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In today's financial world, it’s all about the "crowd" – connecting lenders and investors that have unique needs and goals with similarly diverse individuals and businesses seeking loans or equity capital. In Europe, the Americas and Asia, a host of new platforms have sprung up, supported by innovative technologies and the expansive reach of the Internet, that enable participants from various locales to work together and engage in transactions that benefit all sides.
Among the models that have already gained a strong foothold are loan crowdfunding and crowdlending platforms, which focus, naturally enough, on debt-based finance. Others that are gaining ground, such as equity crowdfunding platforms, are oriented toward capital investment. But that’s not the end of it. The alternative finance arena now includes an expanding array of offerings that can accommodate a variety of needs and requirements, including invoice trading and donation and reward-based crowdfunding.
Although it might be easy to think that crowdlending or crowdfunding or any of the other varieties that are currently in operation are unlike anything that has existed before, that is not quite true. In many respects, these virtual venues are simply the next generation financial exchanges. Like the centralized markets that have existed for hundreds of years in places such as Wall Street and the City of London, online platforms provide an efficient way for countless participants to achieve their financial goals.
One big difference, of course, is that loan crowdfunding and other online marketplaces don't require a trading floor, or even a physical presence beyond what is necessary for operational or regulatory reasons. No matter where they live or work, those who want to transact through these online platforms need little more than a computer or smartphone and an Internet connection to get connected and get things going.
In fact, because these alternative finance models have been designed from the ground up, so to speak, to capitalize on the power of modern technology, they tend to offer greater flexibility and have more user-friendly features than the traditional routes. When seeking a consumer loan through a peer-to-peer lending platform like Bondora, for example, borrowers face fewer bureaucratic obstacles and the underwriting process is much quicker than when applying for credit from a bank or other established institution.
Advanced technologies also make life easier for those who want their money to work harder for them. From having ready access to in-depth insights about those seeking financing – including demographic details, loan-level historical data and broader market trends – to being able to decide – with a click or a tap – when, where, and how they want to be involved, those who have funds to invest maintain a degree of control that is mostly unheard of in dealing with banks, brokerage firms and others like them.
The increased transparency that crowd-oriented platforms offer also benefits both sides in numerous ways. When dealing with traditional intermediaries, for instance, it is often hard to understand or even be aware of all the terms and conditions that may apply, while making fee comparisons among rival firms can be frustrating, at best. However, when it comes to loan crowdfunding platforms, whether for consumers or businesses, things are much clearer. Everyone knows just what the deal is and what happens if things don't quite work out as planned.
Quite simply, there are no "surprises," and nobody gets taken for a ride. At the crowdlending platforms, the rates that borrowers pay is based on creditworthiness and is mostly influenced by competitive forces – it is not “whatever the market will bear.” While this might not seem so enticing for those who are providing financing, the tradeoff is that lenders know as much as anybody about the willingness and ability of prospective borrowers to repay their loans. With a much better understanding about what they are getting into, lenders don't need to factor in a sizable “uncertainty premium.”
Another benefit that these crowdfunding platforms offer is that they open up the financial arena to those who might otherwise be left with limited or no options. In many cases, individuals and firms that might find it difficult to secure financing from a bank or other traditional lender – because of their size, location, line of business or other factors – face fewer obstacles. By tapping a P2P loan or crowdfunding network that is, collectively, much bigger than even the largest global financial behemoth, the odds of getting a deal done are that much greater.
Those seeking financing are not the only ones who stand to gain from going with the crowd. Investors searching for attractive returns, including large institutions with sizable resources at their disposal, can potentially achieve a number of objectives. Not only do they have access to a sizable pool of prescreened prospects, they can also garner significant diversification benefits in a fairly efficient manner. Instead of focusing only on larger borrowers because it seems economical, they can spread their risk among many smaller ones.
Because crowdinvesting, crowdlending and other alternative finance models have targeted what were once considered niche markets, including small consumer loans, they have also created opportunities for investors to diversify portfolios through exposure to asset classes that were once unavailable to them. Indeed, there have been a growing number of cases where major banks and sophisticated financial institutions have been acquiring interests in and providing funding for these online platforms.
Taken together, these various developments are undoubtedly positive for those who are directly involved. But society as a whole also benefits from an industry that is helping to facilitate healthy competition, more transparency and increased efficiency in the financial world. The online marketplaces have also made it easier for those at nearly every level of society and in countries and regions around the world to cooperate for their mutual benefit.
In sum, when it comes to lending and investing, everybody wins when the crowd is involved.
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