SHIFTING PARADIGMS THE 4TH EUROPEAN ALTERNATIVE FINANCE BENCHMARKING REPORT TANIA ZIEGLER, ROTEM SHNEOR, KARSTEN WENZLAFF, ANA ODOROVIĆ, DANIEL JOHANSON, RUI HAO, LUKAS RYLL The Cambridge Centre for Alternative Finance (CCAF) is an international and interdisciplinary research centre based at the University of Cambridge Judge Business School. It is dedicated to the study of innovative instruments, channels, and systems emerging outside of traditional finance. This includes, among others, crowdfunding, marketplace lending, alternative credit and investment analytics, alternative payment systems, cryptoasset, distributed ledger technology (e.g. blockchain) as well as related regulations and regulatory innovations (e.g. sandboxes and RegTech) Research Team ................................................ 5 Acknowledgements ......................................... 7 Forewords .......................................................13 University of Cambridge .................................13 University of Agder .........................................14 Invesco ..........................................................15 Executive Summary ........................................16 Introduction ....................................................19 Research Rationale & Objectives ...................19 Methodology ..................................................19 Data Sources .......................................................... 19 Data Collection ........................................................20 Quality Control and Data Handling ..........................20 External Contributions of Practitioner Insight Texts . 21 Chapter 1: The Size and Growth of the Alternative Finance Market Across Europe .. 22 Total Market Volume ...................................... 22 The Geographic Distribution of Platforms and Market Volumes .................................................................. 24 Alternative Finance Volume per Capita .................... 28 Alternative Finance Volume per Capita vs. GDP per Capita ......................................................................30 The Diversity of European Alternative Finance Models .......................................................... 31 Prevailing Models and Growth in Europe.................32 Country Contributors to Key Models by Volume .....36 The Vitality of Alternative Finance Business Funding ......................................................... 36 Overall SMEs by Volume and Number .....................36 Split of Debt, Equity and Non-investment based Models .................................................................... 37 Key Sectors and Industries .....................................38 Market Dynamics by Model ........................... 38 Onboarding, Successful Funding and Repeat Rates 38 Institutionalization and Institutional Agreements ..... 41 European Alternative Finance Developments 44 Innovation ................................................................44 Internationalization ...................................................48 Financial Inclusion .................................................. 52 Perceived Risks .......................................................53 Perceptions Towards Existing Regulation ................54 Regulatory Friendliness and Alternative Finance Volume per Capita ...................................................55 Chapter 2: Market Snapshots ....................... 57 France ........................................................... 57 Market Volume ........................................................ 57 Volume by Model .....................................................58 Regulation ...............................................................60 Risk ......................................................................... 61 Innovation ................................................................62 Platform Costs and Budget .....................................64 Internationalization ...................................................65 Financial Inclusion ..................................................66 Institutionalization ....................................................66 Germany ...................................................... 67 Market Volume ........................................................ 67 Volume by Model ..................................................... 67 Regulation ...............................................................69 Risk ......................................................................... 70 Innovation ................................................................ 71 Platform Costs and Budget ..................................... 71 Internationalization ................................................... 72 Financial Inclusion ................................................... 73 Institutionalization .................................................... 73 The Nordics ...................................................74 Market Volume ........................................................ 74 Volume by Model and Country ................................ 74 Regulation ...............................................................77 Risk .........................................................................79 Innovation ................................................................80 Platform Costs and Budget .....................................82 Internationalization ...................................................82 Financial Inclusion ..................................................83 Institutionalization ....................................................83 Benelux ......................................................... 84 Market Volume ........................................................84 Volume by Model and Country ................................84 Risk .........................................................................88 Innovation ................................................................88 Platform Costs and Budget .....................................90 Internationalization ...................................................90 Financial Inclusion ................................................... 91 Institutionalization ................................................... 91 Italy ............................................................... 92 Market Volume ........................................................92 Regulation ...............................................................93 Risk .........................................................................95 Innovation ................................................................96 Platform Costs and Budget ..................................... 97 Internationalization ................................................... 97 Financial Inclusion ...................................................98 Institutionalization ....................................................99 CONTENTS Iberia ...........................................................101 Market Volume ...................................................... 101 Volume by Model and Country .............................. 101 Regulation ............................................................. 103 Risk ....................................................................... 103 Platform Costs and Budget ................................... 104 Innovation .............................................................. 105 Internationalization ................................................. 106 Financial Inclusion ................................................. 107 Institutionalization .................................................. 107 Central Europe ........................................... 108 Market Volume ...................................................... 108 Volume by Model and Country .............................. 108 Regulation ..............................................................110 Risk .......................................................................111 Innovation ..............................................................112 Platform Costs and Budget ....................................113 Internationalization ..................................................113 Financial Inclusion ..................................................114 Institutionalization ...................................................114 The Baltics ...................................................116 Market Volume .......................................................116 Volume by Model and Country ...............................116 Regulation ..............................................................118 Risk ....................................................................... 119 Innovation .............................................................. 121 Platform Costs and Budget ................................... 122 Internationalization ................................................ 123 Financial Inclusion ................................................. 123 Institutionalization .................................................. 124 Eastern Europe ............................................125 Market Volume ...................................................... 125 Volume by Models and Country ............................ 126 Regulation ............................................................. 127 Risk ....................................................................... 129 Innovation .............................................................. 130 Platform Costs and Budget ................................... 130 Internationalization ................................................. 131 Financial Inclusion ................................................. 132 Institutionalization .................................................. 132 South Eastern Europe ..................................134 Market Volume ...................................................... 134 Volume by Model and Country .............................. 134 Regulation ............................................................. 135 Risk ....................................................................... 136 Innovation .............................................................. 138 Platform Costs and Budget ................................... 138 Internationalization ................................................ 139 Financial Inclusion ................................................. 140 Institutionalization .................................................. 140 Appendix A ....................................................142 Appendix B ....................................................143 Endnotes ........................................................144 5 RESEARCH TEAM TANIA ZIEGLER Tania is the Lead in Global Benchmarking at the CCAF and manages the Centre’s alternative finance benchmarking program which spans Europe, the Americas, Asia Pacific, and the Middle East and Africa. She has authored 15 industry reports since joining the CCAF. She is an expert on SME finance and also leads the Centre’s work on SME Access to Finance in LATAM. Tania is a 2010 Fulbright Scholar. ROTEM SHNEOR Dr. Rotem is an associate professor at the University of Agder (UiA) School of Business and Law in Norway and serves as the academic director of the university’s Center of Entrepreneurship, as well as the head of the Center for Crowdfunding Research. He holds a PhD in International Management from UiA and a master’s degree in International Business from NHH Norwegian School of Economics. He has been leading the Nordic Crowdfunding Alliance of platforms, co-founded and currently serves on the board of the Norwegian Crowdfunding Association. In addition, he is serving as an affiliate researcher at the Cambridge Centre for Alternative Finance and is a co-author to its reports. He is a frequent contributor to policy and strategic discussions with public, government and industry institutions addressing questions related to crowdfunding. His research includes issues related to crowdfunding success, behavior and motivations, internet marketing, and cognitive aspects of entrepreneurship. He has over a decade long track record of teaching, researching and supporting entrepreneurship and marketing. He has published in academic journals (including ERD, IJEM, CCM, JBM, JPBM, JPM, etc.), trade magazines and contributed a number of chapters to research-focused edited books. He is currently editing both a special issue and a book edited volume on advances in crowdfunding research. KARSTEN WENZLAFF Karsten Wenzlaff is an Alternative Finance Researcher and Lecturer at the University of Hamburg at the Chair for Digital Markets. His research interests are Civic Crowdfunding for Public Goods, Corporate Crowdfunding, and Regulatory Competitiveness in Crowdfunding Ecosystems, especially in Central and Eastern Europe through the project Crowdfundport. Karsten has published reports on the European German Crowdfunding Ecosystems since 2010. He is a member of the European Crowdfunding Stakeholder Forum of the European Commission. He founded the German Crowdfunding Network and is Secretary-General of the German Crowdfunding Association. Karsten has an MPhil form the University of Cambridge in International Relations. ANA ODOROVIĆ Ana is a PhD candidate at the Graduate school in law and economics at the University of Hamburg supported by the German Research Foundation (DFG). Her thesis deals with the question of overcoming asymmetric information in the crowdfunding market from a law and economics perspective. In 2018, she was a visiting researcher the University of Oxford and had an opportunity to present her research on the regulation of crowdfunding in a number of academic conferences in the field of law and economics and financial regulation. She holds an LL.M. degree in business law from the Panthéon-Assas University (Paris 2) and a master’s degree in economics from the University of Belgrade, where she also teaches economics at the Law school. 6 DANIEL JOHANSON Daniel is currently a Research Associate at the CCAF and completed his PhD in International Relations and Chinese Studies at King’s College, London. Prior to this he received his MA, also from King’s College, London, in Intelligence and International Security. Since joining the CCAF, Daniel has contributed to and co-authored several of the Centre’s alternative finance global benchmarking reports. DATA ANALYTICS RUI HAO Dr. Hao is currently working with Cambridge Centre for Alternative Finance as a Research Associate and Data Scientist. She focuses on big data analysis, machine learning, database design, statistical modelling and all technology driven projects. She has co-authored several alternative finance industry reports. She holds a PhD from the Engineering Department at the University of Cambridge. LUKAS RYLL Lukas is a Research Assistant/Data Scientist at the Cambridge Centre for Alternative Finance. His research focuses on the development of new soft computing methods for financial forecasting and automated data engineering. Before joining the CCAF, Lukas studied Finance and Business at WHU – Otto Beisheim School of Management. 7 We would like to thank Invesco and CME Group Foundation for their financial support of this study. We also would like to extend our utmost gratitude to our research partners from the following organizations across Europe who disseminated the survey, including: Anacofi, Bundesverband Crowdfunding, Wirtschaftskammer Österreich Fachverband Finanzdienstleister, CrowdFundPort Interreg Central Europe, Crowdstream Interreg Danube Transnational Program, University of Hamburg, University of Bologna, Arc Romania, Italian Equity Crowdfunding Association, Brodoto, Centrum Gospodarki Społecznościowej, Interreg Central Europe, Interreg Danube Transnational Programme, Crowdfund Insider, Crowdfunding Hub, Lithuanian P2P Lending and Crowdfunding Association, Politecnico di Milano School of Management, Douw&Koren, Norwegian Crowdfunding Association, UKCFA, Fintech Spain, Finance Estonia, Financement Participatif France, UNDP AltFinLab, Czech Fundraising Center, E-zavod, Lend Academy, LendIt, the Swiss Crowdfunding Association, and Crowdfunding Cloud. Special thanks go to some partners who walked the extra mile in helping us to ensure good response from platforms including – Gianluca Quaranta, Ronald Kleverlaan and Dr. Vytautas Šenavičius. In addition, we wish to thank Dr. Anna Alon and Dr. Natalia Maehle for their assistance in translating our survey to Russian for the first time. We are extremely grateful to our extensive network of research assistants and fellows for their contribution to the data collection, sanitation and analysis. The data collection would not have been possible without the incredible work of the CCAF research team, in particular Katherine Cloud, Rok Piletič, Pei, and Yi Wu. We would also like to thank Bryan Zhang, Robert Wardrop and Raghavendra Rau for their counsel and guidance. Finally, we thank Louise Smith for all her hard work on designing the publication, and Charles Goldsmith, Kate Belger, and Philippa Coney for their continued support in producing and publishing this report. ACKNOWLEDGEMENTS 8 We would like to thank our industry research partners from organizations across Europe who kindly disseminated the survey and provided much appreciated assistance to our study: We thank the following alternative finance platforms for participating and contributing to this study: 9 10 11 12 13 Since 2015, we have released four reports aimed at understanding the development and growth of the European online alternative finance market. This sector has continued to evolve, creating both new opportunities and challenges. It has, therefore, never been more important to understand its evolution and track the trajectory of its growth. This year’s report is entitled ‘Shifting Paradigms’ to emphasize the dynamics of this still relatively nascent marketplace, responding to consumer demands as well as recent regulatory changes. Overall, the lion’s share of European volume still originates from the United Kingdom (68%). However, excluding the UK, the European online alternative finance market grew at nearly double the UK’s year-on-year growth rate – 63% in comparison to 35%. While this growth was not as strong as in 2016 (101%), there was visible growth in each sub-region of continental Europe. As a whole, the market grew by just over €1,300m to €3,369m in 2017. P2P Consumer Lending remained the largest market segment for the fourth year in a row, nearly doubling in annual transaction volume to €1392.38m. As in the past, the top three European markets by transaction volume were France, Germany and the Netherlands, respectively. Their share of the overall market has decreased slightly from 46.5% to 45.6%. Bulgaria, Poland, and Latvia were among countries that recorded the fastest year-on- year growth rates at 781%, 677%, and 274%, respectively. The Cambridge Centre for Alternative Finance is also growing and adapting to address the research needs of the alternative finance sector. In the past year alone, we have published 11 reports covering a wide array of research topics, from regional benchmarking studies, alternative SME financing, and distributed ledger technologies to regulatory innovation initiatives. We will continue to work with our collaborators to collect and analyze empirical data on both financial and regulatory innovation in a globally comparative context. We hope that our research and analysis will inform business decisions as well as evidence- based policymaking and regulation. I would like to particularly thank our European research partner for this study – Agder University, as well as our generous financial supporters Invesco and CME Group Foundation, who all made this study possible. Raghavendra Rau Sir Evelyn de Rothschild Professor of Finance Academic Director, Cambridge Centre for Alternative Finance Cambridge Judge Business School FOREWORDS 14 The emergence of alternative finance and its fast growth in recent years presents both opportunities and challenges for a wide array of stakeholders. The ability of those to assess and address these developments depends on availability of quality data that may inform policy making, as well as industry growth and development. The University of Agder’s School of Business and Law is one of Europe’s leading institutions in taking crowdfunding seriously as an important aspect of financial access and inclusion, as well as a potential driver for entrepreneurial growth. We have committed to better understanding this emerging industry in both words and action. Most recently, this has been through recruiting a team of researchers for a newly launched Crowdfunding Research Center. Such investment is unique on an international scale, allowing us to offer both novel courses while conducting leading research in this field. We are particularly proud and thankful for the close cooperation achieved with the University of Cambridge Centre for Alternative Finance, and for the close and collaborative relationships established with all platforms operating in Norway, as well as leading platforms abroad. In this respect, the current report represents the excellent outcome of intensive research collaborations with important impact potential. The message of “shifting paradigms” is of relevance for the financial sector, business education and research sectors. By focusing on important financial aspects of our ever more digital lives, we actively contribute to more informed decision-making as well as the responsible development of new industries. The current report is an impressive read on the current dynamics and operations of alternative finance in Europe highlighting its growth trajectories, innovation directions as well as international scope and impact. We are grateful for the opportunity to contribute to this important work and look forward to ever more ambitious research in the area. Dr. Kristin Wallevik Dean School of Business and Law University of Agder 15 This report from the Cambridge Centre of Alternative Finance and the University of Agder’s School of Business provides a glimpse into the growth and permeation of alternative finance models across European borders after four years of measurement with the European benchmarking report. The report, aptly titled “Shifting Paradigms,” looks at 45 European countries and 269 platforms across the continent. Europe is an interesting use case because of the disparity in economies in such a small geographical slice of the world; however, findings show overall strong and steady growth in alternative finance activity in most countries indicating that these new models of raising and distributing capital are experiencing real-world, tangible benefits that are inspiring market movements. While there was overall growth, the rate of growth seems to have cooled in some more mature markets. Additionally, some European regions beyond the UK and historically stronger European economies have seen explosive rates of growth in the alternative finance space. This finding is also supported by the declining market share in the UK of total alternative finance activities in Europe. The paradigm is shifting in a way that favors technology and models to make capital more accessible beyond the borders of traditional finance. As tokenization technology moves into more robust testing phases, we are taking notice of trends in how real estate and equity-based crowdfunding models are maturing in European markets. Compared to other methods of alternative finance, the market shares are still small from an overall percentage standpoint, but we think there are opportunities for even greater disruption with tokenization on the horizon. Another area of interest for the Invesco Technology Strategy Innovation and Planning team in our mission to innovate for investment performance is how platforms are approaching product innovation and applying research and development. The innovation focus reported by many is improving operational efficiency and increasing automation where possible, a mantra that can be heard among businesses large and small, traditional and alternative. With technology changing at such at rapid pace, there are many opportunities for innovation and forming strategic alliances to close capability gaps and enable new operating models. The ongoing regulation and legislation conversation will continue to influence the impact and outcomes of the alternative finance world. Opinions seems split amidst platform types as to the adequacy and stringency of regulation across Europe, but this is also an area we monitor closely as we push forward on our own strategic path. We’d like to thank all of the teams and individuals involved in the gathering and analysis of the data and the creation of this report from the Cambridge Centre of Alternative Finance and the University of Agder’s School of Business. We look forward to progress in the world of alternative finance, and staying abreast of how trends in alternative finance can impact the decisions we make in the asset management world and how we form our strategies and make best decisions for our clients. Dave Dowsett Global Head of Technology Strategy, Innovation and Planning Invesco 16 This year’s report is titled ‘Shifting Paradigms’ to, in part, emphasize the continued growth and development of the European Alternative Finance Industry, but also underscore that these patterns of growth can develop and change as the sector continues to develop and mature. Throughout the region, platforms have continued to grow, respond to regulation, and expand operations internationally. In some regions, model prominence has shifted, allowing for others to grow. At times, this has been a response to the development or lack of regulation, or simply a result of competing market forces. Last year’s report, ‘Expanding Horizons’, sought to exemplify the positive developments in European Alternative Finance in 2016 and foreshadowed future developments in the industry. The sector as a whole has continued to expand, and across the board has grown in volume. As with last year, this study captured market data from 45 European countries, and continued to explore issues with regard to innovation, research and development, as well as internationalization trends. Key Conclusions: • This year’s study gathered data from 269 platforms with reported operations in 2017. These 269 platforms were responsible for 519 unique data entries across 45 countries in Europe. The study shows that the total European online alternative finance market (including the UK) grew by 36% to reach €10,436m in 2017. The United Kingdom is still the largest individual alternative finance market, albeit with a declining market share from 73% in 2016 to 68% in 2017. Excluding the UK from overall volume, the European online alternative finance industry grew 63% from €2,063m to €3,369m in 2017. This growth is slower than in previous years, as in 2016 the market grew 102%. Between 2013 and 2017, the average annual growth rate for Europe has been 80%. • France, Germany and the Netherlands remained the top three national markets for online alternative finance by market volume in Europe, excluding the United Kingdom. The French market reached €661.37m, followed by Germany (€595.41), the Netherlands (€279.93m), Italy (€240.66m), and Finland (€196.76m). The Nordic countries collectively generated €449.0m, making them the third largest regional market in Europe. The next largest markets were the Benelux countries (€371.0m), Italy (€241.0m), the Baltic states (€234.7m), Eastern Europe (€179.2m), Georgia (€173.3m), Iberia (€169.2m), Central Europe (€110.1m), Ireland (€106.8), South Eastern Europe (€45.2m), and European members of the Commonwealth of Independent States (CIS) (€32.8m). • On a per capita basis France and Germany are ninth and thirteenth, respectively, which is a clear contrast to their position in terms of total volume. Compared with last year, both France and Germany have a higher position (from 12th and 14th, respectively), potentially as a result of their strong growth. As with last year, considerable shifts in overall rankings between total volume and volume per capita indicate that even countries with smaller online alternative finance volumes may have greater penetration and usage of these models. In almost every instance, a high total volume does not necessarily reflect a strong correlation with per capita distribution rankings. • For the fourth year in a row P2P Consumer Lending accounted for the largest market share of European Alterative Finance (excluding the UK). This model accounted for 41% of all volume and grew by 99.8% from €697m in 2016 to €1392m in 2017. Other models accounted for the following market shares: Invoice Trading (15.9% of market share), P2P Business Lending (13.8% of market share), Real Estate Crowdfunding (7.7% of market share), and Equity-based Crowdfunding (6.3% of market share). EXECUTIVE SUMMARY 17 • Institutionalization across all model types decreased considerably between 2016 and 2017. This includes funding from pension funds, mutual funds, asset management firms and banks. For example, the percentage of institutions participating in P2P Consumer Lending decreased from 45% in 2016 to 12% in 2017. Additionally, 24% of P2P Business Lending (down from 29%) was funded by institutions. Invoice Trading saw the overall percentage of institutional funding decrease, falling from 68% in 2016 to 22% in 2017. Additionally, 6% of the investment in Equity-based Crowdfunding (down from 13% in 2016) was funded by institutional investors such as venture capital firms, angels, family offices or funds. • Online alternative finance for businesses across Europe continued to grow, providing €1,660m to over 24,000 businesses. Overall, European business funding grew by €534m, and raised funds for an additional 9,586 businesses. Debt models (including P2P Business Lending, Invoice Trading, etc.) accounted for 76% of all business finance, while equity models accounted for 21%. The top five countries in terms of business funding were France (€325m), the Netherlands (€264m), Italy (€171m), Sweden (€126m) and Germany (€106m). • Internationalization of platforms is on the rise. In 2017, 88% of platforms reported some level of cross-border inflows, while 61% reported outflows. This represents a growth of 11% for platforms reporting cross-border inflows, and 17% growth for those reporting cross-border outflows. Despite the increasingly large share of platforms that have reported some level of cross-border transactions, most still indicate low levels of such activities. For instance, 55% of platforms that have reported cross-border inflows state that they only represent up to 30% of their volumes. Similarly, 45% of platforms have reported cross-border outflows representing up to 30% of their volumes. It is important to note, however, that this share has grown because in the previous year most platforms only reported that these inflows and outflows contributed up to 10% of volume. • Despite growth in international orientation of platforms, the extent of actual localization of services, interface and brand remains limited. The most popular internationalization strategy was having a global website and brand, with 70% of P2P Property Lending platforms, 69% of P2P Consumer Lending platforms, 62% of Donation-based Crowdfunding Platforms, 58% of Reward-based Crowdfunding platforms, and 57% of Equity-based Crowdfunding platforms following such strategy. This represents a relatively low threshold investment based on a globalized view of the market and implies high levels of standardization. • While in 2016, models that were associated with larger volumes reported a higher level of change to their business model, the opposite trend was observed in 2017. For the top five model types by volume, 50% or more of platforms reported making no changes to their business model. Platforms that had the highest amount of change to their business model were: Donation- based Crowdfunding and Real Estate Crowdfunding. For Donation-based crowdfunding 69% of platforms made slight alterations to their model and 12% made significant changes. For Real Estate Crowdfunding, 43% of platforms made slight changes, and 7% made significant changes. Product innovation, however, was high across the board. With the exception of P2P Consumer Lending, 50% or more of platforms from all model types reported that they had made significant changes to their product offerings. P2P Property Lending (88%), Reward- based Crowdfunding (67%) and Invoice Trading (64%) had the highest amount of significant changes to products in 2017. • As was observed in the previous year, most innovation focused on improving the operational efficiency of platforms through process streamlining and automation, as well as optimizing payment processing and customer verification. Investments in process streamlining and automation were particularly common in P2P Property Lending (100%), Real Estate Crowdfunding (95%), and Invoice Trading (85%). Payment processing was 18 reported as an area of focus by 100% of P2P Property Lending platforms, 86% of Donation-based Crowdfunding platforms, and 70% of Invoice Trading platforms. Customer verification was also reported as an area of focus by 95% P2P Property Lending platforms, 77% of P2P Consumer Lending platforms, and 70% of Invoice Trading platforms. Additionally, as with last year, the secondary research focus for platforms in Europe regards investment and development in customer service features, predominantly social media and promotional tools, community management, and CRM systems. • In 2017, perceptions of risk were split amongst model types, with no one clear risk factor for all platforms. For P2P Consumer Lending and P2P Business Lending, ‘Collapse due to Malpractice’ was the highest risk – ranked between high and very high by 55% and 34% of model types, respectively. ‘Campaign Fraud’ was perceived to be the highest risk by Invoice Trading (73% high to very high risk), Debt-based Securities (29%), and Donation-based Crowdfunding (38%) platforms. The risk of a “Cyber-security Breach” was perceived as the highest risk for Equity-based Crowdfunding (40% high to very high risk), and Reward- based Crowdfunding (44%). “Changes to Regulation” was seen by four model types as the second highest risk, particularly Equity-based Crowdfunding (37%), P2P Consumer Lending (30%), Donation-based Crowdfunding (30%) and Reward-based Crowdfunding (26%). • As regulatory regimes across Europe continue to develop, so to do the perceptions of platforms on the adequacy of these regulations. In general, while overall views are still divided, it appears that the level of approval has been increasing. A majority of platforms operating P2P Business Lending (71%), Debt-based Securities (67%), P2P Consumer Lending (63%), Real Estate Crowdfunding (56%) and P2P Property Lending (50%) viewed current regulations to be adequate and appropriate. In contrast, a large percentage of Equity- based Crowdfunding (53%), Reward- based Crowdfunding (43%), and P2P Property Lending (42%) platforms viewed regulation to be excessive and too strict. 19 RESEARCH RATIONALE & OBJECTIVES The fourth comprehensive European alternative finance benchmarking report examines the growth and development of the European Alternative Finance market at both regional and national levels. As alternative finance models fundamentally change capital raising practices across Europe for funder and fundraiser stakeholders, this report examines platform operability in detail and seeks to identify how business models, innovation directions, and internationalization strategies are evolving to achieve continued success. METHODOLOGY The following section outlines key aspects and considerations relating to the methodological choices in the current study, including data sources, data collection procedures, data handling and quality control. Data Sources The primary data reported in the following pages comes from the Alternative Finance Industry Benchmarking survey, distributed annually by the Cambridge Centre for Alternative Finance. This survey captured data from active alternative finance platforms with operations in the region. The list of platforms was compiled based upon the following sources: • List of platforms from previous years • List of platforms provided by research partners • List of additional platforms based upon desktop research, to include new platforms not identified in the previous sources Overall, the data encompassed by this study covered 269 platforms that reported operations across Europe (excluding the UK) for the 2017 calendar year. These 269 platforms were responsible for 519 unique entries. Each entry is defined as platform- country dyad, as some platforms operate in multiple jurisdictions. This allowed us to better capture volumes from domestic and international platforms operating in each country. Of the 269 platforms which participated in this study, 259 are headquartered in Europe, while 10 platforms are headquartered outside of Europe. Platforms operating from outside Europe were primarily based in the United States, Canada, Israel, Brazil and Japan, and were predominantly representative of non-investment models (i.e. reward-based crowdfunding). When broken down by country, the dataset covers 45 countries (including the UK). Focus was made to ensure the inclusion of all major actors by model and by country. The current report was based on the same number of platforms as those covered in our previous report. However, this involved entries from 54 new platforms that did not participate in the previous year’s survey, and 54 platforms that participated in the 2017 survey (2016 data), but not in the 2018 survey (2017 data). Seven of these non- participating platforms ceased operations in the past year, and 1 reported activities and volumes only outside of Europe and hence was excluded from the current report. The absolute majority of the remaining 46 non- participating platforms represent very small platforms that carry no significant impact on reported volumes. Nevertheless, in the few cases where platform non-participation led to a significant impact on reported volumes, these were reported and clearly indicated under the relevant regional review sections. Results of campaigns run independently and outside of alternative finance platform activities1 were not included in the results of this study. Additionally, volumes from European-based campaigns run on non- European based platforms2, which are not included in the 10 platforms mentioned above, were also not included. INTRODUCTION 20 Data Collection The survey consisted of 33 questions, including both single and multiple response questions. These questions were instrumental in gathering self-reported aggregate-level data relating to platform operations and performance in 2017. This year’s survey consisted of five parts covering questions related to: Fundraisers, Funders, Platform Structure & Strategy, Risks & Regulations, and Financial Inclusion.3 The structured nature of the survey allowed platforms to provide comprehensive, precise and cohesive data. Many of the questions remained the same as those used in the previous year to ensure longitudinal analysis was possible, especially with respect to questions relating to total transaction volumes, number of funders and fundraisers, among others. Platforms were also presented with a series of non- compulsory questions which built on key research themes identified in last year’s report. In an effort to more accurately attribute fundraiser volumes, platforms were able to report model activities and volumes on a per country basis. This way, firms could more accurately describe their operations, especially where activities occurred outside of their home market. The 2017 dataset provides a snapshot of country- and model-level activities by platform as internationalization becomes a more substantial trend throughout the sector. As an example, 40.5% of survey responses came from platforms with two or more countries of operation within Europe. Invitations for survey participation were sent by members of the research team directly to platforms, published on targeted social media groups, as well as were distributed via research partners through their own independent networks (i.e. industry associations, partner research institutions, etc.). Survey invitations were distributed in the form of personalized email communications, direct messages via social media and telephone to platform management. The research partners were instrumental in identifying appropriate alternative finance platforms across the region, promoting the survey and serving as advisors to the core research team throughout the research program. The survey was distributed in English, French, Spanish, Portuguese and German. These initial invitations were followed up utilizing repeated multiple reminders in a variety of forms between May 2018 through November 2018. The survey was hosted on a dedicated site, with submissions accessible only to the principal investigators of this project. To complement the survey, web-scraping was also used to get the most up-to-date transaction volumes for Europe for a limited number of key platforms. This was carried out using widely available Python web- scraping libraries, devised within the research center. Once the data set was collected, any discrepancies such as misattributed volumes and anomalous figures were cross-checked through direct contact with the platforms. Quality Control and Data Handling Sanitation and verification were conducted between September 2018 and November 2018. In cases where the survey could not obtain primary data (or where there were discrepancies in reported data), the research team consulted secondary data sets to inform the research and asked for additional or clarifying data directly from the platform. The data used in the previous European report, ‘Expanding Horizons,’ was also verified and updated where appropriate. Throughout the report composition process, both analyses and write-up were subjected to repeated peer-reviewing within the research team. Whenever necessary, additional external reviews of certain sections were also enabled to further ensure quality of reporting. The research team anonymized and sanitized data prior to analysis. All personal data was stripped and securely destroyed from the database. For all average data points the team applied weightings by transaction volume per respondents and significant outliers were removed. At completion, the data was encrypted and stored for retrieval exclusively for the use of this project. Finally, throughout the analysis process, explanations are suggested for identified trends and survey results. Accordingly, and whenever necessary, abnormal deviations in 21 identified trends vis-à-vis our previous report, were explained by specific platforms that had contributed to last year’s research but did not participate again this year. Here, while the current report covers more platforms than in previous years, in a few instances certain critical platforms chose not to participate this year, and resulting outcomes are explained by their non-participation. External Contributions of Practitioner Insight Texts For further insights, deeper understanding and triangulation across sources, we have also invited a selected number of external experts to provide short insight texts, which complement our independent analysis. Such texts reflect the contributing practitioner’s own viewpoints about developments unravelling in their respective countries and serve only as supplementary material to the independent research work by the core research team. 22 TOTAL MARKET VOLUME In 2017, alternative finance volumes from across Europe grew by 36%, from €7.67 billion to €10.44 billion. This figure included alternative finance volumes from the United Kingdom, which accounted for 68% of the overall figure (€7.06 billion).4 Though the United Kingdom (UK) remained the largest single contributor to European over-all volume, it is worth noting that over time the proportion of the UK’s market share against the rest of Europe is shrinking. In 2015, for instance, the UK accounted for 81% of all European volumes. By 2016, the UK’s market share shrank to 73%. Figure 1: European Online Alternative Finance Market Volumes 2013-2017 in €billions (Including the UK) €10.0b €8.0b €6.0b €4.0b €2.0b €0b €12.0b 2013 2014 2015 2016 2017 €1.12b €2.83b €5.43b €7.67b €10.44b 151% 92% 41% 36% Figure 2: European Online Alternative Finance Market Volumes 2013-2017 in €billions (Excluding the UK) €3.5b €3.0b €2.5b €2.0b €1.5b €1.0b €0.5b €4.0b 2013 2014 2015 2016 2017 €0.33b €0.60b €1.02b €2.06b €3.37b 82% 72% 102% 63% €0b CHAPTER 1: THE SIZE AND GROWTH OF THE ALTERNATIVE FINANCE MARKET ACROSS EUROPE 23 When examining these figures at national level, France, Germany and the Netherlands have maintained their leading position in mainland Europe. However, 2017 did present a mixed picture, where: some European countries exhibited strong growth either from relatively large earlier volumes (for example - Sweden, Italy, Georgia and Belgium) or from small earlier volumes (for example - Bulgaria, Slovenia, Russia, Latvia and Poland); some exhibited a healthy though more modest growth (for example - Spain and the Netherlands); while others exhibited stagnation (for example - Estonia) or decline (for example – Czech Republic, Greece, Hungary and Iceland). A more detailed overview of market development at regional and country levels is presented in later sections of this report. Figure 3: Regional Online Alternative Finance Market Volumes 2014-2017 (€billions) €350b €300b €250b €200b €150b €100b €50b €39.54b €320.90b €10.44b €0b €31.81b €221.66b €7.67b €29.98b €94.61b €5.43b €9.65b €20.29b €2.83b 2014 2015 2016 2017 Europe (incl. UK) Americas (incl. US) Asia-Pacific (incl. China) When the total volume figure is adjusted to remove the UK’s contribution, the total alternative finance market volume was €3.3 billion in 2017. Notably, volume increased 63% against 2016’s €2.06 billion. In a global perspective, this growth rate was the highest regional growth rate globally, as the Asia- Pacific grew 48% and the Americas grew 26% during the same period. With our partners, the CCAF conducts a global benchmarking research program, tracking alternative finance transaction volumes on both global and regional levels, enabling data collected in Europe to be contextualized globally. Here, the largest region by volume was the Asia-Pacific, which was ahead of both the Americas and Europe. In each region one country accounted for a substantial proportion of the volume. In this context, China accounted for over 99% of volume within the Asia-Pacific region. Overall, the Asia-Pacific region experienced a 4-year average annual growth rate of 145%, which was largely driven by the Chinese market; when excluding China, the wider Asia-Pacific grew by 134%.5 In the Americas, the United States accounted for 96% of the volume, and grew by a more modest 26% against the previous year, or by a 4-year average growth rate of 89%. In contrast, the Latin America and Caribbean online alternative finance industry grew exponentially (160%) against the previous year, or by a 4-year average growth rate of 146%.6 While Europe is the smallest region in comparison to the other two, it is noteworthy that Europe’s per-annum growth has been far steadier, growing 79% annually on average between 2013 and 2017. 24 The Geographic Distribution of Platforms and Market Volumes This year’s survey captured data on alternative finance activities in 45 European countries (including the UK). In the current report, we captured the growing scope of international flows of alternative finance transactions. Accordingly, our analyses included data from 321 European-based platforms (including the UK) and 10 non- European based platforms operating in various European countries. The table below shows the extent to which international activities are prevalent in Europe, with platforms reporting 276 dedicated operations in European countries (which are not their home-country), putting total number of country level operations of platforms in Europe at 597, when including the UK, or 520, when excluding the UK. While there were a handful of instances where platforms declined to be re-surveyed, in most instances failure to capture repeat data stemmed from platform closure. This was especially true in already established jurisdictions (i.e. France, Germany) where previously surveyed platforms either had left the marketplace altogether, pivoted into more traditional financial activities or merged with other platforms within their market. The geographic distribution of participating platforms from Europe (excluding the UK) showed the highest concentration of platforms in Germany (30 local, 16 foreign, 46 in total), France (36 local, 10 foreign, 46 in total), Italy (34 local, 11 foreign, 45 in total), Spain (26 local, 13 foreign, 29 in total) and the Netherlands (24 local, 8 foreign, 32 in total). 25 Country 2017 Locally-based platform operating in country Foreign-based platforms operating in country Total UK 62 15 77 Germany 30 16 46 France 36 10 46 Italy 34 11 45 Spain 26 13 39 Netherlands 24 8 32 Austria 11 11 22 Norway 14 7 21 Switzerland 6 13 19 Finland 9 8 17 Sweden 8 7 15 Poland 6 9 15 Denmark 4 11 15 Belgium 4 11 15 Estonia 7 6 13 Lithuania 7 6 13 Latvia 4 6 10 Ireland 4 6 10 Portugal 4 6 10 Czech Republic 3 6 9 Slovakia 2 6 8 Romania 1 7 8 Turkey 3 5 8 Greece 3 5 8 Georgia   7 7 Russia 1 6 7 Slovenia 2 4 6 Bulgaria 2 4 6 Ukraine   6 6 Malta 1 5 6 Croatia 2 3 5 Iceland 1 4 5 Hungary   4 4 Albania   3 3 Armenia   3 3 Serbia   3 3 Kosovo   2 2 Macedonia   2 2 Monaco   2 2 Belarus   2 2 Bosnia & Herze- govina   2 2 Moldova   2 2 Cyprus   1 1 Luxembourg   1 1 Liechtenstein   1 1 Total (incl. UK) 321 276 597 Total (excl. UK) 259 261 520 Table 1: Number of platforms operating in European countries 26 Interestingly, in some countries with annual volumes above €10 million, the majority of platforms were foreign-based, such as – Romania with 87% of platforms being foreign-based, 75% of platforms in Slovakia, 73% of platforms in Belgium and Denmark, as well as 68% of platforms in Switzerland. After the United Kingdom, the top five volume-driving countries7 were France (€661.37m), Germany (€596.81m), the Netherlands (€281.19m), Italy (€240.66m), Finland (€196.76m), and Sweden (€196.38m). (See Appendix 1 for Total Alternative Finance Volume by Country).8 Figure 4: The Geographical Distribution of Surveyed Platforms (2017) Total volume in €m 50+ 10-14 40-49 7-9 30-39 4-6 20-25 1-3 15-19 Figure 5: Comparative Market Volumes of Alternative Finance Transactions in the EU (2017) Total volume in €m €7b+ €200-300m €76-100m €25-30m €2.1-5m €0.21-0.5m €600-700m €151-200m €51-75m €10.1-15m €1-2m Up to €0.2m €500-600m €100-150m €30-50m €5.1-10m €0.51-1m Figure 6: Number of Platforms - Local Platforms vs Total National Volumes - Europe 2017 60 50 40 30 20 10 0 €0m €100m €200m €300m €400m €500m €600m R² = 0.7004 R² = 0.6999 €700m Local Platforms in Country Total Platforms in Country Linear (Local Platforms in Country) Linear (Total Platforms in Country) 27 Unsurprisingly, alternative finance volumes generated in country significantly correlated with number of platforms operating in country, both in cases of number of locally based-platforms and total number of platforms. The top three countries by volume (France, Germany and Netherlands) accounted for 46% of the entire region’s volume (excluding the UK). While this remains significant, the same three countries accounted for 47% in 20169, and 70% in 201510. The increase in the number of countries captured in the survey suggests that alternative finance is becoming more commonplace across Europe, which is in turn distributing volumes more widely across the region, especially toward the Nordic, Baltic and Iberian regions. Figure 7: Online Alternative Finance Volume by Country 2017 (€millions) €600m €500m €400m €300m €200m €100m €700m Fran ce €661.37mIta ly€240.66mPolan d€142.46m€0m Ge rman y€595.41mGe orgia €173.28mFin lan d€196.76mIre lan d €106.79mNe th erlan ds€279.93mSpain €160.48mSw eden €196.38mLa tv ia €92.20mBe lgi um Es to nia €90.90m€81.24mDe nm ar k €43.47mNo rw ay €11.79mSw itz er lan d €77.10mCz ec h Re pu bl ic €26.50mAu st ria €32.92mBu lga ria €10.66mLit hu an ia €61.31mSl ov en ia €14.61mRu ss ia €28.44mRo m an ia €10.33mSl ov ak ia Po rtu ga l €10.17m€8.73mFigure 8: Regional Alternative Finance Volumes 2016 - 2017 €600m €500m €400m €300m €200m €100m €700m Fr an ce €445.4m€661.4mBe ne lux €245.8m€371.0mIb er ia €135.3m€169.2m€0m Ge rm an y €321.8m€595.4mEa st er n Eu ro pe €70.8m€179.2mIta ly €127.2m€241.0mCe nt ra l E ur op e €51.1m€110.1mNo rd ics €322.6m€449.0mGe or gia €102.6m€173.3mBa ltic s €136.1m€234.7mIre lan d €76.8m€106.8mSo ut h Ea st E ur op e €9.8m€45.2mCI S* €5.8m€32.8m2016 2017 *CIS=Commonwealth of Independent States European members 28 As a useful analytical framework, this paper also reviews alternative finance volumes grouped by their European geographical regions.11 For instance, when reviewed together the Nordics (Denmark, Finland, Iceland, Norway and Sweden) accounted for just over €449m, Benelux (Belgium, the Netherlands and Luxembourg) accounted for €371m and the Baltics (Estonia, Latvia and Lithuania) accounted for €234m. In terms of regional growth, all regions exhibited impressive growth levels when compared to most industries. The fastest growth was recorded in South Eastern Europe (357.7%) and countries in the Community of Independent States (CIS) (465%), although from very modest volumes of just a few million euros in 2016. Strong growth was also reported in Eastern Europe (153.2%) and Central Europe (115.5%), from base levels of a few dozen million euros in 2016. However, the most impressive growth, when considering base volumes, were associated with the booming markets in Germany (85.5%) and Italy (89.5%). Alternative Finance Volume per Capita While overall country volume serves as a significant tracker for European alternative finance, observing alternative finance market volumes as a per capita figure allows for a more nuanced analysis on the development and impact of alternative finance, adjusting for country size. The UK continued to register the highest alternative finance market volume per capita, at €107.04 (up nearly €41 from 2015 levels, and up €21 from 201613 levels), indicating greater market penetration across the population. In mainland Europe, the countries that reported the highest total volume were not necessarily the leaders in per-capita terms. For instance, France and Germany slipped down to the 9th and 13th spots, respectively, with per capita volumes of €9.85 and €7.20. Nevertheless, these countries both boasted high growth rates, growing 48% in France and 85% in Germany in terms of volumes per capita between 2016 and 2017. The great reformers of Eastern Europe were also the countries that exhibited some of the highest volumes per capita. Here, Estonia, despite presenting stagnation in total volumes, maintained its second place with close to €62 per capita. Latvia jumped to third place, with €47.51 per capita up 243% from its 2016 volume of €13.86 per capita. Region Countries 2016 2017 Growth 1 France France, Monaco €445.4m €661.4m 48.5% 2 Germany Germany €321.8m €596.8m 85.5% 3 Nordics Denmark, Finland, Iceland, Norway, Sweden €322.6m €448.7m 39.1% 4 Benelux Belgium, Netherlands, Luxembourg €245.8m €372.4m 51.5% 6 Italy Italy, Malta €127.2m €241.0m 89.5% 5 Baltics Estonia, Latvia, Lithuania €136.1m €217.4m 59.8% 9 Eastern Europe Poland, Czech Rep., Slovakia, Hungary €70.8m €179.2m 153.2% 7 Georgia Georgia €102.6m €173.3m 68.9% 8 Iberia Spain, Portugal, Andorra €135.3m €170.5m 26.0% 10 Central Europe Austria, Switzerland, Liechtenstein €51.1m €110.1m 115.5% 11 Ireland Ireland €76.8m €106.8m 39.1% 12 South East Europe Romania, Bulgaria, Greece, Turkey, Slovenia, Croatia, Bosnia & Herzegovina, Serbia, Montenegro, Macedonia, Albania, Cyprus, Kosovo €9.8m €44.9m 357.7% 13 CIS12 Russia, Belarus, Ukraine, Moldova, Armenia €5.8m €32.8m 465.0% Table 2: Regional Definitions and Volumes 2016-2017 29 Georgia maintained its fourth place with €46.62 per capita up 69% on 2016 volumes of €27.58 per capita. Some countries stuck out with extreme growth rates due to comparative negligible volumes in the previous year. These included Albania up 5960%, Slovakia up 1244%, Moldova up 875%, and Romania up 786%. However, despite exceptionally high growth rates, these still reflected relatively modest per capita volumes of €0.66, €1.87, €0.1, and €0.53 in 2017 respectively. Impressive growth was also evident with respect to some of the larger markets. Specifically, Sweden grew 123% to €19.51 Figure 9: Market Volume Per Capita by Country for Europe (€ EUR) 2017 €20 €40 €60 €80 €100 €120 UK €0 Estonia Latvia Georgia Finland Ireland Lithuania Sweden Netherlands France Switzerland Belgium Denmark Germany Slovenia Italy Poland Austria Spain Czech Republic Norway Liechtenstein €107.04 €61.76 €47.51 €46.62m €35.70 €22.19 €21.68 €19.51 €16.34 €9.85 €9.11 €7.99 €7.53 €7.20 €7.07 €3.97 €3.75m €3.74 €3.45 €2.50 €2.23 €2.10 per capita, Switzerland grew 158% to €9.11, and Italy to €3.97 per capita in 2017. On the other hand, significant declines were recorded in three countries, including: Iceland down 44% to €1.7 per capita mainly due to limited market size and stringent financial regulations; the Czech Republic down 16% to €2.5 per capita due to the closure of a major local platform; and Denmark down 51% to €7.5’ correct to 2.50 and 7.53, respectively. In this sense, the decline in the former two countries represents real decline, while the decline in Denmark is superficial and was a result of missing data.14 30 Alternative Finance Volume per Capita vs. GDP per Capita Per capita volumes were plotted against GDP per capita for each country to provide another comparative framework. Countries such as the UK, Estonia, Latvia, Lithuania and Georgia indicated some of the highest contributions of alternative finance per person in contrast to their 2017 GDP (lying well above the line of best fit). Conversely, countries like Cyprus, Hungary, Bosnia & Hercegovina, and Luxembourg all lie well below the line of best fit, a possible indication of an underutilization of alternative finance in these markets versus their potential. Over the past year, some countries have moved from below the line of best fit to above it. Switzerland, Slovakia and Albania, for instance, have all shifted above this line, implying the development of a more sophisticated alternative finance marketplace in these countries. It is also interesting to review the make- up of platform activity in the countries that lie just above the line of best fit, as Figure 10: Alternative Finance Volume per Capita vs GDP per Capita (€EUR) 2017 €1,000.00 €100.00 €10.00 €1.00 €0.10 €0.01 €0 €0 €20,000 €40,000 €60,000 €80,000 €100,000 GDP Per Capita Online Alternative Finance Volume Per CapitaR² = 0.1641 Luxembourg Netherlands Norway Switzerland Ireland Iceland Denmark Sweden Finland UK France Italy Spain Slovenia Lithuania Bulgaria Armenia Kosovo Moldova Serbia Albania Estonia Latvia Georgia Poland Slovakia Czech Republic Malta Greece Portugal Cyprus Hungary Turkey Ukraine Macedonia Croatia Russia Romania Belgium Germany Austria opposed to those below. Countries with strong P2P Consumer and Business Lending activities tend to outperform (i.e. UK, Georgia, Latvia and Estonia), while countries with strong Non-Investment- based models, such as Reward-based or Donation-based Crowdfunding, tend to underperform (i.e. Norway, Iceland, Malta, Greece, Luxembourg, etc.). This is not altogether surprising, as the contributions per fundraiser/campaign from individual funders will be lower in a non-investment focused model. Additionally, regulatory regimes that might hinder or prohibit investment-based activities (e.g. P2P Lending or Equity-based Crowdfunding) can contribute to underperforming markets. The regulatory impact will be further discussed in subsequent sections. Overall, a simple logistic regression analysis, suggests that 19.5% of the variance in alternative finance per capita can be explained by GDP per capita, as proxy indicator of economic development in each country. In this respect, our findings can be interpreted as indicative that alternative 31 finance is only partially delivering on its potential for filling financial gaps in less developed countries versus more developed countries, at least in the European context. Here, while this trend may be evident in Georgia, Albania, Romania and Bulgaria to a certain extent, it is noticeably absent in countries like Bosnia & Hercegovina, Hungary, Macedonia and Ukraine. THE DIVERSITY OF EUROPEAN ALTERNATIVE FINANCE MODELS The European alternative finance market is relatively diverse, with 13 distinct model- types operating across the region. The below table provides a snap-shot of the 2017 working taxonomy, which mirrors that in the previous European industry benchmarking surveys as well as those conducted in other regions. Alternative Finance Model Definition 2017 Volume 2017 Market Share 2017 Ranking (and Change in Position) P2P Consumer Lending Individuals or institutional funders provide a loan to a consumer borrower. €1,392.38m 41% 1 Invoice Trading Individuals or institutional funders purchase invoices or receivable notes from a business at a discount. €535.84m 16% 2 (1) P2P Business Lending Individuals or institutional funders provide a loan to a business borrower. €466.60m 14% 3 (1) Real Estate Crowdfunding Individuals or institutional funders provide equity or subordinated-debt financing for real estate. €258.75m 8% 4 (2) Equity-based Crowdfunding Individuals or institutional funders purchase equity issued by a company. €210.93m 6% 5 (1) Reward-based Crowdfunding Backers provide funding to individuals, projects or companies in exchange for non- monetary rewards or products. €158.80m 5% 6 (1) Balance Sheet Business Lending The platform entity provides a loan directly to a business borrower. €94.84m 3% 7 (1) Debt-based Securities Individuals or institutional funders purchase debt-based €75.20m 2% 8 (2) P2P Property Lending securities, typically a bond or debenture at a fixed interest rate. €66.57m 2% 9 (2) Donation-based Crowdfunding Donors provide funding to individuals, projects or companies based on philanthropic or civic motivations with no expectation of monetary or material €53.14m 1.6% 10 (1) Minibonds Individuals or institutions purchase securities from companies in the form of an unsecured retail bonds. €29.10m 0.9% 11 (1) Profit Sharing Individuals or institutions purchase securities from a company, such as shares or bonds, and share in the profits or royalties of the business. €1.57m 0.05% 12 (1) Balance Sheet Consumer Lending The platform entity provides a loan directly to a consumer borrower. €3.00m 0.1% 13 (1) Other The research team recorded volumes raised through other alternative finance models, including Community Shares, Pension-led Funding, crowd-led-microfinance and other model’s which fall outside of the existing taxonomy. €22.42m 0.67% Taxonomy and Volume Table 3: 2017 European Taxonomy 32 In 2017, P2P Consumer Lending accounted for 41% of all European Alternative Finance volumes, followed by Invoice Trading (16%), P2P Business Lending (14%), Real Estate Crowdfunding (8%), Equity-based Crowdfunding (6%) and Reward-based Crowdfunding (5%). Platform activities from these six models accounted for just over 90% of the alternative finance landscape. Since 2013, the P2P Consumer Lending model has remained the single largest volume driver across Europe. In 2017, this model accounted for a market share of 41%. While most of the other model activities present in Europe have maintained their proportional market share at similar levels year on year, the P2P Consumer Lending model has increased its market share from 34% in 2016 to this year’s 41%. It is worth noting that P2P Consumer Lending was the largest alternative finance model globally in 2017, driving volumes in the Asia-Pacific and Americas region. In the case of Asia-Pacific, the models’ strong market-share position was driven by P2P Consumer activity in China (63% of the market). Over the course of 2017, model rankings in terms of overall market-share position have shifted considerably for certain models against the previous year. Invoice Trading, for instance, accounted for 12% of 2016’s European volume and was in third position. In 2017, this model accounted for 16% of market share, having nearly doubled against the previous year and moved into second position. While Real Estate Crowdfunding was the sixth largest model type in 2016, its volume more than doubled in 2017, and accounted for 8% of the market. Equity-based Crowdfunding’s total volume decreased slightly, reducing its share of the market from 11% in 2016 to 6% in 2017. An interesting development, countering trends in other models, was the significant decrease in Reward-based Crowdfunding. Total volumes fell 17% between 2016 and 2017 and moved it from being the fifth largest model in 2016, to the sixth in 2017. Models that did not perfectly fit under any existing model type accounted for €22.42m and were identified as ‘other’ in the above table. Prevailing Models and Growth in Europe In contrast to 2016, where all models experienced positive growth, just over half of all models (eight out of the 13 model types) experienced positive annual growth in 2017. P2P Consumer Lending continued to grow, increasing by 99.8% from €697m in 2016 to €1,392m in 2017. This growth can be attributed to strong incumbent firms that have increased their operations internationally. In 2017, our data set includes 73 distinct P2P Consumer Lending model entries from 35 firms across Europe, nine of which operated in two or more countries (or 26% of firms operating in multiple jurisdictions). Invoice Trading grew by 113% between 2016 and 2017, increasing from €252m to €536m. In 2017, this model recorded 42 entries from 23 firms, with 4 of these firms operating in 2+ countries. This model is closely linked to that of P2P Business Lending, with six firms actively operating P2P Business Lending activities as well. Half of these multi-model firms are also highly international (2+ country-level operations). Though there are an increasing number of firms that operate multiple models, the firms which are driving volumes in the Invoice Trading segment tend to only operate within that model. P2P Business Lending grew 33% from €350m to €467m. There were 90 entries from 53 unique firms across Europe. Of these 53 firms, 11 (or 21%) had operations in two or more countries. 69% of firms (37) operated only one model, while the remaining 31% (16 firms) had activities in related models such as Consumer, Property or Invoice lending. In most cases, these 16 firms only operated one other model. Real Estate Crowdfunding grew 136%, increasing from €109m in 2016 to €259m in 2017, generating the fourth largest volume in Europe. This model recorded thirty-nine entries from 35 distinct firms. Only three firms had operations in more than one country. Despite the impressive growth reported for this model, volumes of Real Estate Crowdfunding may still be underestimated, as some Equity-based Crowdfunding platforms don’t distinguish between Real Estate Crowdfunding campaigns and Equity- based Crowdfunding campaigns on their platforms. 33 In 2017, Balance Sheet Business Lending grew to €95m, up 60% against the previous year. There were ten entries associated with this model, from seven firms, with one Figure 11: Alternative Finance Volume by Model in Europe 2015-2017 (€millions) €200m €0m €400m €600m €1400m €800m €1200m 2017 2016 2015 €1600m Profit Sharing €2m €8m €1m Balance Sheet Consumer Lending €3m €17m Real Estate Crowdfunding €259m €109m €27m Balance Sheet Business Lending €95m €59m €2m Invoice Trading €536m €252m €81m Equity-based Crowdfunding €211m €219m €159m Debt-based Securities €75m €23m €11m Donation-based Crowdfunding €53m €32m €22m P2P Business Lending €467m €350m €212m Reward-based Crowdfunding €159m €191m €139m P2P Property Lending €67m €95m Minibonds €29m €10m P2P Consumer Lending €1,392m €697m €366m firm operating in several jurisdictions. 71% of these firms only operated one model, while the remaining 29% had P2P Business Lending operations as well. 34 The Donation-based Crowdfunding model continued to grow, increasing 64% to €53m from 2016’s €32m volume. Although this model came in tenth in terms of overall volume rankings, this model has steadily increased its annual growth rate every year since 2014. When we look at how this model has developed outside of Europe, it is interesting to note that while Donation-based activities were growing in Europe, they were declining in almost every other jurisdiction. Some of this growth may be associated with shifting campaigns from Reward-based model to the Donation-based model, as the latter more frequently allows for a “take what you get” fundraising approach versus the “all or nothing” fundraising approach typical of Reward-based Crowdfunding platforms. The fastest growth observed across all models was in Debt-based Securities, up 229% - from €23m in 2016 to €75m in 2017. There were 18 entries from 14 firms. Though the model has a smaller number of unique firm-operators, all of the firms grew year- on-year. Furthermore, despite this model having limited multi-European operations, with only two firms operating in multiple jurisdictions, it is worth noting that several of these firms had operations outside of Europe. Specifically, several Debt-based Securities firms were servicing fundraisers in Africa. Those volumes have been accounted for in the Middle East and Africa dataset and are reported in the Middle East and Africa alternative finance report. The second largest annual growth rate was observed in the Minibonds model, which increased by 186% in 2017 - from €10m to €29m. Eleven firms operated within this model, with eight firms operating several alternative finance models. More than half (55%), also reported having Equity-based Crowdfunding activities. Despite being the fifth largest model across Europe, Equity-based Crowdfunding shrank by 4% in 2017 – from €218.64m to €210.93m. Even with this slight decline, this model had significant platform activity, with 105 unique entries from 66 firms and from 31 countries. Eleven firms (10%) had operations in two or more countries. Though this model shrank in 2017, this does not necessarily mean that this model will not recover in 2018. Since this model complements traditional angel and seed-level investment activities, it is important to view this model within the broader European VC and PE activities that went on in 2017. In 2017, while deal size was on the rise, the number of early stage deals fell.15 As such, it is not surprising that early- stage investments across European Equity- based Crowdfunding models followed similar trends for 2017. Reward-based Crowdfunding’s volume declined by €32m (17%), from €191m to €159m. This is the first year that this model has not experienced growth. There were 111 unique entries from 69 firms, with an additional 73 web-scrapped entries from 2 platforms. Such development may be explained by a combination of three trends: first, gradual crowding-out by investment model platforms which raise higher sums and have become more clearly regulated in various jurisdictions; gradual crowding- out by Donation-based platforms allowing donation collection for businesses under the “take what you get” versus the “all or nothing” fundraising schemes typical of reward platforms; and, finally, a certain level of closures of “first mover” Reward-based platforms following difficulties to achieve financial sustainability under their current business and revenue model schemes. P2P Property Lending’s total volume decreased by €28m, dropping by 30% to €67m in 2017. There were 33 unique entries from 13 firms in 2017. In previous years, this model was closely related to P2P Business Lending activities, with firms that were primarily P2P Business Lenders also offering property-based loans to business borrowers. In 2017, the number of firms which were operating in both models has dwindled, with those firms re-focusing their activities to unsecured business lending. This move away from property-secured lending by firms that are primarily business lenders helps explain this decrease, at least in part. An alternative explanation is that some platforms operating within the P2P Business Lending sphere don’t distinguish between P2P Property Lending and P2P Business Lending in their operations, essentially distorting reported figures for these two models. However, firms that have property-based lending as their primary activity have increased their 35 transaction volumes against the previous years. It is likely that the 2018 data set will reflect stable growth, with dedicated property firms continuing to grow. Balance Sheet Consumer Lending, while first included in this research last year, fell 82%, from €17m in 2016 to €3m in 2017. Firms with balance sheet activities primarily operated as P2P Consumer Lending platforms, with balance sheet activities supplementing their P2P offerings. In this case, there were no reporting firms that operated only a Balance Sheet Consumer Lending model. Instead, these firms saw a decline in balance sheet driven funding, while their overall lending increased. Finally, Profit Sharing, which experienced 1449% growth between 2015 and 2016, declined by 81% in 2017 to €2m. However, due to relatively small volumes, no clear trend has yet been identified with respect to this model. Figure 12: Top Three Countries by Key Models 2017 €0m €50m €100m €150m €300m €250m €350m P2P Business Lending France Germany Netherlands €88m €86m €71m Reward-based Crowdfunding France Switzerland Germany €47m €26m €15m P2P Property Lending Estonia Sweden Spain €18m €18m €9m Equity-based Crowdfunding Finland Sweden France €51m €48m €34m Donation- based Crowdfunding Germany Netherlands France €19m €9m €8m Debt-based Securities France Finland Netherlands €39m €26m €5.7m Balance Sheet Business Lending Netherlands Austria France €62m €30m €3m P2P Consumer Lending Germany Georgia France €325m €293m €170m Invoice Trading Italy Belgium Ireland €139m €100m €73m Real Estate Crowdfunding Germany Sweden France €127m €67m €48m €200m 36 Country Contributors to Key Models by Volume The chart below identifies the top three contributors to each model of the key model types in 2017. Akin to last year, France appears as one of the top three contributors for nine of the eleven models, while Germany appears in five. Additionally, the Netherlands was also is present in the top three of five of the eleven models. This result is consistent with their role in the marketplace, as they are key drivers of regional volumes. France was the market leader for the P2P Business Lending (€88m), Reward-based Crowdfunding (€46.8m), and Debt-based Securities (€9m) models. Additionally, France’s volume contributed the second largest amount for P2P Consumer Lending (€293m), Equity-based Crowdfunding (€48m), Real Estate Crowdfunding (€67m), Donation- based Crowdfunding (€9m), Balance Sheet Business Lending (€30m), and Minibonds (€9m). While Germany was second to France in overall volume, it was the market leader for P2P Consumer Lending (€325m), Real Estate Crowdfunding (€127m), Donation-based Crowdfunding (€19m), and contributed the second highest volume to Reward-based Crowdfunding (€26m). The Netherlands was also present in the top three for key models five times. It contributed the greatest amount to both Balance Sheet Business Lending (€62m) and Minibonds (€20m). It was also ranked second for P2P Business Lending (€86m) and Debt-based Securities (€26m), and third for Donation- based Crowdfunding (€8m). Of the eleven model types, only three did not have France, Germany, or the Netherlands as the top contributor. For these, Italy was the top contributor for Invoice Trading (€139m), Estonia for P2P Property Lending (€18m), and Finland for Equity-based Crowdfunding (€51m). THE VITALITY OF ALTERNATIVE FINANCE BUSINESS FUNDING Ensuring the vitality of the European SME sector was viewed as a key priority throughout the region. Even still, the development has often been restricted by the inability to access adequate and appropriate levels of financing. Over the past few years, alternative finance has grown to become a viable funding source for entrepreneurs, start-ups and small and medium sized businesses across Europe. Overall SMEs by Volume and Number In 2017, 24,107 businesses raised roughly €1,660m though an online alternative finance platform.16 In terms of volume, this figure represented a 47% annual growth compared Figure 13: Total Online Alternative Business Funding Volumes (Excl. UK) 2012-2017 (€millions) €1,000m €1,600m €800m €1,400m €600m €400m €200m €0m €1,200m €1,800m 2012 €66m 2013 €117m 2014 €201m 2015 €536m 2016 €1,126m 2017 €1,660m 77% 72% 167% 108% 47% 37 to the 2016 figure. While this is still notable growth, the growth rate has continued to decelerate since 2015. Between 2014 and 2015, the growth rate was 167%, which decreased to 110% in 2016. Overall, the number of businesses utilizing alternative finance grew 66% in 2017 (up from 14,521 in 2016). Nevertheless, it is important to stress that the above figures underestimate the real contribution of the industry to the financing of SMEs, as not all platforms monitored and/or reported these figures. Split of Debt, Equity and Non-investment based Models Platform respondents were able to report business-fundraiser volumes by model and A total of €1,605m was generated for businesses across Europe from debt and equity models. The remaining 3% of business funding (€55.26m) came from non-investment models such as Reward- based or Donation-based Crowdfunding. While overall business funding continued to increase in 2017, the portion derived from non-investment models decreased by 18%. Across Europe, lending platforms continued to account for the majority of the volume generated, with 76% of all business funding country. While certain models are inherently used by businesses to raise funds (i.e. P2P Business Lending or Equity-based Crowdfunding), our survey allowed firms to indicate volumes that went to business fundraisers, regardless of the over-arching model type. As such, debt-based business volumes include applicable volumes from the following models: P2P Business Lending, Balance Sheet Business lending, Invoice Trading, Minibonds, and applicable volumes from P2P Consumer Lending, P2P Property Lending, Balance Sheet Consumer Lending and Debt-based Securities. Equity-based business volumes came from the following models: Equity-based Crowdfunding, Real Estate Crowdfunding, and Profit Sharing. coming from debt-based models, up from 67% in 2016. This equated to €1,264m in 2017. From 2016 to 2017, overall business funding from debt-based funding increased by 68%. 21% of all business volumes (€341m) was derived from Equity models in 2017. While the annual growth rate for business funding from equity models between 2014-2016 remained in the 90% range, this fell between 2016- 2017 to 12%, while still increasing in absolute terms by €36.5m. Figure 14: Debt vs Equity Online Alternative Business Finance 2012-2017 (€millions) Debt Funding Equity Funding €1,000m €1,600m €800m €1,400m €600m €400m €200m €0m €1,200m €1,800m 2012 2013 2014 2015 2016 2017 €60m €48m €136m €83m €349m €159m €754m €304m €1,264m €341m €18m €15m 38 France (20%), the Netherlands (16%), Italy (10%), Sweden (8%), and Germany (6%) accounted for the top five countries whose SMEs utilized alternative finance channels to support their businesses (See Appendix 2 for business volumes by country). France had the largest amount of equity- based business volumes (€113m) and non- investment-based business volumes (€17m) in 2017. It is worth noting, the Netherlands accounted for the largest country in terms of debt-focused business funding, at €240m in 2017. Ranking third overall, Italy’s business volume landscape was predominantly from debt-models (95%), and in particular from Invoice Trading activities. Sweden, ranking fourth overall, had significant Equity-based activities. When we account just for Equity- based activities, Sweden ranks second (with €82m). Rounding out the top five was Germany, with 73% of business activity stemming from debt activities, 19% from equity, and 8% from non-investment models. Ireland, though overall ranked 6th in terms of business-focused alternative finance volumes, was the 4th largest when looking only at debt-based volumes (€106m). Key Sectors and Industries A key characteristic of alternative finance is that fundraising activities are sector agnostic. With the exception of Property and Real Estate-focused models, which have significant and expected concentrations of firms from the ‘real estate & housing’ sectors, data suggests that alternative finance platforms attract diverse firms from a wide variety of sectors. Nevertheless, certain models tend to attract a greater share of business fundraisers from certain sectors than others. In the 2017 survey, platforms were asked to rank business sectors as representative of the largest proportion of successful funding on their platform. High sector concentrations were observed from businesses utilizing the Reward-based Crowdfunding model, with 35% of volumes going to businesses in the ‘Cultural and Creative Industries’ (including - Arts, Music and Design sectors). This was followed by ‘Media & Publishing’ (12%) and ‘Charity & Philanthropy’ (8%) ranking 2nd and 3rd respectively. Balance Sheet Business Lending saw 28% of volumes going to firms in the ‘Retail & Wholesale’ industries, followed by ‘Business & Professional Services’ (17%) and ‘Food & Drink’ (10%). 20% of firms that received funding through an Invoice Trading platform came from ‘Manufacturing & Engineering’, followed by ‘Transport & Utilities’ (12%). Equity-based Crowdfunding saw 20% of volumes going to ‘Bio/Medical Tech’ firms, followed by 12% to ‘Environment, Renewable Energy & Clean-Tech’, and 11% to ‘Technology Software Developers and Service Providers’. Finally, the most sector agnostic model was P2P Business Lending, with their highest- ranking sector only accounting for 7% of their volume, coming from ‘Retail & Wholesale’ firms. MARKET DYNAMICS BY MODEL The following pages will focus on how key stakeholders, funders and fundraisers, utilize alternative finance. Onboarding, Successful Funding and Repeat Rates Prior to raising funds on an alternative finance platform, a fundraiser must first go through a series of checks and assessments to determine their suitability. While the process varies from platform to platform, onboarding and successful funding17 rates across the key models provide some insight into how this first checkpoint impacts fundraiser success. The chart provides these data points wherever data was sufficiently robust for analysis. The Equity-based Crowdfunding model had the lowest recorded on-boarding rate, with only 6% of fundraisers able to go on to the platform to raise funds. Of the 6% that were onboarded, a staggering 81% were successful. This suggests that the more stringent the onboarding process, the likelihood of fundraiser success increases. The average campaign size was €214,690. Real Estate Crowdfunding, another ‘equity- based’ model also saw high levels of successful funding (87%) yet onboarding rates were also quite significant (59%). This 39 may be due, in part, to the fact that most Real Estate Crowdfunding platforms function as a SPV (Special Purpose Vehicle/Entity), doing much of their own deal origination. As such, their own ‘onboarding’ will be higher, as these are opportunities which they have actively sought, in many cases. The average deal size was €388,608. Turning to lending models, the onboarding rate for P2P Business Lending activities was 17%, with a follow-on 83% successful funding rate achieved by borrowers. In coming years, our survey will ask for an onboarding and successful funding breakdown as related to secured and unsecured lending. The average deal size in 2017 was €66,445. For P2P Consumer Lending, the onboarding rate was 22% and the successful funding rate was 29%. When compared to last year, the onboarding rate decreased (from 25%) and the successful funding rate increased (from 19%). Interestingly, as this model relies more on significant levels of investor auto- selection, this lower success rate may be reflective of insufficient investment to support deal-flow. The average deal size for a P2P Consumer loan was €8,079 in 2017. P2P Property Lending denoted an onboarding rate of 55%, with successful funding at 98%. This figure is quite Figure 15: Onboarding and Successful Funding Rates 2017 by Model 100% 80% 60% 40% 20% 0% 88% Invoice Trading61% 87% Real Estate Crowdfunding59% 95% Debt-based Securities21% 66% Reward-based Crowdfunding47% 83% P2P Business Lending17% 29% P2P Consumer Lending22% 98% P2P Property Lending55% Onboarding Rate Successful Funding Rate Donation-based Crowdfunding74% 69% Equity-based Crowdfunding6% 81% interesting, as overall, the volume driven by this model has decreased. As platforms operating this model now tend to be solely focused on property-based lending (where as last year, platforms were operating hybrid models), the deal origination and property specific due diligence has improved with greater platform specialization. So, while the model has contracted, specific deals funded through this model tend to be larger ticket deal sizes, albeit fewer overall deals, with an average deal size of €85,066. The Invoice Trading model recorded an onboarding rate of 61%, with a successful funding rate of 88%. It is worth noting that the proportion of repeat borrowers to this model is quite high, impacting their ‘onboarding’ rate as firms apply for follow- on credit. This model also relies heavily on institutional-led investment, which helps explain the high success rate. With respect to Reward-based (47%) and Donation-based Crowdfunding (74%), both models noted that their onboarding rate related more to ‘fundraiser fit’, in cases where a platform was specifically targeted at an industry or sector. While the onboarding rate for Reward-based and Donation-based models were not similar, the success rates were much closer - at 66% and 69%, respectively. 40 With few exceptions, it appears that non- investment model platforms (i.e. Reward and Donation Crowdfunding), also enjoy less regulatory limitations and lower ticket campaigns, and apply a less rigid filtration mechanism than investment model platforms (i.e. Equity, P2P Business Lending, etc.) that are more heavily regulated and involve relatively high-ticket campaigns. However, this practice translates into lower success rates for non-investment models, which may be indicative of a certain level of crowd- wisdom able to differentiate between varying campaign quality in Reward-based and Donation-based campaigns. Another good measurement of fundraiser alternative finance adoption is the repeat fundraiser rate. The survey asked firms to identify the proportion of fundraisers that Figure 16: Repeat Funding Rate Across Models (2017) 10% 20% 30% 40% 50% 60% 70% 80% 90% Invoice Trading 0% P2P Property Lending Real Estate Crowdfunding P2P Business Lending Donation-based Crowdfunding P2P Consumer Lending Equity-based Crowdfunding Reward-based Crowdfunding 82% 37% 25% 21% 18% 17% 15% 12% were repeat users within a calendar year. Overall, 82% of the borrowers that utilized the Invoice Trading model were repeat borrowers. Compared to last year, the number of repeat borrowers has continued to increase (up from 60%). Borrowers are using this model more akin to a revolving line of credit, and as a tool for managing cashflows, than one-off invoice factoring. This higher repeat rate also helps explain the higher ‘onboarding-rate’ for this model. 37% of P2P Property Lending borrowers were repeat users, while only 21% of P2P Business Lending borrowers and 17% of P2P Consumer Lending borrowers were repeats. Repeat fundraisers accounted for 25% of all Real Estate Crowdfunding issuers, and 15% of Equity-based Crowdfunding issuers. Figure 17: Proportion of Auto-Selection by Models (2017) 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% P2P Consumer Lending P2P Property Lending Invoice Trading P2P Business Lending Real Estate Crowdfunding 82% 67% 59% 25% 3% 41 Turning now to funder dynamics, our survey also probed platform respondents to indicate the proportion of investors or lenders who used auto-bid or auto-selection mechanisms to facilitate their investments. Auto-bid or auto-selection is a function offered by many alternative finance platforms, where individual lenders or investors specify investment amount, duration and risk appetite and the platform allocates funds across available investment options based upon the pre-set preferences, effectively auto-diversifying against the available portfolio. However, since such services are heavily regulated only a subsample of properly authorized platforms employ such a model. In 2017, P2P Consumer Lending utilized auto-bid or auto-selection functions the most, at 82%. One of the key reasons for platforms offering this investment option is to improve market efficiencies regarding fulfilment. In this case, both the lender and borrower know their applicable interest rate with greater certainty, leading to a quick fulfilment and draw-down of the desired loan. Yet, as noted in a previous section, 29% of borrowers are successful on such platforms. This may suggest that there is insufficient funding to support borrower demand. P2P Property Lending (67%) also registered a high-level of auto-selection usage, followed by Invoice Trading (59%). Unlike previous years, P2P Business Lending saw auto- selection drop to 25%, from last year’s 49%. The Real Estate Crowdfunding model had very low usage of auto-selection (3%). Institutionalization and Institutional Agreements As alternative finance becomes more mainstream, it is not surprising that institutional investors (including pension funds, mutual funds, asset management firms, family offices and banks) have taken greater interest in capital raising fintech solutions to support their own investment strategies or support their clients. In 2017, €452 million originated from institutional investors, representing roughly 13% of all European Alternative Finance volumes for the year. Though the nominal value of institution-led investment has increased in 2017, when we observe the proportions of institutional vs retail investment by model, 2017 is actually characterized by retail-led volumes. In fact, across every observed model, the proportion of investment from an institution fell, in some cases quite dramatically. The proportion of institutional investment in the P2P Consumer Lending model dropped from 45% to 12%, accounting for €161.84m of its total volume. For P2P Business Lending, institutional investment accounted for €110.27m its volume, representing 24% of its total. This represents a smaller decrease of 5% from 2016’s 29%. Institutional participation in Invoice Trading also decreased considerably in 2017, from 63% to 46% and accounted for €248.89m of the model’s volume. Institutional investment fell in the Equity- based Crowdfunding model by over 50%, from 13% in 2016 to just 6% in 2017. Overall, institutions contributed €12.17m in comparison to the €198.75m raised through non-institutional investors. While 9% of funding for Real Estate Crowdfunding came from institutional investors in 2016, this fell to 2% in 2017. P2P Property Lending’s share of volume derived from institutional investors experienced an even sharper decrease, falling from 46% to 1%. This development may suggest that, at least in the European context in 2017, alternative finance indeed lives up to its name as an alternative channel for finance, enlarging the circle of participants in investment and startup support activities, which have been underserved by more traditional channels. Proportions of institution-driven volumes were more prominent in certain jurisdictions. 45% of Italy’s alternative finance volume (€109.6m) came from institutional investors, followed by Ireland with 43% of volumes (€45.5m) derived from institutional investors. This was predominantly from the Invoice Trading model. The Nordics (21%) and Benelux (20%) also saw considerable volume driven by institutional investors, predominantly in debt- based models. Even though the Nordics came in third in terms of proportion of institutional investment, it was the second largest overall volume driver after Italy, at €96m. 42 Figure 18: Percentage of Institutional Funding Across Key Models in 2017 (Weighted) Non-Institutional Institutional €0m €200m €400m €600m €1400m P2P Business Lending 72% 28% 2015 24% 76% 2017 71% 29% 2016 Invoice Trading 63% 2015 46% 54% 2017 32% 68% 2016 37% Real Estate Crowdfunding 98% 2017 91% 2016 9% 2% €1200m €800m P2P Consumer Lending 74% 26% 2015 12% 2017 55% 45% 2016 88% Equity-based Crowdfunding 90% 2015 94% 2017 87% 2016 6% 13% 10% P2P Property Lending 99% 2017 54% 46% 2016 1% Figure 19: Percentage of Institutional Funding by Regions in 2017 (Weighted) Non-Institutional Institutional €0m €100m €200m €500m €300m €600m €400m €700m Ireland 57% 43% CIS 1% 99% South Eastern Europe 10% 90% France 6% 94% Germany 5% 95% Nordics 21% 79% Benelux 20% 80% Italy 45% 55% 3% Baltics 97% 5% Eastern Europe 95% 1% Georgia 99% 18% Iberia 82% 6% Central Europe 94% 43 Iberia, and in particular Spain, registered 18% institutional volume, followed by South Eastern Europe at 10%. France and Germany, the lead countries, registered considerably lower proportions of institutionalization in 2017, at 6% and 5% respectively. Just under €40m was attributed to France’s alternative finance volumes from institutional investors, while Germany’s institutional investment was €30m. The remaining seven regions had even lower levels of institutional involvement – all reporting 6% or lower. Other Collaborations with Institutional Partners While institutional investment certainly is an important marker in understanding the synergies between traditional financial services and alternative finance platforms, it is also important to review the types of collaborative arrangements that exist between platforms and traditional financial institutions. To this end, platforms were asked about the ways in which they collaborate with such partners. These included referral agreements, data exchange, agent banking, platform ownership and custodianship. Platforms in every model indicated having referral agreements in place, with the highest instances of this from the Balance Sheet Business Lending model (86% of platforms). 34% of firms from P2P Business Lending also indicated having referral agreements in place, followed by 23% of Invoice Trading firms, 14% from P2P Consumer Lending and 12% from P2P Property Lending. Qualitative remarks indicate that these referral agreements were predominantly between the alternative finance platform and a partner bank. Furthermore, 35% of Equity-based Crowdfunding platforms also indicated having referral agreements in place, though these were predominantly between the platform and a traditional VC or Angel Network. In light of PSD2 and the continuing conversation around open banking, it was suspected that more platforms would have data-exchange arrangements in place in 2017. Yet, instances of such agreements were quite varied across models. For instance, only 6% of platforms from the P2P Business Lending model indicated having a data-exchange collaboration or arrangement in place. This was even less for P2P Consumer Lending (3%) and P2P Property Lending (4%). In contrast, 11% of Equity- based Crowdfunding firms indicated having such arrangements in place. Platform ownership was most prevalent in the Reward-based crowdfunding model, where 30% of platforms answering this question indicated ownership by institutional partners. No institutional partner ownership was seen in P2P Consumer or P2P Property models, this may indicate that such organizations view platforms more as a competitor than a potential collaborator. Nevertheless, 15% of platforms in the P2P Business lending and 30% of platforms in the Debt-based Securities spheres, indicated that institutional partners consider alternative finance platforms as a channel for them to engage in such segments, which may represent higher risk than they have followed in recent years, without fully incorporating such risk under their corporate brands and organization. When we review institutional collaborations by country, platforms from Ireland (67%), Belgium (62%) and Switzerland (62%) had the most instances of Referral Agreements in place with an institutional partner. France and Germany, despite low levels of institutional investment (as proportion of their volume), saw significant instances of institutional partnership in the form of referral agreements, at 48% and 37% respectively. Italy, whose institutional investment volumes were quite significant, saw 47% of firms engaging in referral agreements with institutions. With respect to platform ownership by institutional partners, we see that 15-20% of platforms operating in Western Europe report such ownership, while the same is only reported by 4-8% of platforms in Baltic, Central and South East Europe. No platform operating in Eastern Europe and the CIS reported ownership by institutional partners.