News

Crowd finance in the home of banking

April 19, 2017 • By TAB team

Will crowd finance achieve its slated aim of democratizing financial services in Italy, ensuring efficient and legally valid distribution of finance to those who deserve it? Could disintermediation spell the end of financial crime in Italy, revolutionizing business and society across the country, and how would vested interests respond to such a development?

Italy is the home of modern banking. Banca Monte dei Paschi di Siena – the recent recipient of a state bailout – is the oldest surviving bank in the world, founded as a ‘mount of piety’ as far back as 1472.

The global financial crisis hit Italy hard and has precipitated a slew of high-profile banking scandals and recapitalizations. The sheer volume of non-performing loans on the balance sheets of Italian banks has led to accusations of corruption on an institutional scale. Some commentators have speculated that Italian lenders are incompetent, corrupt, or both.

So it’s interesting to consider how the country is adapting to the rise of the crowd economy across Europe. Should we expect more of the same? Or will crowd finance achieve its slated aim of democratizing financial services in Italy, ensuring efficient and legally valid distribution of finance to those who deserve it? Could disintermediation spell the end of financial crime in Italy, revolutionizing business and society across the country, and how would vested interests respond to such a development?

Italy was one of the first European countries to enact crowd finance regulations. Approved at the end of 2012, they were implemented in 2013, preceded by a ministry report on fintech. According to the Decree companies registered in the EU and licensed by the Italian authority on financial markets (CONSOB) could collect capital from non-accredited investors via websites. Previously, the Italian law had prevented limited liability companies from offering financial products to the public. Forbes hailed the new law as a game-changer for Italy’s developing fintech and startup scene.

But equity crowdfunding regulations proved constrictive, with startups forced to meet onerous conditions regarding staffing and R&D spending and reserving at least 5% of invested funds for qualified investors. Once campaigns have closed, transactions must be processed via banks and financial intermediaries to enable the settlement of funds.

This final condition is paradoxical – there is little scope for genuine disruption and innovation if crowdfunding is dependent on traditional finance. Despite lower barriers to entry, capital raised via crowd finance still ends up inside the banking system, subject to transaction costs, bureaucracy and perhaps even corruption.

Regulatory restrictions have reduced market growth, keeping Italy on the lower rungs of the ladder compared to other European countries like the UK and the Netherlands.

A research paper appeared on CONSOB’s website calls Italian crowdfunding “immature”, placing the blame on a general lack of knowledge on the investment process, bureaucratic hurdles, and the fact that only 0.5% of all corporations registered in the country have access to available crowdfunding options.

In late 2016, the law was amended to accommodate the needs of an expanding market, extending crowdfunding to all small and medium enterprises seeking capital online. The market has expanded and, as of June 2016, 18 CONSOB-regulated platforms were operating. Looking at Crowdsurfer Pro's analytics, we notice that, in spite of a 67% failure rate, £108 million was raised in 2016 by 25 Italian platforms across the four crowdfunding categories of debt, equity, charity, and rewards. The most active platforms were the equity and reward site ProduzionidalBasso with a total raise of £1.4M, the charity portal Rete del Dono (£419,900), and the peer-to-peer marketplace Prestiamoci (£1.2 million).

Figures for campaigns closing between January-March 2017 report 451 funded campaigns for a total pledged amount of £120.3M, compared to 600 not funded.

As continental economies adapt to changes in funding models, Italy will no doubt continue to upgrade its regulatory framework to support further development of crowd finance and other areas of fintech. However, the deep integration of crowd finance with traditional banking in Italy raises as yet unanswered questions regarding the efficiency and transparency of the market going forward.

You can use Crowdsurfer Pro to keep track of the crowd finance industry in Italy and elsewhere.