More than a million British investors staked some cash to crowdfunding or peer-to-peer lending platforms during the past 12 months, according to a new study.
The alternative finance market in the UK has around £3.2 billion of cash tied up in investments, loans and donations.
The cash ploughed into the market is a massive 84% increase on the amount invested in 2014, says innovation charity NESTA, which worked with Cambridge University and business consultancy KPMG on the research.
The huge jump in cash and numbers of people investing in alternative finance is a direct result of miserable rates of interest and low returns on savings in the high street, the study disclosed.
Make or break year for platforms
Many regard crowdfunding and P2P lending as offering better returns than banks, building societies or other financial providers who reduce returns with perceived hidden and unfair charges and fees.
However, the report points out that alternative finance is the investment frontier and that many unlisted firms are poor risks and few safeguards are in place from regulators to protect investor cash.
“This year could be a make or break year for crowdfunding and peer to peer investors,” said a NESTA spokesman.
“We expect to see some equity crowdfunded business to mature and investors will be looking at the real rates of return rather than projections.
“Peer to peer lenders will also learn more about the risks they are taking on if the economy slips back this year.
“Any bad news like this from either type of platform will be a challenge for the market.”
Protection needed for investors
Meanwhile former financial services regulator Lord Adair Turner has faced criticism from the alternative finance sector over comments he made about peer to peer lending.
He claimed that lenders would face big losses in the coming years that would make the worst bankers look like geniuses.
Adair is recommending regulators should not let investors into the market unless they can afford to lose all the money they are staking.
From April, advising on peer-to-peer lending becomes a regulated activity supervised by the Financial Conduct Authority to coincide with the introduction of the service into ISAs.