News

Why we can't afford to think like Turner

February 23, 2016 • By Emily Mackay


Accessible (theoretically at least) to the 3.5 billion people who form the internet-connected population, and a potential funding mechanism for the c.100m businesses worldwide, crowdfunding marketplaces are embracing online behaviours. They are bringing together online technology and payments, demand for funding, and demand for decentralised control on where and how money is deployed, to create a highly disruptive fintech movement.

We don’t think anything of buying physical products online now, from purely online shops, or those with a dual offline/online presence. Online product marketplaces are entirely the norm; £645b is expected to change hands over product retail platforms in the major geographical markets by 2018 [OC&C].

Fuelled by the deficiencies of and mistrust in the banking system, that same concept of marketplace technology is revolutionising finance. Thousands of online money marketplaces are taking over, broadly known as ‘crowd finance’, offering debt (including micro loans), equity, rewards, donations, and more. We have mapped in detail £15b of an estimated £30b in transactions already taking place on these marketplaces.

Accessible (theoretically at least) to the 3.5 billion people who form the internet-connected population, and a potential funding mechanism for the c.100m businesses worldwide, crowdfunding marketplaces are embracing online behaviours. They are bringing together online technology and payments, demand for funding, and demand for decentralised control on where and how money is deployed, to create a highly disruptive fintech movement.

Critics of the crowd finance industry, such as the UK’s Lord Turner (click here to see the Financial Times article) often cite the perceived high risk to the funder and potential losses (particularly surrounding debt markets) as their objections to the industry. (As an aside, let’s not forget similar fears surrounded online buying: why would you pay upfront and trust someone to post something to you that you only saw in a photo? It would seem that a few years later the billions of pounds of evidence, and the likes of Alibaba, Amazon and eBay, heavily stacks against their anxiety. And just as well for the global economy!)

For crowd finance, while transparency is fundamental to trust and growth, the data analysis of historical risk and results is in its infancy (not only for debt funding but for all return-expected forms of crowd finance) simply because the industry is relatively young. It’ll take a few years before a truly industry-wide view of realised risk is possible. So any accusations at this stage are somewhat unfair.

But let’s be clear, of course transparency, appropriate regulation, insurance mechanisms and risk management are absolutely paramount for platforms. So now is the time to grow and develop, and make mistakes and improvements. Let’s face it, it’s these innovations that will salvage and better the financial industry, so stifling them would not be particularly helpful to reducing long-term economic risk.

With turbulence hitting major stock markets, interest rates grinding along the bottom, the unity of the European Union being called into question, and impending political change in the US, marketplaces are not only desirable to keeping money moving but a potentially important pressure valve. The world simply can't afford to nod in agreement with Turner. We must embrace crowd finance and manage the risks for the long-term good.

Emily Mackay