Crowd
funding means a large number of investors spends small amounts of
money to fund projects through web-based platforms.
By
focusing on a fraction of the [bank] services, we can provide those
services, and those services alone, cheaper.
Giles
Andrews – Zopa – February 14, 2013
What
is commercial crowd funding?
Commercial
crowd funding (also called financial return crowd-funding or FR
crowd-funding) can take two forms, peer-to-peer lending and equity
crowd funding.
Peer-to-peer
lending
Peer-to-peer
lending is like traditional lending. Simply, people use on-line
platforms to match lenders’ and borrowers’ demands.
Peer-to-peer
lending platforms can follow two business models. In the client
segregated account model, one individual lends directly to the
other. The platform is simply a service, helping collect loan
payments. In the notary model, a bank lends to the borrower.
The peer-to-peer platform then refinances the loan by issuing notes
which individual peer-to-peer lenders buy through the platform.
Equity
crowd-funding
Today,
there are only very few equity crowd-funding platforms, with the
majority focusing on angel investors or sophisticated investors.
When
you are involved in the on-line finance business, there is a pressure
to grow very quickly.
Anil
Stocker – Market Invoice – February 14, 2013
Commercial
crowd funding market
Today’s
total global market size is 6.4 BUSD. Since its beginning in 2006 in
the U.K., the market grows very fast. This is mainly due to
technological innovation and the inability of traditional credit
providers to lend, in the aftermath of the financial crisis, to the
real economy. However, despite strong growth, the commercial crowd
funding market is still small, as compared to total bank-originated
credit. For example, peer-to-peer lending only represents 0.01 % of
the total bank lending market in 2013.
Most
platforms act locally, in individual jurisdictions.
Pros
and cons
Commercial
crowd funding has five advantages:
- It spreads risk.
- It lowers the cost of capital for borrowers and increases returns for investors.
- It contributes to economic recovery by financing small and medium enterprises.
- It creates a new assets class, allowing investors to diversify.
- As it is entirely internet-based, it is cost efficient.
The
banks have this philosophy that for every service there should be a
charge. And the charge has got nothing to do with the cost to doing
this particular service.
Michael
Joseph – Vodaphone – February 14, 2014
On
the other hand, commercial crowd funding entails seven major risks:
- Risk of borrower’s default: As such, this is nothing special, a borrower can always default. However, if you lend through a crowd funding web site, you don't have necessarily all appropriate information to invest. Available statistical data can be biased towards big platforms and, if carried out by the platform, the financial analysis of the borrower might not be critically worked through.
- Risk of platform closure: If the platform is the only link between lender and borrower, this can directly lead to default, simply because contracts and payment systems disappear.
- Risk of illiquidity: Today, there is no secondary market for crowd funding instruments, meaning that investors cannot sell their participations.
- Risk of cyber-attack: If FR-crowd funding markets are on-line, this risk is obvious.
- Risk of fraud: Identity theft, money laundering, and data protection violations are common problem in any lending business. However, as the Internet is particularly anonymous, they are enhanced in commercial crowd funding.
- Systemic risk: Today, the industry is not big enough to threaten the financial system. But this might change in the future...
- Circumvention of banking regulation: In my view, this can be bad if investor protection is abandoned or conflicts of interest of the platform are not properly addressed. However, as lender and borrower are directly connected, I don't see any potential problem for the economy at large.
Should
we regulate commercial crowd funding?
The
spectrum of possible regulation ranges from no regulation at all (for
example Brazil, United Kingdom, and South Korea) to complete
prohibition (for example Israel and Japan).
We
have spent the last three years lobbying for regulation which is
ironic.
Giles
Andrews – Zopa – February 14, 2013
In-between,
you can treat peer-to-peer lending platforms either as brokers, as
banks (for example France, Germany, and Italy), or as collective
investment schemes.
The
IOSCO report is a very good introduction to crowd and definitely
worth reading.
Resource:
