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Is the Rise of Alternative Finance a Concern for Banks?

The UK’s alternative finance sector grew by 84% in 2015, with £3.2 billion worth of investments, loans and donations facilitated in total. This has seen a lot of lending and borrowing taken away from major banks, as more and more individuals and businesses use peer-to-peer platforms and other financial services for their money needs.

With such a large increase in alternative finance use, there are some concerns that the practice could have a big impact on banks. In order to combat this new trend banks will have to start taking new action and assess the threat alternative finance has introduced.

Factors Leading to the Rise

The global financial crash can be viewed as the starting point for the rise of alternative finance. Some banks were struggling in the wake of the credit crunch and lending levels were down as many became a lot warier about providing finances to every customer that required it.

Conditions for borrowing from banks became a lot stricter, making it harder for some people and small businesses especially, to be granted loans. Seeking borrowing opportunities elsewhere, it opened up a gap in the market for new financial institutions to offer their new services, such as business loans and invoice financing with Market Invoice.

Increasing Interest Rates

One effect of the rise in use of alternative finance is that interest rates have increased as well. However, this is also a sign that the economy is recovering and that alternative finance has been a strong factor behind some of the UK economy’s recovery.

This positivity could be slightly concerning to banks, which used to be the financial pillars of every economy. It shows that there has been a shift and that alternative finance options have been a help not just to individuals and businesses, but the economy as a whole too.

Popularity with SMEs

A lot of SMEs have struggled to acquire the necessary funds to run their companies ever since the global financial crash, especially with banks being stricter about lending. Many have found that alternative finance options hold various advantages, such as delivering services more tailored towards their needs.

Especially for start-ups and SMEs, alternative finance has provided a solution to help them get set up in the first place, whether it be through invoice financing, independent loans, grants or other products. Their popularity with SMEs is taking a certain amount of business away from banks and the growing trend is not good news for them.

Fresh Opportunities

Research has found that 50% of SMEs say that alternative finance is opening up fresh opportunities for them. While 74% of larger companies with an annual revenue of over £1.1 million agree with that statement too.

It demonstrates an increasing awareness about alternative finance options for businesses and an ever-increasing positive attitude. Access to finance is the biggest barrier to growth for many SMEs, with alternative finance providing a solution many banks did not have. This is a threat to banks, and with the same study finding 60% of businesses wanted to fund growth, the rise in alternative finance for businesses doesn’t look like slowing down.

Established Market Presence

Another reason behind the continuing growth of alternative finance has been that it now possesses a fully established place on the market. Previously a less well known about option, with most people automatically going to banks for financial help, the rise in popularity has helped establish them.

There are now more options than ever for individuals and businesses to gain financial help, widening the market and making it harder for banks to dominate the lending market. Banks will need to adapt their strategy to remain competitive in the future.

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