017 from $1.3 billion to just over $1.4 billion.

Marketplace/P2P Property Lending grew by 18% from $1.0 billion in 2016 to $1.2 billion in 2017.

Real estate crowdfunding experienced dramatic growth of 129% from $807 million in 2016 to $1.9 billion in 2017.

So what is the takeaway from all of this?

Online lending or debt based platforms dominate alternative finance in the US – just like the rest of the world. Traditional debt markets are huge so this is not unexpected.

Models of alternative finance for both consumers and businesses are morphing, and adapting, as the sector evolves and models change to remain competitive.

Real estate, both debt and equity, is a big winner as the model of providing more efficient access to an asset class previously difficult to access appears to be working.

Investment crowdfunding may be the biggest disappointment. The authors of the CCAF report speculate that the regulatory environment may be at least part of the cause.

In the US, there are three separate securities exemptions that equity crowdfunding platforms use. These exemptions each come with certain limitations and requirements but engender a convoluted and confusing ecosystem. The most popular exemption, Reg D (506c), is also the one that blocks out smaller investors as it is available only to accredited investors – an issue that policymakers say they will address.

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