Welcome to the first installation of what will be a monthly feature going forward – my thoughts on the alternative finance space. This time round I will be opining on the major trends that are threatening to redefine the very basis of the sector. Four trends stand out:
Where to turn?
Anybody faintly interested in crowdfunding knows that platform birth rates are startlingly high. There are a simply dizzying variety of bespoke options for entrepreneurs out there. I’ve seen a lot of articles trying to provide a guide to the web of platforms, but they cannot hope to remain up-to-date. Thus the recent phenomenon of crowdfunding directories.
These sites, to borrow the words of Alex Feldman – Founder of CrowdsUnite, look something like a Yelp for the crowdfunding industry. They help entrepreneurs to gauge the best site to host their campaign. To use CrowdsUnite as an example, they provide a search filter based on crowdfunding type (debt, equity, rewards or donation-based), campaign-type (all or nothing or keep what you raise), sector/area of interest (sports, music, social good) and country. CrowdsUnite lists 100 US platforms currently. The site offers entrepreneurs who have already used a given platform the chance to review it. CrowdingIn is a similarly structured service – but with a UK focus.
The Crowdfunding Directory is attempting to get a handle on the international alternative finance scene. It features a world map upon which relevant platforms can be listed. If you hailed from the Philippines, you could zoom in on the region and find two platforms listed in the form of Artiste Connect and GetStarted. The directory’s listings are far from exhaustive, but it is a useful tool nonetheless.
Feldman intends to install listings on CrowdsUnite for the growing pool of crowdfunding consultants that is emerging. These experts include lawyers, accountants, videographers, marketers, fulfilment centres for distributing rewards to donors, and so on. It is only natural, as the world of crowdfunding sprawls outwards, for an ecosystem of support and advisors to grow up around it. I won’t be surprised to see many more services designed to help navigate the crowdfunding space spring up in 2014.
Your very own platform:
Crowdfunding, and alternative finance services in general, famously cuts out the middleman. It allows entrepreneurs to circumvent the banks and traditional finance routes in order to secure finance from their peers – and at a better a rate. But the fact remains that crowdfunding platforms are themselves middlemen. They match donors/lenders/investors with borrowers/fundraisers and extract a fee for doing so. They are intermediaries – just like banks – even if they offer a better/fairer deal for consumers.
But now we are seeing services arise to entirely remove the middling party from the crowdfunding relationship. These have come in the form of what I will term “platform factories”. There are a number of examples of these:
The key here is autonomy. By acquiring a platform of their own, fundraisers have full control over any projects they host – rather than having to rely so heavily upon a particular crowdfunding site. These “platform factories” will erupt in 2014. Users will relish the idea of being able to grip the reins more firmly whilst trying to crowdfund an idea.
This innovation may end up drawing bigger businesses into crowdfunding. I’m talking about the sorts of businesses who don’t desperately need capital, but might be interested in running a campaign for promotional purposes. The sorts of businesses whose websites already receive a large number of unique visitors. If such a business were to integrate a crowdfunding platform into its website – projects on that platform would benefit greatly from the website’s already high traffic.
This change is a challenge to the traditional rewards/donation-based crowdfunding sites. As James Beshara, CEO of Crowdtilt, explains: “Kickstarter is not the future of crowdfunding, and we are building the product we think should exist.”
Protect the investor:
The first thing to note here is this: bolstering investor security has rightly become the obsession of P2P lenders. Zopa and RateSetter blazed the trail in the UK with their contingency measures. Competition between platforms and tighter regulation from the FCA has led a host of platforms to follow suit. Newcomers to the space now seldom appear naked of a provision plan, or without a uniquely structured platform designed to minimize risk for investors. See below for details on the investor protection schemes of various new entrants:
These are just a few examples. It is plain enough to see that companies across the space (and indeed the space itself) are pushing to be viewed as increasingly secure options by investors. Yet despite all these commendable innovations, two questions remain – how will such security measures hold up in the event of a recession? And will the burden of safety measures take its toll upon lenders’ ROI?
We’re yet to see how P2P lenders will cope in a period of economic downturn. The issue is two-fold. Firstly, reputation is everything to alternative finance hubs. Their extremely low default rates are as shiny a lure to investors as their high yields. And they spare no expense in stressing these numbers. But in the event of a downturn (which at some point or another is inevitable) these default rates will go up (equally inevitable). Now, whether or not the various provision funds can reimburse lenders whose loans have defaulted is not really the question. The question is how these P2P lenders will continue to attract lenders once their stellar reputations have been somewhat tarnished. And I don’t have the answer to that.
It also seems inevitable that yields for investors will decrease as P2P lending becomes more and more secure. Return is commensurate with risk. If indeed these platforms are successful in driving risk down, how can they expect return not to fall? Having said that, P2P lenders will always be capable of offering greater returns than the banks, due to the leanness of their operations. Returns may well fall a bit, but not too far.
Location, location, location:
Another trend emerging in the P2P space is a rising interest from the platforms in geography. Given the slick, automated nature of lending and borrowing online, the location of lender and borrower has up to now been of little consequence to the platforms. But that is changing. See below – a few examples of platforms who care greatly about the whereabouts of their customers:
One of the major reasons for this shift is a desire on the part of the younger platforms to draw custom away from the P2P giants. Sancus, for instance, will hope to entice Jersey-based SMEs and entrepreneurs away from the more established UK P2P lending hubs – which do not offer the same local benefits. Finmar similarly may need that local edge to compete with new German entrant Lendico. A focus on location will also be beneficial for marketing purposes. Platforms will want to know where in the country their promotional efforts will bear the most fruit.