Alternative Finance: Peer-to-Peer Lending & Crowdfunding
Ahead of the upcoming DCU symposium on alternative finance, Dr. Pierangelo Rosati discusses how stricter regulatory requirements along with the availability of new Fintech services has led to growth in alternative sources of finance such as peer to peer lending and crowdfunding. Dr. Rosati is a postdoctoral researcher at IC4 and his research focuses on organisational competences in accounting, finance and data analysis in the cloud.
Small and medium enterprises (SMEs) represent the backbone of the European and worldwide economies. According to Eurostat estimates, SMEs account for more than 99% of the number of companies in the EU; over 66% of employment; 60% of value added; and 56% of investment. They also represent the main innovation driver in many sectors, and exploiting their full potential would benefit both the economy and society in general.
A major hindrance faced by SMEs in pursuing opportunities for growth, development, and entrepreneurial initiatives is undoubtedly access to external financing. Traditionally, bank financing (loans, overdrafts, credit lines) accounted for the overwhelming majority of external financing, with the rest coming from equity contributions from the business owners, and effective debt and credit management with suppliers and customers. Difficulty in gaining access to bank financing was compounded by the Global Financial Crisis (GFC) and is significantly harder since the introduction of stricter regulatory requirements under the Basel II regime. We all know how severe the consequences of the GFC have been, and the constraints on bank lending have significantly amplified them, with SMEs paying the highest price.
The recent rise of technology-enabled financial services (Fintech) has been able to, if not solve, then at least alleviate the shortage of external funding for SMEs by providing them with valid, alternative financing channels. Such channels, usually grouped under the name of Alternative Finance, are “alternative” in the sense that they are, for the most part, not provided by banks but from individuals and institutional investors.
The two most successful alternative financing channels are peer-to-peer (P2P) lending and crowdfunding. Peer-to-peer lending, also known as “social lending”, is the practice of matching borrowers and lenders through online platforms. Borrowers are usually able to obtain funds quickly and typically at lower interest rates than traditional financial intermediaries. Our recent research on the UK P2P lending industry, conducted in collaboration with Orca Money Ltd., shows a significant increase in the number of loans approved, and in the overall volume of lending over the last few years. This appears to be driven by a growing interest of institutional investors in this Fintech space.
By comparison, the crowdfunding model consists of raising small amounts of money for a project or venture from a large, potentially geographically distributed pool of people (the “crowd”). Again, this is typically achieved using an online platform.
Crowdfunding can take different forms based on the benefits afforded to funders. The most common forms of crowdfunding are equity, rewards, and donation crowdfunding. The Equity Crowdfunding model is rather straightforward and similar to more traditional investment models. Funders are real investors who obtain, in return for their investment, a beneficial interest in the form of a shareholding (equity) in the company. In the case of Rewards Crowdfunding, funders receive, unsurprisingly, a reward, generally in the form of free products or discounts. Lastly, the Donation Crowdfunding model implies simply that – a donation – wherein the donor receives no explicit compensation for their financial support.
Alternative finance channels generate undeniable funding and growth opportunities for SMEs and entrepreneurs. However, they also present challenges due to limited or an uncertain regulatory landscape that both companies and regulators must carefully navigate.
Recent trends and future perspectives of P2P lending and crowdfunding, as well as the opportunities and challenges they create, will be the focus of IC4’s 2nd Symposium in Capital Markets and Fintech, organised in collaboration with DCU Business School and DCU Alpha. This half-day event will take place from 9am-1pm on the 9th of June, 2017, in DCU Business School and will bring together leading industry experts and academics who will cover the various facets of P2P lending and crowdfunding.
For more information on the event and to register your place, please visit http://bit.ly/2qNZYyp. We look forward to seeing you there.