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It has been an interesting time of late for the alternative finance sector. Like all parts of financial services, the industry is coming to terms with the post-referendum landscape and what the Brexit decision means for the future whilst platform failures and instances of lapse corporate governance have continued to attract negative headlines.

 

With the tectonic plates of the industry continuing to shift, the issue of consolidation is once again back on the agenda. Furthermore, with the race for scale gathering pace many platforms are being forced to re-evaluate their business models and client propositions in a new climate of economic uncertainty in order to secure their long term sustainability.

 

Critics may argue that it was ever thus and that retrenchment of traditional banks was always likely to be temporary with only a few large scale challengers able to assert themselves. At some level they may well be right, but such a position shows a lack of understanding in regard to the industry’s future and the competitive landscape which is rapidly evolving.

 

Specifically it fails to recognise the different operating models employed by those platforms that provide SMEs with access to lower-margin vanilla products, and those which have identified specialist niches in which they can provide products which SMEs simply find impossible to access from other providers.

 

 

Scale vs. Specialism and consolidatory pressures

 

When the bottom fell out of the financial markets in 2008 and the world realised that the structure of the traditional banking system was fundamentally flawed, the issue of Scale vs. Specialism became immediately apparent. The alternative finance supernova took off and hundreds of platforms sought to seize the commercial opportunities that SME finance provided.

 

Since then, we’ve seen a clear divergence in the types of growth strategies employed with two camps clearly emerging. In the blue corner are platforms offering vanilla products which have quite rightly focussed on driving scale and origination volumes. In doing so, they have attracted significant capital from institutional investors keen to generate returns in a low interest rate environment. Across the ring, in the red shorts, we’ve seen the emergence of specialist players who have combined technology with deep credit underwriting expertise to offer products that are less reliant on volume in order to deliver higher margin, sustainable returns.

 

 

The squeezed middle

 

What is becoming increasingly apparent is that for platforms offering vanilla products, the long-term winners are those that can combine scale with brand credibility. Businesses that fail to meet either of these criteria, will quickly find themselves running out of road with their assets, technology and talent becoming firmly “in-play”.

 

For specialist players, whilst regulatory pressures will undoubtedly need to be managed, attracting the right kind of talent with deep credit writing expertise, and combining this with a technological solution that can take advantage of the mandatory referral scheme included within the Small Business Enterprise and Employment Act will be key issues to address.

 

In such a dog-eat-dog landscape, evolution is as inevitable as it is necessary and will ensure that only those platforms with the right management teams, the right risk management frameworks, and institutional backing will survive.

 

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Dr Louise Beaumont is Head of Public Affairs and Marketing at , which is a leading investor in SME alternative finance.

Louise has over twenty years experience in growing companies - from initial spark, to operationalisation, results delivered, and value created. Having previously worked for organisations such as Siemens, Hewlett Packard, Microsoft, and Capgemini, Louise has focused on the UK’s fast growing alternative finance sector since 2010, including co-founding one of GLI’s investees. Louise has advised key UK government departments and units on FinTech and AltFin including; HM Treasury, British Business Bank, Government Office for Science, Cabinet Office, UK Trade & Industry, Department for Business, Innovation & Skills, and Number 10 Downing Street's Policy Unit.