Nearly half of the world’s population access regularly the internet. Its development in the last few years has significantly modified many aspects of our lives.
The mass-adoption of new online technologies and the expansion of the Web 2.0 functionalities have boosted the emergence of crowd-generated business modelsi in every sector of activity. Internet users are becoming more and more comfortable with this kind of platforms. AirBnB, Uber Snapgoods, TaskRabbit or BlaBlaCar are just some of the most famous peer-to-peer companies that have disrupted their respective economic sectors.
Not surprisingly, this trend has also affected the financial industry. The development of the “sharing economy”, combined with the recent economic and financial crisis that caused a credit-crunch and a loss of trust on traditional institutions, have led to the rise of crowdfunding platforms.
However, crowdfunding initiatives are not so new, the funding of the Statue of Liberty having already used this mechanism, back in 1885! With regard to crowdfunding online, it started in the 90s as an alternative way of funding projects through donations. At the beginning, they were based on social networks and people contributed to a project they wanted to support, expecting nothing in return (donation-based crowdfunding) or just a small gift (reward-based crowdfunding).
Since then, these initiatives have evolved into investment products and grown in terms of size and number. Dozens of Fintech companies have sprung up all over the world proposing intermediary services, avoiding traditional credit institutions such as banks, consumer credit entities, private equity funds or venture capital companies.
Through their platforms, hundreds of individuals can finance other people’s projects in return of some kind of remuneration.
What is crowdlending?
As seen above, crowdfunding can be defined as the financing of a venture or a project by individuals who don’t know each other.
There are several types of crowdfunding:
- Donation-based: investors do not expect anything in return,
- Reward-based: investors receive a small gift or public acknowledgement,
- Pre-ordering/pre-selling -based: investors receive an early version of the product at a reduced price,
- Equity-based (crowdequity): investors receive company’s shares,
- Loan-based (crowdlending): investors receive regularly interest payments and the reimbursement of the principal at maturity date.
Thus, crowdlending, also known as Peer-to-peer (P2P) lending or Debt crowdfunding, is one of the crowdfunding business models. It enables individuals, entrepreneurs and companies (especially small and medium-sized enterprises) to finance their investments through loans from large groups of individuals.
The crowdlending mechanism is composed of three participants:
- Borrowers fill out all the necessary documents and ask for a loan through the lending platform. The advantages for borrowers are less paperwork, reduced delays to obtain the loan, lower interest rates than the ones they would have to pay to traditional financial entities.
- Intermediary platforms check the borrowers’ background, define the interest rates for each loan according to the borrower’s risk-profile and publish an anonymized request on the platform. They also handle the amortization payments. They get paid if and when the loan is set up, and charge additional fees for dealing with the payments.
- Lenders invest small sums of money in the projects they have chosen to support. They receive better rates than the ones they could get through classic banking loans, but they might lose their investment.
Origin and evolution of crowdlendingii
Many specialists consider the launch of Zopa in the UK in 2005 as the origin of the crowdlending business model. It was followed by the creation of Lending Club and Prosper.com in the United States in 2006.
In the following years, crowdlending platforms have emerged all over the world. This rapid growth was partly due to an absence of specific regulation, since some governments were willing to encourage the development of this activity in order to compensate the shortfall of financing through traditional channels.
Most recently, facing the exponential development of crowdlending platformsiii (see figures 2 and 3), several governments have issued regulations in order to protect individual investors. A few platforms have indeed been closed after having scammed many investors, such as Trustbuddyiv in Sweden (for an amount of $9m) or the Chinese Ezubaov (for an amount of $8bn).
While the first crowdlending platforms allowed individuals to lend money to other individuals (P2P crowdlending) and small businesses (P2B crowdlending), the impressive market growth has attracted institutional investors:
- traditional financial entities creating their own lending platforms or acquiring a stake on existing ones,
- private equity companies, investment funds and business angels willing to finance projects through these platforms.
For some of the largest platforms, institutional lenders now account for up to 80% of the capital lent. Several specialists consider this could be the end of the P2P (that is, between individuals) lending businessvi.
The market seems now to be heading to a specialisation of lending platformsvii, some dedicated to lending between individuals exclusively, and others opened to both individuals and institutional investors with more or less significant investment caps for the latterviii.
i Web 2.0 and crowdfunding platforms, Springer Link Web site
ii Origins and Development of Credit-Based Crowdfunding, Social Science Research Network Web site
iii UK P2P Lending Grows Over 80% Percent in 2015, P2P Banking Web site
iv Fraude au crowdlending en Suède, Crowdlending.fr Web site
v Une plateforme P2P détourne près de 8 milliards de dollars, Crowdlending.fr Web site
vi The Disappearance Of Peer-To-Peer Lending, Forbes Web site
vii KissKissBankBank lève 5,3 millions auprès d’Orange, Crowdlending.fr Web site
viii Diez claves de la nueva ley que regulará el crowdfunding, El Mundo Web site