Alternative finance: a tiny firecracker that’s about to explode
When it comes to evaluating the rise of fintech in Australia and indeed the Asia Pacific region, we can learn a lot from Bill Clinton’s 1992 election campaign slogan: “It’s the economy, stupid”. KPMG’s recent study, conducted in collaboration with Cambridge Centre for Alternative Finance shows that in Australia the alternative finance (alt-fi) volume grew 320 percent in 2015 to a US$340 million market.
It’s clear that at 1-2 percent of the overall volume, incumbent financial services companies may not yet be too concerned. However, online alternative finance, which includes peer-to-peer lenders, crowdfunding platforms and other innovative fintech businesses, is exploding in popularity across the world. In China, which is the true global behemoth in the sector, over US$100 billion of alt-fi transactions took place last year. In the UK, a far more similar market to our own, the volume was US$4.5 billion.
Most importantly, the sector is seeing a huge volume of growth, with new startup platforms being launched on a regular basis. These nimble businesses, unencumbered by legacy systems and ingrained procedures, and enabled by data analytics capability, are taking advantage of their freedom to serve the customer in new and ‘frictionless’ ways. In low touch regulatory environments like China, their massive and rapid growth is perhaps not so much of a surprise. But alt-fi is also rapidly developing in the UK, Japan and Australia where regulators are increasingly balancing their support for innovation while ensuring investors and customers are protected.
In Australia, our US$340 million alt-fi market is divided amongst a range of subsectors, many of which were not even on the radar over recent years.
The largest share of Australia’s alt-fi market volume was balance sheet business lending, accounting for over US$120m in 2015. Invoice trading came in second at over US$105m. Marketplace/peer-to-peer consumer lending, the next largest segment of Australia’s alt-fi market, has grown from US$2m in loans in 2013 to US$9.5m in 2014 and then to over US$43m in 2015.
On a per capita basis, Australia ranks third in funding for alt-fi in Asia Pacific for 2015 (US$14.38), with China in top place at US$75.54 and New Zealand in second at US$59.37.
So what does this mean for the sector’s incumbents, new and growing alt-fi platforms and the Australian consumer?
For the consumer it means greater access to finance, diversity of funding sources and better service. Take SME businesses for example, an online balance sheet lender or invoice trading platform can be a quick and easy solution to unlock cash for your business.
For alt-fi platforms it means there is more investment available and growing momentum in the market. It is not inconceivable that within five years, alternative finance will account for 5-6 percent of the total market. That means a lot of growth, and a lot of potential for new players.
For the incumbent financial services companies like incumbent banks, alt-fi is by no means an extinction level threat. Of the hundreds of alt-fi platforms across the region, it’s a question of achieving scale – attracting enough customers to be able to pay for the price of servicing them via these new models.
The reality is, only a few platforms in each category of marketplace lending will be able to achieve sufficient scale to survive.
And this is where we come back to that play on Clinton’s campaign slogan. The winners in the alt-fi markets will be those that execute well. Make no mistake, some of these platforms have great business models, not just new ones. As the banks track and engage with these new platforms, we’ll see increasing collaboration and no doubt more than a few acquisitions.
The benefit to Australia in pioneering these alt-fi models and fintech technologies, beyond better products for our local consumers, is economic value creation and jobs growth.
Read the full report: Harnessing potential: Asia-Pacific Alternative Finance Benchmarking Report