Financial services: healing the UK economy


As with financial services generally, it is London and the UK that are leading the world in this emerging sector, with innovative new business models and platforms that are now expanding across the globe. But crucially, it is these new financing services that are stimulating the economy at home, providing UK SMEs with access to the funding they need to grow and succeed.

The rise of alternative forms and sources of finance is a necessary innovation as we emerge from the recession. The major banks dominate finance in the UK, and efforts to increase competition have enjoyed limited success; the four largest banks between them have 85% of business current accounts as well as providing 90% of the loans taken by businesses. The figures on lending by major banks to SMEs also demonstrate the challenges young businesses face. Such lending has continued to decline this year, with the first quarter of 2014 seeing a decrease of £700 million, followed by a further £435 million fall in the second quarter.


A new beginning for alternative finance


It is this atmosphere that has enabled the fintech and alternative finance sectors to flourish. What we have seen over the past few years is the beginnings of a democratisation of finance, as more people are able to seek and offer funding by circumventing the traditional gatekeepers. With the rise of peer-to-peer lending, crowdfunding, and direct funding platforms, access to lines of finance has increased dramatically. Unlike the decline in lending seen in the large banks this year, peer-to-peer lending platforms for example together provided over £500 million in the first half of 2014, a new record.

Furthermore, the alternative finance sector is set to continue to grow, and upcoming government efforts will assist with this. At the launch of Innovate Finance, the industry body accelerating the growth of fintech firms, the Chancellor announced that future legislation will ensure large banks refer failed funding applications from SMEs to alternative lenders via matching platforms, if the SME consents. This will not only help those companies that are unaware of the wider opportunities for funding, but also further cement London and the UK’s position as the centre of the alternative finance world. Additionally, this creates a great opportunity for developing these platforms that will form the bridge between banks and alternative lenders.


The impact of peer-to-peer lending


Peer-to-peer lending platforms are leading the alternative finance market in the UK, directly connecting businesses looking to borrow funds with those who are interested in lending. The Peer-to-Peer Finance Association predicts that the amount of funding provided by its sector will surpass £1 billion this year. This is the combined total of the money offered to young businesses and those looking to start them by over 66,000 individual lenders. The platforms have achieved this growth by offering attractive rates to lenders, a result of having low margins through operating exclusively online, alongside faster access to funding for borrowers.

The alternative finance sector is successfully providing greater choice among services to both consumers and SMEs, and diversifying the UK’s financial services.

The peer-to-peer sector is rapidly becoming an established alternative to banks, and the UK is at the forefront. In July, RateSetter, a leading platform and founding member of Innovate Finance, became the first to be given a risk rating by a research agency. Furthermore, platforms that were developed in the UK are now expanding to other markets and exporting their approach: RateSetter is due to open in Australia, while Funding Circle is operating in the US.

Less well publicised in the alternative finance sector have been those employing new revenue-based financing models, in which SMEs borrowing funds pay a percentage of their revenue in return. The size of these payments therefore varies depending on the success of the company, and this has proved an attractive option for growing businesses. For example, Fleximize has provided funding totalling almost £2 million to over 100 companies, all within its first six months. They also offer the more personalised service to the companies they fund that large banks would only provide for their corporate clients.


Catching on


Yet the success of alternative finance has not gone unnoticed by traditional banks, and some have started to engage with these new providers. Santander, for example, has partnered with Funding Circle and will refer customers to the peer-to-peer lender. In doing so, Santander is ahead of the aforementioned proposed legislation, and has the opportunity to establish itself in this area before the emergence of matching platforms. The partnership also means that Funding Circle will market Santander’s services to their growing customer base.

The alternative finance sector is successfully providing greater choice among services to both consumers and SMEs, and diversifying the UK’s financial services. As well as bringing the acknowledged benefits of greater competition to our financial system, by broadening the range of players beyond the largest banks the rise of these new models and businesses has the potential to increase the resilience of the economy, which should be of benefit to, and welcomed by, the whole industry.