The Alternative Finance revolution remains in full swing. But as with any major upheaval, questions relating to direction and definitions are surfacing.
Speaking to the various platforms allows me some insight into the queries and gripes that may well become important and contentious issues – and I will explore those issues in this this column. I’ll also be considering the following points:
A War Over Words
“It is odd how learned persons fail to see that new terms and definitions are apt to mean new doubts and litigation.” – Frederick Pollock
The terminology of this industry is already a confusing beast.
“Alternative Finance” is defined by many as online finance platforms that have a peer-to-peer element. Examples include crowdfunding, p2p lending and invoice funding platforms. However, to some the meaning of the phrase should also encompass any non-traditional source of finance – regardless of whether that source contains a p2p element. Examples of non-p2p companies currently considered within the alternative finance bracket are pensionledfunding.com and Fleximize.
Perhaps because of the blurred distinction above, some instead refer to online, p2p sites as “Crowdfunding” platforms. The difficulty here is that others see crowdfunding as specifically relating to donation, reward or equity-based investment in startup businesses, with debt-based p2p lending and invoice funding as individual categories unto themselves. Within the p2p space, some question how distinct p2p consumer lending and p2p business lending truly are.
How important is it to settle upon answers to these questions?
Firstly, it will benefit the industry’s supporting ecosystem to have clear definitions of each sub-sector of the space, and that in turn benefits the industry. One of the major challenges for alternative finance platforms is raising awareness and trust for the sector throughout the country (and indeed the world over). The alternative finance ecosystem can help to accomplish that. If the media, the statisticians, the aggregators, lawyers, advisors and investors are all speaking the same language – that will only help to bolster the confidence of all those that they direct to the industry. In spite of the massive progress and growth throughout the space, skepticism remains rife among those who still know little about the various forms of alternative finance. It will not ease their wariness to meet with an industry teeming with muddled jargon.
Finally, a lack of established terms inevitably leads to the pointing of fingers. A few times now I’ve witnessed platforms, without naming any names, questioning the makeup of a rival platform, i.e. are they really p2p? Should that platform be considered an alternative finance provider? Etc. That sort of internal feuding will again serve only to put potential borrowers, lenders, investors and entrepreneurs off of the industry as a whole. For now, the best course of action is for the many and various platforms to continue to collaborate in building a mainstream and popular alternative finance sector – and standardized definitions will help with that.
“One of the best parts of One Spark is the real-world feedback. You are out there talking to the public every day during the event and these are the people to whom you will be selling. For them to be able to hold your product and be able to tell you what they like and don’t like was invaluable.” – Pete Cochrane, Co-Founder of Aurora
Last weekend saw the second coming of the crowdfunding festival – One Spark – take over the streets of downtown Jacksonville. Hundreds of project creators pitched their ideas to an audience of 235,000 people. One Spark in essence produces a live version of the crowdfunding process. It got me thinking about whether face-to-face interaction has a role to play within an industry famed for the digital nature of its transactions. A yearly spectacle like One Spark is great for raising awareness of both entrepreneurial projects and of the crowdfunding space itself, but physical interaction can also be a distinguishing element in the approach of a platform.
Take ThinCats, for example. This peer-to-business lending platform’s due diligence goes beyond the rigorous online checks that are typical within the space – they also send representatives to meet every business that comes to the platform seeking a loan. A new entrant to the UK crowdfunding space – CrowdShed – is developing a physical space named “The Shed”, as part of the platform’s holistic approach. Based in London, The Shed is a place for entrepreneurs to work, get support, hold meetings and promote their project. The Shed will also play host to various inspirational talks from business and crowdfunding experts. The equity crowdfunding platform CrowdBnk hosts quarterly “Meet the Entrepreneurs” evenings. These give investors the chance to talk with some of the entrepreneurs who are raising money via the platform, and to sample the product that these entrepreneurs have created.
Physical interaction can generally be considered a unique feature among platforms at present, but that may not always be the case. I suspect an increasing number of platforms will begin to supplement their online service with a face-to-face element.
Who’s Going to Claim the One-Stop-Shop Crown?
“As more sites are launched, aggregators will play a more important role than ever before. Similar in nature to travel and hotel site aggregators, they will become the standard since it will be nearly impossible for the average surfer to keep up with the deluge of new projects and sites being started.” – CrowdFundFusion Founder Jon Mushey
I write almost as much news about emerging aggregators as I do about new platforms. Every new site that springs up does so prominently flaunting a unique feature, and each seems to have its sights fixed firmly upon the title of one-stop-shop for the crowdfunding industry.
The fervent pursuit of that title represents a general recognition of the fact that the Alternative Finance movement is now gaining real scale. There is an opportunity for a singular site to pool various products, services and/or projects from the industry into one hyper-intuitive, highly efficient portal. Users will thus be able to peruse the offerings of all the platforms at once, and then be funneled through to the site which best suits their requirements. But is that the extent of what an aggregator can offer?
Although there are a fair number of them out there, there is as yet no definitive one-stop-shop for alternative finance. In general, each new entrant adds a new and innovative twist to what may be called the typical aggregating model – described above. Let’s take a look at a few of the existing claims to the throne:
Those are just five brief examples, offered to give you an idea of the variety that’s out there. What is clear is that the best aggregators will not simply present users with a mishmash of products and projects. Going forward, it will be fascinating to see which of the structural quirks championed by the above aggregators will prove to be the most effective.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.