June 16, 2016

Resetting the alternative finance agenda


How Ratesetter’s entry into the SME Finance has the potential to reshape market fundamentals

The announcement by Ratesetter this week that it is diversifying its product range into SME lending has significant potential to accelerate the shifting landscape of the alternative finance sector. As one of the largest players in the peer-to-peer (P2P) space, this strategic broadening of Ratesetter’s proposition will likely send some sizeable ripples through the industry; not just amongst the company’s immediate competitors in this space but also amongst broader stakeholders.

Serious intent from a serious player

What is clear from Ratesetter is that this a business opportunity that remains hugely unexploited. The issue of SME access to finance is one that shows no signs of abating as traditional banks continue to retrench and, Funding Circle aside, many platforms operating in this area struggle to build scale whilst juggling the financial firepower required to balance supply and demand amongst borrowers. With this in mind it’s a shrewd move from Ratesetter to partner with the British Business Bank who bring not only immediate credibility and awareness to this space but also £10m of funds to help smooth the profile of SME uptake following launch. One can also not ignore the importance of deep credit expertise in the success of any lending business and Ratesetter’s commitment to this space has been signalled by the appointment of Paul Martson who brings significant experience from his time at Secure Trust Bank and RBS.

Regulatory scrutiny and barriers to entry

Given the potential growth that Ratesetter could deliver, it’s likely that this move will add further weight to calls for greater regulation. With the Innovative Finance ISA meaning that the alternative finance sector is increasingly on the radar of retail investors, regulators will be keen to ensure the correct framework is put in place to protect both borrowers and lenders. Such a move will be welcomed given the upcoming implementation of the Small Business Employment and Enterprise Act which will see traditional banks forced to refer SMEs they are unable to service to an alternative provider. Against this backdrop, greater and more enforceable regulation is a good thing. It will help drive up standards in the sector, raising barriers to entry and ensuring that only the most robust and well governed platforms survive in the long-term.


Another dynamic that Ratesetter’s entry to the SME finance sector may shape is consolidation. Alongside Funding Circle, the business is likely to become a dominant force and “go-to” source for many SMEs given its scale and high levels of brand awareness. The potential size of these two providers will likely put significant pressure on smaller providers to either diversify or consider opportunities for strategic acquisitions as they seek to broaden their proposition or drive scale. This is particularly true for those platforms offering more generic vanilla products rather than those serving more specialist niches.

A race to the bottom vs. specialisation

Indeed, for existing platforms there is a very real threat that with Ratesetter and Funding Circle becoming the dominant brands, any SME that cannot find a solution through either platform will fall into one of two camps. Either they will not be creditworthy meaning that platforms servicing them will have to take on additional risk or they will require a specialist product or solution. In light of Ratesetter’s move, industry players may need to reassess where they feel growth is likely to be driven from in order to be sure their proposition resonates and is appropriately priced.

In light of the above, it is clear that for existing platforms in the alternative finance space the need to clearly define their market positioning. In such a rapidly shifting sector, it is crucial that this positioning is then communicated effectively to a range of stakeholders in order to create a reputational and brand environment in which a businesses’ growth strategy can be successfully executed.