Regulations and banking go hand in hand. The need to regulate and save the unwitting from scurrilous businesses or poor operating approaches has always been the charter of most governments. In a time of uncertainty there is a tendency for regulations to be more overbearing instead of less constrictive. The most glaring example is of course the global finance industry. As quoted in a recent article in the Economist;
Banks everywhere are under pressure from regulators, creditors and shareholders to refashion themselves into safer, smaller entities…
Retrenchment by European banks is creating problems round the world: French and Spanish banks provided 40% of trade credit to Latin America and Asia last year, according to the World Bank, and analysts at Morgan Stanley reckon that since June 2011 foreign lending by French banks has shrunk by 20% (or more than $650 billion). But the banks’ difficulties are also felt acutely at home. Another big difference with America is that banks dominate Europe’s funding landscape.
So as markets have a tendency to do – given a certain amount of freedom – they react and adjust. In this excellent article the Economist highlights some of the creative approaches taking advantage of this market opportunity. Businesses need financing. Banks are not supplying the demand and thus alternatives enter for this growing need. MarketInvoice – a UK based receivables financing start up, has loaned £40m since 2011.
Zopa, another peer to peer lending platform has been growing at a rapid clip. Since 2005 they have financed £250m from their site. Recently the British authorities have indicated they would regulate this segment which ironically may help the public accept the legitimacy of these new vehicles and encourage further growth.
So while the opportunity for new financing methods are grand the need may be too great. At least in the beginning.
As the banks retreat, other forms of funding are sorely needed, which is why companies of all shapes and sizes, from MarketInvoice to BlackRock, are bullish about their prospects. The worry is that, despite their best efforts, the shortfall will be too big to fill.
In the UK successful equity based crowdfunding platforms have surfaced such as CrowdCube and Seedrs. Recently the rewards based platform Kickstarter experienced a successful launch generating a total pledged in the first month of £2,069,164. It should be clear that equity based platforms may have the potential to shore up the gap between peer to peer lending, bank financing and other non traditional structures.
Diversity of funding options should be a goal of regulators, legislators and entrepreneurs. Options will breed competition which generates efficiency. This process will evolve over time. Adjustments will be needed and mistakes may be made if given the opportunity to do so.