Our ‘Crowd Finance 101’ series takes a look at the nuts and bolts of crowd finance.
Following on from the last three weeks in the series where we considered equity, debt, charity and rewards crowd finance, today we take a look at the composition of the UK crowd finance market as a whole, comparing P2P with crowdfunding.
The Current State of UK Crowd Finance
The UK market is currently dominated by peer-to-peer lending.
This is a far higher percentage share than in the rest of the world, where P2P makes up around 74% of global crowd finance.
This is no great surprise.
The growth of P2P platforms was, in part, a response to the financial crisis of ‘07/08. Since then, the UK economy has been defined by a low interest rate environment, with investors demanding an alternative to the “0% + nothing” they were getting on their cash. P2P offered one.
British investors aren’t going to become risk-averse overnight, so cash alternatives have to be low risk. Equity crowdfunding was always going to be a harder sell in the UK, and growth would naturally be slower, because the typical investor seeks low-risk, low-volatility fixed-income investments alongside riskier assets like real estate and equities.
The hegemony of marketplace lending isn’t going to change in the near term, especially in light of the news that traditional players are about to enter the P2P space. But what we do is expect is that crowdfunding, especially in the equity space, will use the positive developments in the debt sector as a foundation upon which to build its own growth and success.
Looking at a breakdown of both sectors in the UK, we find more interesting detail.
Consumer and business lending comprises 87% of the £10 billion P2P market, with invoice financing, a more recent innovation, making up a smaller composition of the market.
The consumer and business lending space is dominated by three major players – ZOPA, Funding Circle and RateSetter.
And the big three will continue to dominate as they enjoy record-breaking growth. In the last year, we’ve seen very strong volume and campaign growth across these three companies, with the news that ZOPA and Funding Circle broke through the £2 billion barrier. RateSetter isn’t far behind.
The rest of the P2P market, whilst growing, is fragmented and diversified.
In comparison, UK crowdfunding (including equity, rewards and charity) remains relatively underdeveloped, making up only 4% of the overall crowd finance market.
Much like P2P, the sector is dominated by three key players – Crowdcube, Seedrs and Syndicate Room – who make up 80% of the market, with Seedrs and Crowdcube facilitating 86% of all crowdfunding activity between them in 2016.
Crowd finance in the UK is currently dominated by P2P, and we don’t expect that to change overnight, especially with news that giants like Hargreaves Lansdown, Goldman Sachs and others are joining the marketplace.
The potential of both sectors remains huge but, perhaps, it is in the equity crowdfunding space where the biggest giant sleeps. As in traditional finance, equity markets tend to follow the development of the debt markets and the outcome in crowd finance will likely be no different. Now that P2P is fully developed in the UK, the crowdfunding giant is beginning to stir.
In conversations we’re having with the big players in P2P and crowdfunding, we’re seeing no let-up in the ambition or optimism of either sector. We fully expect their burgeoning businesses to keep growing, reflecting the sentiment that they have hardly scratched the surface when it comes to the UK market’s demand. There is huge untapped demand in the UK, and both sides of the marketplace require education, information and regulation.
2017 already looks set to be another record year as crowd finance continues to grow. We’ll look into these growth rates in a future Crowdsurfer 101 piece so watch this space.
Keep up to date with all the developments on Crowdsurfer Pro.
Crowd finance 101: How do rewards and charity crowd finance actually work?
Crowd finance 101: How does debt-based crowd finance actually work?
Crowd finance 101: How does equity crowd finance work?
The elephants marching into the P2P room