As crowdfunding and alternative finance continue their market growth, encompassing innovations from the fintech sector along the way, a number of opportunities are opening up. So, one wonders, what will impact most the European sector of crowdfunding and p2p lending in the upcoming years? Which trends, opportunities and challenges should we keep an eye on? Here are those we deeme the five most significant ones and that will be the focus of various debates at the 6th ECN Crowdfunding Convention:
- The PSD2, or the 2nd European Payment Service Directory, which forces banks to open their interfaces and allows consumers to have their bank data shared with third parties’ providers, is going to be a major game changer. Online lenders, for example, will be able to access financial data of their customers that were once an exclusive to banks. With these, they will be in a position to better assess the financial behaviour of the borrower and more accurately assess their creditworthiness.
- Cross-borders investments in the EU. Since 2012, ECN has been advocating a pan-European crowdfunding market. While reward crowdfunding has almost reached this dimension, crowdfunding models involving investments into securities (i.e. equity crowdfunding, quasi equity, bonds) and lending (i.e.P2P and marketplace lending, invoice trading) are still struggling to scale at European level. Why? The reasons are various, but for simplicity, they can be reduced to three: different national regulations, excessive red tape and diverse fiscal regimes are making it too expensive for many portals. The problem does not only concern crowdfunding, of course, but angel and VC investments too, thus impacting the whole European early stage capital market, which, as a consequence, channels insufficient levels of funds into SMEs.
- Blockchain and AI. Likely you have heard a lot about this lately: blockchain and artificial intelligence. Many consider these new technologies revolutionary, able to transform and further disintermediate entire industries. How? There is no clear model yet, but several players are experimenting with both, creating interesting applications and cases: from a simple chatbot to assist entrepreneurs in preparing and running their crowdfunding campaign, via blockchain as a tool to register and trade securities issued by companies via crowdfunding, to offering cryptocurrencies payments. The attention is high – especially on the side of banks and investment funds – and the possibilities are plenty.
- Consolidation. In the last few years the alternative finance market has seen the emergence of numerous platforms facilitating online investments and access to finance. At the beginning of 2016, we counted over 600 portals and probably this number is by now outdated. At the same time, the growth rate of the sector has slowed down, as shown by the last European Alternative Finance report by Cambridge University, “Sustaining Momentum”. These factors together indicate that the sector is likely going to face a consolidation period, where many companies will go out of business and a few, with better resources or simply better positioned will stay. Nevertheless, for those platforms that will survive it is crucial to gain sustainability. To this end, they will have to scale and grow faster, especially if they want to attract growth capital. Some players, which have succeeded in raising risk capital themselves, are already pursuing a strategy aimed at increasing the number of projects or of loans originated, and first mergers and acquisitions have taken place.
- Standardization and transparency. To gain more trust from the public and attract more investments, including from institutional and professional investors, the sector should guarantee a higher level of transparency. Increasing pressure from customer protection agencies and regulators has so far not being met by a professional response of the sector. This means adopting common definitions of KPIs and standardised best practices (i.e. valuation and return calculations, reporting, data security, redress, contractual aspects), will be decisive in the years to come. . There are already market initiatives in place – ECN has been leading this discussion for the past four years – but the sector is still far from a common minimum level of professional conduct. Although the short-term costs of compliance can seem high, the long-term benefits will for sure outweigh them.
These will be among the main topics that will be discussed with several international experts and players at the 6th ECN Crowdfunding Convention, 19-20 October, Vilnius. If you are interested in participating and have your say, make sure to book your early-bird ticket now!