Alternative finance

Last updated

Alternative finance refers to financial channels, processes, and instruments that have emerged outside of the traditional finance system, such as regulated banks and capital markets. [1] Examples of alternative financing activities through 'online marketplaces' are reward-based crowdfunding, equity crowdfunding, revenue-based financing, online lenders, peer-to-peer consumer and business lending, and invoice trading third party payment platforms. [2]

Contents

Alternative finance instruments include cryptocurrencies such as Bitcoin, SME mini-bond, social impact bond, community shares, private placement and other 'shadow banking' mechanisms. Alternative finance differs to traditional banking or capital market finance through technology-enabled 'disintermediation', [3] which means utilising third party capital by connecting fundraisers directly with funders, in turn, reducing transactional costs and improve market efficiency. [4]

Growth

Alternative finance has grown into a considerable global industry in recent years following the financial crisis, according to various reports, particularly for small and medium enterprises. [5] [6] For instance, the European online alternative finance market is estimated to have reached nearly €3bn in 2014, [7] and is projected to reach €7bn in 2015. [8] For the United Kingdom, according to the University of Cambridge and Nesta, the UK online alternative finance market reached £1.74bn in 2014. [9] In comparison, the alternative finance markets in France and Germany reached €154m [10] and €140m [11] respectively in 2014.

Regulation

Alternative finance activities such as equity crowdfunding and peer-to-peer lending are now regulated by the Financial Conduct Authority in the United Kingdom from 1 April 2014. [12] Peer-to-peer lending investment will be eligible for an Innovative Finance ISA from 2016. [13] In the US, under the Title II of the JOBS Act, accredited investors are allowed to invest on equity crowdfunding platforms from September 2013. [14] The SEC then announced the updated and expanded Regulation A mandated by the Title IV of the JOBS Act to allow non-accredited investors to participate in equity crowdfunding. [15]

See also

Related Research Articles

<span class="mw-page-title-main">Security (finance)</span> Tradable financial asset

A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equity and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.

A financial intermediary is an institution or individual that serves as a "middleman" among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, insurance and pension funds, pooled investment funds, leasing companies, and stock exchanges.

Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources.

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions. As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower. There is the risk of the borrower defaulting on the loans taken out from peer-lending websites.

LendingClub is a financial services company headquartered in San Francisco, California. It was the first peer-to-peer lender to register its offerings as securities with the Securities and Exchange Commission (SEC), and to offer loan trading on a secondary market. At its height, LendingClub was the world's largest peer-to-peer lending platform. The company reported that $15.98 billion in loans had been originated through its platform up to December 31, 2015.

<span class="mw-page-title-main">Zopa</span> British financial services company

Zopa Bank Ltd. is a British online bank which offers deposit accounts, personal loans and credit cards. It began as the world's first peer-to-peer lending company in 2005 and gained a full banking licence in 2020. The peer-to-peer side of its business closed in December 2021.

Crowdfunding is a process in which individuals or groups pool money and other resources to fund projects initiated by other people or organizations "without standard financial intermediaries." Crowdfunded projects may include creative works, products, nonprofit organizations, supporting entrepreneurship, businesses, or donations for a specific purpose. Crowdfunding usually takes place via an online portal that handles the financial transactions involved and may also provide services such as media hosting, social networking, and facilitating contact with contributors. It has increased since the passage of the Jumpstart Our Business Startups (JOBS) Act.

Crowdcube is a British investment crowdfunding platform, established by Darren Westlake and Luke Lang in 2011.

<span class="mw-page-title-main">Symbid</span> Online funding platform

Symbid is an online funding platform providing access to traditional and alternative finance for small and medium-sized enterprises. Headquartered in Rotterdam, Netherlands, Symbid was founded in April 2011 by Dutch entrepreneurs Robin Slakhorst and Korstiaan Zandvliet as one of the first equity crowdfunding platforms worldwide. Since 2017, Symbid operated under the license of Ilfa Group, that bought Symbid early 2019.

<span class="mw-page-title-main">Assetz Capital</span>

Assetz Capital is a British company which makes property-secured loans to businesses. It was established in 2012 as a peer-to-peer or "marketplace" lender which allowed private and institutional investors to lend money directly to small businesses (SMEs) and property developers. In December 2022 it became solely funded by institutional capital for new lending.

SoFi Technologies, Inc. is an American personal finance and financial technology company. Founded in 2011 at Stanford University, it operates as a direct bank and supports other financial institutions through its technology platform. As of 2024, SoFi reports 10.1 million customers and 168 million platform accounts.

Peer-to-peer investing (P2PI) is the practice of investing money in notes issued by borrowers who are requesting a loan without going through a traditional financial intermediary and who are unknown to the investor. P2PI is not to be confused with Peer-to-peer lending (P2PL) which deals with the borrower's part. Investing takes place online via a peer-to-peer lending/investing company. There is an individual investor and an individual borrower. The notes can be sold as a security and so investors can exit the investment before the borrower repays the debt.

SeedInvest is an equity crowdfunding platform that connects startups with investors online. The company was founded in 2012 and launched in 2013. SeedInvest has focused on building liquidity in the platform by attracting high-net-worth individuals, family offices and venture capital firms. SeedInvest screens and vets deals before allowing them to take advantage of the JOBS Act exemption permitting General Solicitation. In September 2014 the company launched a partnership with Angel Investing website Gust.

"Fintech", a clipped compound of "financial technology", refers to the application of innovative technologies to products and services in the financial industry. This broad term encompasses a wide array of technological advancements in financial services, including mobile banking, online lending platforms, digital payment systems, robo-advisors, and blockchain-based applications such as cryptocurrencies. Fintech companies include both startups and established technology and financial firms that aim to improve, complement, or replace traditional financial services.

Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it is often subject to securities and financial regulation. Equity crowdfunding is also referred to as crowdinvesting, investment crowdfunding, or crowd equity.

<span class="mw-page-title-main">The House Crowd</span>

The House Crowd was a British peer to peer lending and crowdfunding platform that allowed people to invest in bridging loans and property development loans from £1,000. In 2018, the business achieved authorisation from the Financial Conduct Authority and launched their Innovative Finance ISA. As of January 2019, The House Crowd had funded 368 properties, raised over £93 million and paid investors returns in excess of £38 million. The House Crowd was placed into administration on 24 February 2021 and subsequently wound-up.

Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over US$34 billion was raised worldwide by crowdfunding.

The Cambridge Centre for Alternative Finance was established in 2015, and is a part of the Cambridge Judge Business School, University of Cambridge. The Centre is a research and education institute focused on researching technology-enabled financial innovation and its interplay with policy, regulation, supervision and infrastructure.

BondMason is a direct lending investment manager based in Harpenden, England.

Private credit is an asset defined by non-bank lending where the debt is not issued or traded on the public markets. "Private credit" can also be referred to as "direct lending" or "private lending". It is a subset of "alternative credit". Estimations of the global private credit industry's size vary; as of April 2024, the International Monetary Fund claims it is just over $2 trillion, while JPMorgan claims it to be $3.14 trillion.

References

  1. ↑ "Cambridge Judge Business School: Cambridge Centre for Alternative Finance". Jbs.cam.ac.uk. Retrieved 2015-07-24.
  2. ↑ "The Rise of Future Finance" (PDF). Nesta.org.uk. Archived from the original (PDF) on 2015-02-26. Retrieved 2015-07-24.
  3. ↑ "Crowdfunding: Disintermediated Investment Banking by Brian J. Rubinton :: SSRN" (PDF). Papers.ssrn.com. doi:10.2139/ssrn.1807204. S2CID   53662264. SSRN   1807204.{{cite journal}}: Cite journal requires |journal= (help)
  4. ↑ "The Future of Financial Services" (PDF). Weforum.org. Retrieved 2015-07-24.
  5. ↑ "Ripe for the picking : A guide to alternative sources of finance" (PDF). Cbi.org.uk. Archived from the original (PDF) on 2015-09-23. Retrieved 2015-07-24.
  6. ↑ "Global insights from regional Alternative Finance studies" (PDF). home.kpmg/uk/en/home.html. Retrieved 2019-03-07.
  7. ↑ Harriet Agnew (2015-02-23). "European market for online alternative finance surges". FT.com. Retrieved 2015-07-24.
  8. ↑ "Moving Mainstream" (PDF). Jbs.cam.ac.uk. Retrieved 2015-07-24.
  9. ↑ "Understanding Alternative Finance" (PDF). Nesta.org.uk. Archived from the original (PDF) on 2015-05-20. Retrieved 2015-07-24.
  10. ↑ "Crowdfunding in Deutschland wenig verbreitet - SPIEGEL ONLINE". Spiegel.de. 2015-02-20. Retrieved 2015-07-24.
  11. ↑ "L'essor du prêt en ligne booste la finance participative en Europe". Lemonde.fr. 2015-02-23. Retrieved 2015-07-24.
  12. ↑ "A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media" (PDF). Fca.org.uk. Retrieved 2015-07-24.
  13. ↑ "Including peer-to-peer lending in the new innovative finance Isa will provide boost for millions of Brits | City A.M". City A.M. 2015-07-09. Retrieved 2015-07-24.
  14. ↑ "Jumpstart Our Business Startups (JOBS) Act". SEC.gov. Retrieved 2015-07-24.
  15. ↑ "SEC Adopts Rules to Facilitate Smaller Companies' Access to Capital". SEC.gov. 2015-03-25. Retrieved 2015-07-24.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.