Laggard no more? A look at what European markets offer investors and why platforms are peering across the Channel

If you want to keep up with alternative lending, you should probably be looking to the continent. Last week, Seedrs announced a partnership with ING, which will see the platform become the bank’s equity crowdfunding partner in Belgium and Luxembourg. ING will refer businesses to Seedrs if it thinks a firm could benefit from funding via the platform – it also has a partnership with donation-based platform KissKissBankBank. 

 

But that’s not all. Two weeks ago, P2P business lender Funding Circle announced that it had acquired Zencap. The Rocket Internet-backed platform is now trading as Funding Circle, enabling the company to roll out its services across Germany, Spain and the Netherlands. It intends to dominate SME lending across five significant markets. With 450 employees, it’s aiming to lend $120m every month. Perhaps no longer quite so alternative. 

 

Excluding the UK, Europe’s direct lending market penetration is still around 15 times behind Britain and the US, and about 100 times behind China. That’s according to Liberum, whose research I’m citing. China, incidentally, will account for roughly 85 per cent of annual online direct lending volumes this year. Despite the industry currently being three times smaller in continental Europe than in Britain (UK volumes are at about $4.5bn, compared to the continent’s $1.5bn), its addressable market is 5.2 times larger. “What’s interesting is that the penetration is extremely low,” says Cormac Leech, director of fintech at Liberum. “In fact, it’s just 1 per cent of the addressable market.” 

 

And that leaves much room for catch-up growth. Estimates suggest that the UK online direct lending market will grow by around 85 per cent this year. On the continent, that figure will be 200 per cent. In fact, Liberum predicts that, despite starting from a lower base, by 2020, continental volumes will have overtaken the UK’s. 

 

For investors, this offers real potential – particularly when it comes to equity. “There’s a huge land grab opportunity here,” says Leech. “And the M&A activity is consistent with the growth theme.” Funding Circle’s move is smart, he adds. “By acquiring a platform that already had the regulatory licences to operate across several countries, it’s accelerating its growth and the sector’s.” 

 

But it’s worth waving a yellow flag of caution. First, says Bryan Zhang, director of the Cambridge Centre for Alternative Finance at Judge Business School, note that industry growth in Europe has been driven more or less by lending. According to Judge’s research, equity crowdfunding accounts for just 13 per cent of volumes on the continent (at €82.56m in 2014), while peer-to-peer and peer-to-business lending made up 60 per cent of the 2014 volumes, at €617m.

 

And there are challenges. In Germany, for instance (and it’s a very similar story for France and Spain), the lending industry “is still quite a difficult landscape,” says Zhang. In July of this year, the country’s Retail Investor Protection Act came into force. On the equity side of things, an increase in the amounts investors can put into a business has made the landscape more workable. Under the new law, while most people can only invest up to €1,000 in a business via a platform, higher earners can invest up to twice as much as their net monthly income, up to €10,000. And you can invest the same if your liquid assets are worth at least €100,000. That said, companies raising €2.5m and over are still required to issue a prospectus – an expensive and time-consuming task, even for a larger and fast-growing SME. 

 

But when it comes to lending, the law puts a heavy lid on innovation. “This is the main cause of the shortage of SME loans from retail investors on platforms,” Zhang says. Platforms and banks have been forming mutually beneficial relationships for years now, but that hasn’t stopped regulators making it mandatory for platforms to be partnered with banks – and only the latter can originate loans. “The regulations in place across Germany, France and Spain will protect investors, but they also present a bottleneck to growth,” says Zhang. 

 

The takeaway for Europe is that it’s not a race, he continues – the situation is very fluid. “There are lots of cross-border transactions – and those will only get more interesting.” A push on the Capital Markets Union will also have an impact on the sector – though that won’t be for some time yet. Expect far more M&A in the industry, too – and with UK firms driving innovation. After all, RateSetter and ThinCats continue to do well in Australia, and Seedrs has just announced a move into the US. “The UK is exporting its innovative financial models and best practice into other countries. Volumes in Europe will pick up, and it’ll probably be UK companies driving that. They have first mover advantage,” Zhang says. 

 

What really matters for the alternative finance industry is the quality of growth, rather than the speed or volume of that growth, adds Zhang. And this, of course, makes the need for smart regulation – rules that protect investors but also encourage growth – ever more vital.