News

How the Crowd obeys the laws of economics

March 16, 2017 • By TAB team

With the first ten weeks of 2017 gone, we compared debt crowd finance in the opening ten weeks of 2016 to previous years. What we found was interesting.

With the first ten weeks of 2017 gone, we compared debt crowd finance in the opening ten weeks of 2016 to previous years.

What we found was interesting.

In the years leading up to 2016, we saw the average campaign size trend sharply downwards over time.

Is this something to worry about? Has economic uncertainty and static growth all around the world been bleeding into alternative finance? This could spell the start of bad things to come for debt crowd finance.

On closer inspection, the sector looks in fine health when we analyse the number of campaigns and total volumes being raised.

We’re seeing growth in the number of campaigns, the totals raised and a steep decline in the average volume raised.

This is a logical relationship, straight out of an undergraduate economics textbook.

The democratisation of debt crowd finance and P2P lending that took place during the years prior to 2016 meant that a wider range of individual borrowers and businesses were attracted to the market. Those seeking lower funding volumes realised debt crowd finance was a viable way to raise capital.

So, whilst the total amount of money raised has grown year on year, that growth has been eclipsed by an even stronger increase in the number of raises. Hence, the average transaction size has fallen.

This is a classic example of elasticity – where a growing number of customers are paying less to participate in a market. It signifies of a thriving market, where average transaction sizes are falling as the market expands and customers are given more options and choice. We’ve seen this in sectors such as mobile telecommunications, tabloid newspapers, and supermarket branded products. We’re now seeing it in crowd finance.

Basic economics tells us that debt crowd finance looks to be in fine health. But this positive news does raise questions about asymmetries in the debt finance marketplace, with the rapid growth in the number of transactions needing more scrutiny and regulation.

If the industry is to sustain its growth trajectory, debt finance and P2P platforms need to work harder at attracting investors, and they will only do this by becoming more transparent.

We will have to wait until the numbers for the first ten weeks of 2017 are finalised, so we can compare the data to previous years. These will be especially interesting given uncertain economic and political landscapes on both sides of the Atlantic and the concomitant impact on investor sentiment. Can debt crowd finance stand up to one of the most turbulent years in recent economic and political history?

It will also be fascinating to watch this data play out over the next year with elections on the horizon in France and Germany. Fortunately, crowd finance is established enough to ride out any storm that 2017 could throw at it, and we’ve already seen encouraging reports on world economic aggregates in the early stages of this year, and a stabilising victory for moderates in Holland.

Regardless of the macro context, if platforms fail to attract more liquidity into the market and rebalance demand to support rampant supply side dynamics, debt crowd finance might be in for a slowdown.

By reassuring investors with increased transparency and regulation, we see no reason why this growth shouldn’t continue through 2017 and beyond.

You can use Crowdsurfer Pro to keep track of what happens.