Fintechs in Crowdfunding, P2P lending and Banking Services
Existing Financial Alternatives (4 of 4)
Whether on Wall Street or High Street, banks are still the first reference that comes to mind when the subject is investment. Nevertheless, the last decade has witnessed a wave of newcomers in the financial sector, who are generating a lot of buzz without having a single physical branch. These players are fintechs. While there is difficulty in establishing a consensual definition, fintechs can be broadly understood as “digital innovations and technology-enabled business model innovations in the financial sector” (Philippon, 2016:2).
Despite being a rather recent phenomenon, fintechs have been attracting substantial attention from professional investors, entrepreneurs and the civil society, whilst raising serious challenges for traditional bankers. Offering alternatives to a banking system whose reputation deteriorated severely following the 2008 crash, these new digital companies appealed enormously to a fresh generation of millennials ready to make their first investments. The fintech umbrella comprises a long spectrum of digital platforms, apps and technologies, and it is nearly impossible to keep track of the sector’s innovation. From SMS-based mobile payment systems to digital banks, cryptocurrencies and the use of machine learning to build diverse investment portfolios, new players appear on a regular basis. This is not to say, however, that all innovation in the sector is contributing to a more regenerative finance. In fact, many digital wealth managers and advisors continue to reinforce the idea of ‘get rich fast’. Similarly, the Bitcoin euphoria was strongly motivated by speculation while its negative ecological implications were overlooked. Provided that these drawbacks reinforce the need to always keep a critical eye for innovation, the tech space is undoubtedly a fertile ground for positive change.
In the lines that follow, I will introduce three categories of fintech relevant to this conversation and which have been actively promoting an alignment of money and values, as well as offering a more transparent and inclusive way of engaging with finance: crowdfunding, peer-to-peer lending, and financial intermediaries & digital banks.
Crowdfunding
Since 2008/2009, when pioneers like Kickstarter and Indiegogo started their activities, crowdfunding has evolved enormously, enabling hundreds of thousands of creative projects to come to life. Besides its growing reach and diversity, this fundraising dynamic has also unfolded into different financial mechanisms. In addition to donation-based and reward-based crowdfunding, at least two other categories emerged more recently: equity-based crowdfunding and debt-based crowdfunding. While the first two forms do not qualify as proper investing instruments (some refer to them as non-investment-based models), the debt-based and equity-based models can (but not necessarily have to) generate financial returns for lenders and investors.
One of the beauties of crowdfunding is that investors can analyse, choose and invest directly in the project, business or organisation they want to see thrive (Shuman, 2012). Although many platforms still reproduce the business-as-usual approach, others specialising in equity crowdfunding for impact-driven businesses only are slowly appearing. Two examples are LITA.co (France), and the just-recently launched Brazilian platform Clube de Impacto (Impact Club). Community shares are also a form of equity-based crowdfunding which really puts people and planet first. Bridging the gap between bank loans and public funding, community shares are used to fund projects and businesses “which are owned and run by the communities they serve, enabling community-led regeneration and boosting local resilience” (Nesta, 2019:5). Following the Cooperative Principle of ‘one share, one vote’, investors participate in the decision-making process and, in some cases, are paid dividends or interest if the project is profitable. In the UK alone, crowdfunding platforms such as Ethex and Crowdfunder raised GBP 20 million through community shares in 2017. This capital was used to fund a broad range of community projects and assets including infrastructure and services, housing, renewable energy, pubs and community gardens.
Debt-based crowdfunding is another well-suited investment model for socially-focused projects. In this case, capital is raised through bonds which will be paid back by a set date, with interest usually being paid periodically. The main difference here is that investors have no voting rights, and risks are lower than when buying shares. Triodos Bank launched in 2018 its own crowdfunding platform, where people can invest directly through equity or bonds in projects with environmental, cultural or social impact. To date, the great majority of projects at Triodos Crowdfunding are debt-based, with over GBP 25 million raised to support the installation of wind, solar and hydro generating projects.
Peer-to-Peer Lending
Peer-to-Peer (P2P) lending started even earlier than crowdfunding, back in 2005. Kiva, one of the first players in this space and a key reference to date, carries a straight-forward purpose: “to connect people through lending to alleviate poverty” (Jackley, 2015). In a nutshell, P2P lending platforms connect people who have spare money to lend with those in need of loans, for an agreed interest rate between the parts. Lenders in Kiva do not receive any returns, but are encouraged to make a new loan once the previous one is paid, and thus keep the virtuous cycle alive. Through the platform, lenders can specifically choose the cause or person they wish to support, from farmers in Uganda to women artisans in Bolivia and midwives in the United States. On the other hand, there are P2P platforms which yield returns to their investors. Prosper, one of the sector’s veterans, advertises annual returns averaging 5.3%. Meanwhile, in the Indonesian platform CROWDE, in addition to the original loan, individual investors receive an agreed share of revenue from small farmers once the investment period comes to an end. Because loans might be as small as USD 25 in P2P platforms, one borrower can receive money from many lenders — which has made some people refer to this dynamic as ‘crowdlending’.
P2P lending has also expanded from the individual to the business sphere. Similar to crowdfunding, there are only a few P2P Business lending platforms which work exclusively with ethical, sustainable, socially-responsible borrowers. However, their work is normally based on transparency and accountability, not to mention investors can (most of the time) choose in which specific business they wish to invest. Funding Circle (UK) is one of the most popular P2P Business Lending platforms and it offers tax-free returns through ISA accounts. Lendahand (NE) focuses on supporting entrepreneurs working with projects related to agriculture, housing and access to drinking water in developing countries. In Brazil, P2P Business lending was only regulated fairly recently and, within one year, two platforms focused only on social enterprises were launched: Dinheiro e Consciência (Money and Consciousness) and Empréstimo Coletivo (Collective Loan).
Michael Shuman (2012:147) celebrates two changes that P2P lending platforms accomplished for local investment: “They have demonstrated that it’s possible to evaluate smaller borrowers, including small businesses, in a cost-effective way. (…) Second, these sites have really shaken up the pre-internet thinking of the world’s securities-regulatory establishments”.
Financial Intermediaries & Digital Banks
Combining ethical investing with modern user experience, a number of fintechs have emerged in the form of digital banks and financial intermediaries. In retaliation to traditional banking, many of these actors are advocating for the democratisation of financial management and, therefore, investing in accessible vocabulary, financial education, beautiful designs and offering agile customer support. Moreover, they are appealing to an increasing class of depositors and retail investors wanting to support businesses that meet ethical, social and environmental standards, instead of investing in fossil fuels or other harmful industries.
Examples of players offering these services are manifold. Ethex (UK), for instance, is a not-for-profit ethical exchange for positive investments. Besides running crowdfunding campaigns, they work as a ‘window’ of positive investing opportunities in many different areas: Innovative Finance ISA, Funds of funds, Savings accounts and savings bonds. The Swiss platform Yova, on the other hand, is a wealth manager that invests customers’ money in a diverse mix of stocks and bonds taking into account their interests, values, risk exposure and exclusion criteria. The purpose behind Yova’s business model is to enable investments that “promote clean energy and equal rights, not climate change or the weapons industry” (Yova, n.d.). Another example worth sharing is Matter (DK), a financial intermediary offering sustainable pension savings — which in Nordic countries represent significant financial assets. According to their website, all of their investments “to a certain degree support the goals of the Paris Agreement or contribute to one or more of the Sustainable Development Goals”.
Even though a wave of new mobile banks has entered the financial sector in the past few years, ethical digital banks are still starting to appear. Operating in the United States since 2015, and granted the B Corp Certification* in 2018, Aspiration helps its customers align their money with their values through a carefully designed range of products covering checking, savings and retirement accounts, and investments funds. Having developed its own sustainability monitoring and scoring system (Aspiration Impact Measurement), the bank encourages depositors to monitor how their daily spending and investments impact people and planet. In addition, they have a 10% commitment to charity and are compensated by a ‘Pay What Is Fair’ model in which the customers decide the fee for the services provided.
Following the footsteps of Aspiration, but still to be launched and using a slightly different approach, Good Money (U.S.) wants to be “the world’s first digital banking platform where we make every customer an owner and allocate 50% of our profits to social and environmental impact” (Good Money, n.d.). Their proposal is that depositors become partial owners, earning the right to influence where the bank will invest its profits — from a range of potential sustainable projects including clean energy and reforestation efforts. As of August 2019, Good Money is still recruiting first-customers and raising capital, but it is worth keeping an eye to its future unfolding.
From the examples covered in these last four articles (check 1, 2, 3), it is indisputable that the finance sector is witnessing great disruption with the entrance of new online and offline players, financial mechanisms, and networks that are demanding for change. Despite the general lack of clear and consensual terminology in many of the alternatives here explored, there seems to be a powerful discourse connecting them all — one that is revealing the flaws of the current system and pointing out where innovation is needed, be it with regards to business models, ownership structures, or resource allocation. Furthermore, digital platforms are making finance more diverse and accessible, promoting financial education and accountability. It all seems an optimistic prospect. Nonetheless, it is very important to make a few considerations before jumping to conclusions. The following article covers a few of those.
*The B Corp Certification measures a company’s entire social and environmental performance, from supply chain and input materials to charitable giving and employee benefits
References used for this article:
POPPER, N. (2018) The ‘Neo-Banks’ Are Finally Having Their Moment [Online] Available from: https://www.nytimes.com/2018/11/20/technology/finance-start-ups-neo-banks.html [Accessed 17/08/19].
DE CASTRO, L. M. (2018) Framing fintechs: the coverage of innovations in the financial sector by opinion pieces in the Financial Times. Thesis (MA), CITY University of London.
SHUMAN, M. (2012) Local Dollars, Local Sense: How to shift your money from Wall Street to Main Street and Achieve Real Prosperity. White River Junction: Chelsea Green Publishing.
SCHILLER, B. (2017) What Can We Do About Bitcoin’s Enormous Energy Consumption? [Online] Available from: https://www.fastcompany.com/40503695/what-can-we-do-about-bitcoins-enormous-energy-consumption [Accessed 17/08/19].
ROUBINI, N. (2018) Blockchain isn’t about democracy and decentralisation — it’s about greed. [Online] Available from: https://www.theguardian.com/technology/2018/oct/15/blockchain-democracy-decentralisation-bitcoin-price-cryptocurrencies [Accessed 17/08/19].
NESTA (2019) Taking Ownership: Community empowerment through crowdfunded investment. [Online] Available from: https://www.nesta.org.uk/report/taking-ownership/ [Accessed 14/08/19].
CCAF — CAMBRIDGE CENTRE FOR ALTERNATIVE FINANCE (2018) 5th UK Alternative Finance Industry Report. [Online] Available from: https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/5th-uk-alternative-finance-industry-report/#.XVh46ZNKhbU [Accessed 17/08/19].
COMMUNITY SHARES (2014) What are community shares? An animated guide. [YouTube film] Available from: https://www.youtube.com/watch?v=q6w-311GBIM [Accessed 17/08/19].
TRIODOS BANK (2018) Annual Report 2018. [Online] Available from: https://www.annual-report-triodos.co.uk/en/2018/ [Accessed 14/08/19].
TRIODOS BANK (n.d.) Direct Investments [Online] Available from: https://www.triodos.co.uk/ethical-investments#direct-investments [Accessed 14/08/19].
TRIODOS BANK (n.d.) Our History. [Online] Available from: https://www.triodos.co.uk/about-us [Accessed 14/08/19].
TRIODOS CROWDFUNDING (n.d.) Investment opportunities. [Online] Available from: https://www.triodoscrowdfunding.co.uk/investments [Accessed 14/08/19].
INVESTOPEDIA (n.d) What is ‘Peer-To-Peer Lending (P2P) | Investopedia [Online] Available from: https://www.investopedia.com/terms/p/peer-to-peer-lending.asp [Accessed 17/08/19].
PROSPER (n.d.) Invest Differently. [Online] Available from: https://www.prosper.com/invest [Accessed 17/08/19].
THE ASEAN POST (2019) CROWDE-funding Indonesia’s farmers [Online] Available from: https://theaseanpost.com/article/crowde-funding-indonesias-farmers [Accessed 17/08/19].
GOOD TECH LAB (2019) The Frontiers of Impact Tech: moonshots worth taking in the 21st century. Paris: Good Tech Lab [Online] Available from: https://www.goodtechlab.io/reports [Accessed 14/08/19].
FUNDING CIRCLE (n.d.) Earn a projected return of 4.5–6.5% per year [Online] Available from: https://www.fundingcircle.com/uk/investors/ [Accessed 17/08/19].
LENDAHAND (n.d.) Mission and Vision. [Online] Available from: https://www.lendahand.com/en-EU/mission [Accessed 17/08/19].
NETO, J. S. AND AGUIAR, T. (2019) Com apenas R$ 500 é possível aplicar em negócios de impacto social [Online] Available from: https://oglobo.globo.com/economia/com-apenas-500-possivel-aplicar-em-negocios-de-impacto-social-23808112 [Accessed 17/08/19].
KIRKLAND, R. AND SCHULMAN, D. (2017) Using fintech to democratize financial services. [Online] Available from: https://www.mckinsey.com/industries/financial-services/our-insights/using-fintech-to-democratize-financial-services [Accessed 17/08/19].
VIGEO EIRIS (2013) Ethical banking — a big opportunity for Britain’s retail banks, EIRIS survey reveals. [Online] Available from: http://vigeo-eiris.com/ethical-banking-a-big-opportunity-for-britains-retail-banks-eiris-survey-reveals/ [Accessed 17/08/19].
HARTZELL, J. (2016) Are You Ready? The Finance Innovation Lab. [YouTube film] Available from: https://www.youtube.com/watch?v=kWbcy_svao8 [Accessed 17/08/19].
ETHEX (n.d.) Homepage. [Online] Available from: https://www.ethex.org.uk/ [Accessed 17/08/19].
YOVA (n.d.) Our Story. [Online] Available from: https://yova.ch/en/about-us/ [Accessed 17/08/19].
MATTER (n.d.) Your money should be invested in a world you want to retire in. [Online] Available from: https://www.matterpension.com/about/ [Accessed 17/08/19].
ASPIRATION (n.d.) Homepage. [Online] Available from: https://www.aspiration.com/ [Accessed 17/08/19].
B LAB (n.d.) Certified B Corporation. [Online] Available from: https://bcorporation.net/certification [Accessed 17/08/19].
B THE CHANGE (n.d) A Financial Institution That Consumers Can Trust. [Online] Available from: https://bthechange.com/a-financial-institution-that- consumers-can-trust-1ada215b3a77 [Accessed 17/08/19].
MASHAYEKHI, R. (2019) Kiva’s Co-Founder Is Joining This Leo DiCaprio-Backed Bank. [Online] Available from: https://fortune.com/2019/04/26/nonprofit-kiva-cofounder-banking/ [Accessed 17/08/19].
ANZILOTTI, E. (2018) At this new online banking platform, customers are the owners. [Online] Available from: https://www.fastcompany.com/90276403/at-this-new-online-bank-customers-are-the-owners [Accessed 17/08/19].
