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How Fintech Is Evolving Against Traditional Banking

Written by James Sinclair at Trade Finance Global

It is estimated that around 78% of UK small and medium sized enterprises (SMEs) have their main banking relationship with the four largest retail banks. The fintech industry is attempting to challenge this. The joint Nesta-Cambridge ‘Understanding Alternative Finance Industry Report’ (2014) estimated that the UK alternative finance market was worth £1.78bn. It is important to look at the size of the wider European alternative finance market, which grew to €3 billion in 2014 and could increase to €7 billion by the end of 2015 according to The European Alternative Finance Benchmarking Report. 

When we look at the alternative finance market, this includes peer-to-peer lending (P2P), crowdfunding, invoice trading and property finance companies. One of the many reasons for this growth is innovation and current low interest and savings rates, so people are happy to invest both through debt and equity and customers are willing to test the traditional banking system and existing relationships. 

The rise of these lenders is assisted by the new bank referral legislation in the Small Business, Enterprise and Employment Act (given royal assent on 26 March 2015). After the UK government consultation from October 2014 on the structure of Individual Savings Accounts (ISA), there was a decision to extend the list of ISA eligible investment products to include more “debt and equity securities offered via crowd funding platforms”. The July 2015 Budget set out that the new ISA will allow investment in P2P loans and be open to investors on the 6th April 2016. This is coupled with an investigation into ISA eligibility for debt and equity securities derived from crowd funding. 

In terms of partnerships, we have seen GroupamaBanque in France has committed to investing €100m via the Unilend platform over the next 4 years, which shows the teaming up of older, existing institutions and new platform based lending. 

All of these initiatives have allowed new players to enter the market and contend with those traditional financiers. These alternative finance providers are challenging traditional forms of lending, holding themselves out to be flexible and advancing less restrictive terms credit (e.g. for stock finance) and low value loans to a wider client base. This is coupled with new legislation that assists small businesses on their search for finance. With many financiers de-leveraging after 2007 at the cost of SMEs, we have seen many of the more agile alternative finance companies handing out much needed life boats in relation to credit worthy opportunities.

The information contained in this report should not be used by consumers to make financial decisions. Consumers have a range of different financial needs and requirements and as such should always seek independent professional financial advice before making an investment decision. 

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