Alternative Finance: Trends and Future Paths

Introduction

In recent years, the alternative finance sector has experienced a surge in investment, and with the start of the year, there is growing anticipation for further growth. The evolving landscape of regulation, technology, and traditional finance is set to pave the way for a broader public to reap the benefits of alternative finance tools.

An overview of the market: what are the expectations?

The alternative finance market has registered a growing trend over the years, closing the year 2022 with a value of $173.9 billions. By 2032 the category is expected to reach a value that floats around 920.9 $billions, with a CAGR of 18.5%.

Alternative tools allow small businesses to access capital without the need for passing through intermediaries, making capital more accessible especially for the customers that do not satisfy the requirements of traditional banks. This has led to a significant increase of alternative tools as a way to obtain capital.

The alternative market is categorized into segments such as peer-to-peer lending, debt-based crowdfunding, invoice trading, and others. In 2021, the P2P lending segment exhibited consistent growth, reaching over $4 billion in 2022. Major institutional investors, including hedge funds, pension funds, and banks, have incorporated P2P lending into their strategies due to its high returns and diversification benefits. As its popularity continues to rise, governments are positioning themselves to protect investors and borrowers by introducing regulations.

In the first half of 2022, crowdfunding recorded a volume of over $800 million, marking a 55% increase from 2021. Real estate and startups secured the majority of the funding during this period.

Alternative Finance Business Funding, Volumes by Region, USD

The graph illustrates the funding amount through alternative tools from 2017 to 2020. As depicted, the segment has gradually increased, particularly in the USA and Canada in 2020.

The Covid-19 pandemic moderately impacted the alternative market. The growing use of online platforms facilitated easy customer access to peer-to-peer lending platforms and led to an increased demand for alternative finance. Traditional lenders became more cautious due to economic uncertainty. Consequently, alternative finance providers encountered heightened challenges in evaluating creditworthiness and accurately pricing their offerings amid the economic disruption caused by the pandemic. Despite these challenges, the pandemic also created opportunities for adaptable providers to capitalize on evolving market dynamics.

Impacting Factors

The positive evolution of the alternative market is influenced by the development of the following factors:

  • Advancement in technology: The development of new technologies has enabled the creation of platforms and tools, allowing users easy access to funding, investment opportunities, and other financial services.
  • Lack of access to traditional finance: Many people and businesses are underserved by traditional financial institutions, which can be slow to approve loans or may require collateral that many do not possess. Alternative services provide tools for customers without access to credit or those dissatisfied with traditional services. For example, microfinance institutions support small businesses in developing countries without access to traditional banking services.
  • Change in consumer preferences: Consumers are increasingly seeking financial services offering greater transparency, convenience, and personalized solutions. Alternative finance services often meet these requirements, making them a compelling choice for individuals. For instance, digital currencies like Bitcoin and Ethereum enable rapid and secure transactions without intermediaries like banks. This direct approach appeals to those involved in international transactions or prioritizing privacy and security.
  • Regulatory Environment: The regulation surrounding alternative services has evolved, creating both opportunities and challenges. It has erected barriers to entry for new alternative finance services, while simultaneously providing a framework for them to operate within. Favorable regulatory changes, such as the JOBS Act and PSD2, have fostered a more supportive environment for alternative finance providers, contributing to their significant growth.

The role of China

From the The 2nd Global Alternative Finance Market Benchmarking Report by Cambridge Centre for Alternative Finance, China, once the largest alternative finance market in the world, has progressively lost its role as alternative leader: the following graph shows how the constant decrease of volume transactions in the Asian country until 2020.

The 2nd Global Alternative Finance Market Benchmarking Report

China dominated the alternative market up to around 2018. In 2017 it accounted for 86% of the total market. In 2019, China held a substantial 48% share of global volume. However, in 2020, China’s involvement dwindled to a mere 1% of global activity, reflecting the impact of regulatory measures implemented in response to the market’s rapid expansion.

The CCAF reveals that the global online alternative finance market has demonstrated unwavering growth over the past three years. Excluding China, alternative finance expanded by 3% from 2018 to 2019, from $89 billion to $91 billion. In 2020, despite the COVID-19 pandemic’s impact, the global market volume surged an additional 24% year-on-year, reaching a remarkable $113 billion.

The P2P/Marketplace Consumer Lending model, which has consistently been the largest alternative finance model since 2013, has witnessed a substantial decline in absolute volume, falling from $103 billion in 2019 to a mere $35 billion in 2020. This dramatic drop can be attributed to the sharp decline in Chinese P2P Consumer Lending.

Similarly, the P2P/Marketplace Business Lending model experienced a significant downturn, recording a 59% drop to $21 billion in 2019 and a further 26% decline to $15 billion in 2020. This downturn mirrors the broader trend of declining P2P lending in China.

The decline of the Chinese alternative finance ecosystem highlights the interconnectedness of the global alternative finance market and the importance of stable regulatory environments for the growth and sustainability of alternative finance models.

Today the USA and Canada are the largest regions in terms of volume transactions in alternative markets,followed by the UK and Asia Pacific (excluding China).

Debt-based platforms dominate the sector providing a key resource to both consumers and, mostly, smaller businesses – an important aspect of any economy.

Conclusion

The alternative finance market has experienced significant growth in recent years, driven by technological advancements, evolving consumer preferences, and regulatory changes. The alternative finance market is expected to continue to grow in the coming years, with the global market value reaching a remarkable $920.9 billion by 2032. The sector’s optimistic outlook is fueled by technological innovation, evolving consumer preferences, and regulatory support, offering diverse financial solutions for businesses and individuals alike.

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