The Centre for Alternative Finance at University of Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation team at Chicago Booth School of Business have joined forces to initiate the 2015 Americas Alternative Finance Benchmarking Survey. This landmark survey is the first comprehensive and empirical assessment of crowdfunding, peer-to-peer lending (marketplace lending) and other forms of alternative finance across North, Central and South America.
“We hope that marketplace lending and crowdfunding pioneers and operators in the Americas will be able to join our collective effort in ushering in an new era of transparency, collaboration and evidence-based policymaking for the alternative finance sector,” remarked Bryan Zhang, a Director of the University of Cambridge Centre for Alternative Finance.
The survey is supported by the IDB, BDC, KPMG and a number of highly influential industry research partners. Major alternative finance industry associations and organizations in the United States, Canada and across Central and South America, including the LendIt/Lend Academy, Crowdfunding Professional Association (CfPA), Crowdfund Intermediary Regulatory Advocates (CFIRA), National Crowdfunding Association of Canada (NCFA), Orchard, Crowdnetic and Queen’s University and the Impact Group.
Integral to this research include a series of exclusive interviews with the thought leaders of the collaborating associations and platforms. I recently had the exciting opportunity to connect with Gabriela Andrade and Diego Herrera of IDB, the Inter-American Development Bank via email to learn more about their perspectives regarding alternative finance in the Americas and the importance of the 2015 Americas Alternative Finance Benchmarking Survey.
Andrade, an Ecuadorian citizen, holds a double bachelor’s degree in Economics and International Development, and a master’s degree in Economics, from McGill University in Montreal, Canada. She has worked for IDB since 2005 in various roles including economic advisor to the Vice-President for Countries, coordinator of the concessional fund of the Bank and country economist for different regions. Andrade is currently a Financial Markets Senior Specialist in the Capital Markets and Financial Institutions Division at Inter-American Development Bank (IDB), working primarily on financial inclusion, digital finance, and the use of guarantees to scale up financing for development.
Herrera is a Senior Specialist at the Capital Markets and Financial Institutions Division of the Inter-American Development Bank. His work comprises topics such as capital markets, Fintech, central banking, financial inclusion, productive financing, among others. He was Delegate Superintendent for Market Risk and Integrity at the Colombian financial regulator. Herrera also worked as Chief Risk Officer, Risk Coordinator and in Front Office functions in the Colombian financial private sector. Herrera also specializing in financial microeconomics and risk-related topics as at Universidad del Rosario and Universidad de los Andes, in Bogota, Colombia. He holds BA and MSc. degrees in Economics from Universidad del Rosario and MSc. Degree in Risk Management from NYU-Stern.
IDB aims to improve lives in Latin America and the Caribbean. Through financial and technical support for countries working to reduce poverty and inequality, the banks seeks to improve health and education, and advance infrastructure in a sustainable, climate-friendly way. Founded in 1959, today IDB is the leading source of development financing for Latin America and the Caribbean, providing loans, grants, and technical assistance as well as conducting extensive research.
Our interview follows.
Erin: Why did you decide to support the Cambridge / Chicago research?
Gabriela Andrade and Diego Herrera: There is an increasingly strong need to understand the shape and size of the Alternative Finance (AF) industry across the Latin America and the Caribbean region (LAC). Currently governments, and in particular, regulators, but also academics, the traditional financial sector, consumers, among other groups of interest in LAC, do not have complete and accurate information and data about the industry in their countries and what is the general landscape in the region. This study claims to cover an extensive list of industry participants to bring out the best possible picture with details such as: types of activities, investors, lenders, projects funded, among others. The survey for this study also includes data such as the acceptance rate, business survival, gender, average size deals, and includes questions about the regulatory environment in each country. Moreover, we considered that applying the research methodology for a benchmarking taxonomy, developed by the CCAF and applied thus far in other markets, provided a great opportunity to have fairly comparable information. All in, the study will provide all the groups of interest a clearer picture of the current status of the industry, particularly for LAC.
Erin: How will the Survey, be impactful? Who will benefit by new forms of finance?
Gabriela and Diego: Considering that this is the first initiative to study the AF industry at large, we expect a large impact across the LAC region —and a lot of surprises as well. The possibility of getting detailed data and information will not only be of particular benefit to the groups of interest mentioned before, but we also expect that it will generate interesting discussions and debates at the country and regional level once the evidence is available. Moreover, the dissemination of the study through the Inter-American Development Bank, the leading source of development financing for LAC with presence in 26 countries, guarantees an amplified impact for private and public sectors, including policymakers.
The second question is relevant, since the levels of access to finance and other financial products in the region are not only low, but even below what would be expected given its countries’ per capita GDP. In fact, limited access to finance is one of the key factors constraining productivity and growth in the private sector in the region, affecting SMEs in particular. AF could be a very valuable solution to complement the traditional financial industry in the region, giving investors the chance to invest in projects from people and businesses that otherwise would not get financing. On the other hand, demanding resources to fund projects through platforms in a transparent fashion can be instrumental for attracting investors. The main challenge for the industry in LAC is to offer adequate products that satisfy demand by both investors and project suppliers. In this sense, anecdotal evidence with the industry shows that they are slowly finding market niches such as self-employed costumers and micro and small enterprises with no or little credit information, posing some challenges regarding credit risk.
Erin: How do you anticipate/hope Latin American and Caribbean policy makers will use Survey data to help guide their rulemaking approach?
Gabriela and Diego: We believe that this study will be the main reference for regulators, supervisors and, in general, policy makers in the region. The results from the survey will give them a clearer picture of what is really happening within their jurisdictions and, in particular, they will have real evidence of the number of platforms already existing in their countries and an order of magnitude of their operations, outreach and relevance. Importantly, the study will provide regulators with the tools to further understand the industry so it can be properly regulated with the benefit of complementing the traditional financial industry, issuing and implementing appropriate policies and regulations to guarantee macro and micro financial stability, consumer protection and adequate compliance. Policymakers who are implementing reforms to improve access to finance can benefit from the study as well, identifying the types of platforms already operating and giving them the chance to identify opportunities to properly impulse the adequate policies.
Erin: How active is investment crowdfunding and marketplace lending (P2P) in the Americas?
Gabriela and Diego: Although the industry in LAC is relatively nascent relative to other markets, we have already identified around 50 different platforms operating in several countries. The study will bring a clearer picture of these and other platforms in terms of origination, type of clients, and all the aforementioned data and information. We think that this is a very new and still small industry within the region, but also a very dynamic and promising one.
Erin: What are some of the most prominent platforms?
Gabriela and Diego: The pioneer in the region was Chilean platform Cumplo, which started in 2012. Today Cumplo funds US$44 million in 1,111 credit operations from 1,784 investors. Afluenta in Argentina promotes itself as the “collaborative finance network of Latin America” and currently holds US$27 million in loans in 1,342 operations funded by 96,134 investors. Prestadero and Kubo Financiero in Mexico are among other prominent and growing internet based platforms. It is also important to remark that many of these platforms lend to both individuals and SMEs in LAC, and that “global” platforms such as Kiva have been working across the region for several years.
Erin: What is the regulatory environment across the region?
Gabriela and Diego: As of this interview [30 October], specific regulations for AF have not been issued in the region. However, we know about several countries which are designing and preparing primary AF regulation; some of those countries have requested technical assistance from the IDB to help them in the process. One key aspect, for example, is related to the definition of deposits, which within the region varies across countries, and is one of the main barriers for the model to develop in LAC, since it is assumed that investors are “depositing” their money in the platforms. It is frequent for this activity to be allowed only for regulated financial institutions.
On the other hand, in countries such as Argentina, platforms have used already existing regulations, such as those for trusts, to be actually functional. In other jurisdictions such as Mexico we are aware of at least one platform which used the applicable rules for financial intermediaries to operate, including high capital requirements and complying with several risk and anti-money laundering regulations.
Erin: Will the IDB be leveraging these new forms of finance? If yes, how will you do so?
Gabriela and Diego: Expanding financial inclusion and supporting entrepreneurs and SMEs across LAC are key objectives of the IDB group. In general, the Bank supports and encourages financial sector reform through financial and technical support. An example of this, and as mentioned before, some countries have already requested technical assistance from the IDB to prepare their regulations for these new forms of finance. In addition, the IDB Group, has published two studies regarding Crowdfunding in Mexico and Chile. For Mexico, specifically, a first study was published in 2013 to impulse Crowdfunding in Mexico, which was complemented by a further study, in 2014, jointly with Anahuac University, which includes support to the industry. A similar type of support was given by the IDB Group in Chile during the last year.
Erin: In the UK, the government has sponsored the British Business Bank to funnel funding to SMEs. The BBB uses P2P lending platforms. Is this a model for the Americas?
Gabriela and Diego: It is difficult to say if the British model could work in the context of LAC countries. However, we consider that national development banks have a unique and interesting opportunity to reach further impact through innovation and technology, including but not only restricted to P2P and AF. For example, in recent years an experiment was performed by the Chilean development bank, CORFO, and a platform: Cumplo. Results are still to be evaluated.
Erin: What are your thoughts on the democratization of access to capital and transparency in stark contrast to the “public markets” today? What changes would you recommend to Latin American and Caribbean countries and how do you expect these changes to unfurl?
Gabriela and Diego: Alternative Finance can be an excellent complement to traditional bank credit and traditional capital markets financing, particularly for projects with a high level of risk or in the early stages of development. Nonetheless, public markets are still very shallow in the region, with only few exceptions. Moreover, the opportunities for democratizing financial opportunities for entrepreneurs, SMEs, and other groups that tend to be more excluded, such as women, is of particular importance and is something that has to be further studied in the region.
For the AF model to be further developed beside the effort coming from the industry that requires a leveling of the regulatory playing field to create legal certainty for the entrepreneurs who want to create platforms but also, more importantly, for general financial consumers.
Erin: Do you believe this to be a transformative shift in all forms of finance?
Gabriela and Diego: Without a doubt, technology is bringing great innovations for expanding financial inclusion, access to finance and for supporting SMEs and entrepreneurs. This is a transformation in the way finance currently works, using technology to solve many of the problems affecting financial markets. From the experience from other regions we see that such a phenomenon is a complement to the traditional financial system. Looking forward, the question is not whether there will be a transformative shift in finance, but rather how will this transformation take place and what can we all do to ensure this is achieved without risking the stability of the system and while adequately protecting consumers. As such, it is very important to see the evolution of the industry, in terms of credit risk arising from expected shocks such as a raise in the international interest rates but also unexpected shocks such as hacker attacks or money laundering issues. Also, credit scoring techniques, which are claimed to be revolutionary, are still to be tested, posing a huge long term challenge for some members of the industry.
Erin: How will this shift impact legacy financial firms?
Gabriela and Diego: It is interesting to see how some of these firms are already starting to understand that this shift might be here to stay and are already finding ways to participate, directly or indirectly. In general, with time, traditional financial firms will have to change to solve many of their engineering problems using technology. The issue here is how to increase efficiency all across the industry: payments, origination, credit scoring, etc, which reduce costs, which translates to better opportunities for both investors and project suppliers. The industry has the chance to induce these changes through competition with the traditional financial system, but being a complement in the current stage.
Main benchmarking survey link:
- For Spanish version: https://es.surveymonkey.com/r/AltFin_Spanish
- For Portuguese version: https://pt.surveymonkey.com/r/AltFin_Portuguese
- For Canadian Platforms: https://www.surveymonkey.com/r/AltFin_Canada
Crowdfund Insider has joined with The University of Cambridge and University of Chicago Booth School of Business to be the exclusive media partner on this benchmarking research. This interview is one of a series that includes multiple, in-depth interviews with international thought leaders and alternative finance industry pioneers from the collaborating associations.
For benchmarking research enquiries please contact:
Dr. Olena Verbenko, Chicago Booth School of Business ([email protected])
Tania Ziegler, Cambridge Centre for Alternative Finance, Cambridge Judge Business School ([email protected])
About the University of Cambridge and the University Chicago
University of Cambridge
This research is led by the Cambridge Centre for Alternative Finance, Cambridge Judge Business School. The Cambridge Centre for Alternative Finance is an international, interdisciplinary, academic research institute, dedicated to the study of alternative finance, which includes financial channels and instruments that emerge outside of the traditional financial system (i.e. regulated banks and capital markets).
Examples of alternative finance channels are online ‘marketplaces’ such as equity and rewards-based crowdfunding, peer-to-peer consumer/business lending, and third-party payment platforms. Alternative instruments include SME mini-bonds, private placements and other ‘shadow banking’ mechanisms, as well as social impact bonds and community shares used by non-profit enterprises and alternative currencies. The mission of the University of Cambridge is to contribute to society through the pursuit of education, learning and research at the highest international levels of excellence.
University of Chicago Booth School of Business
The University of Chicago Booth School of Business is consistently ranked among the top five business schools in the world. The school’s faculty includes renowned scholars and its graduates occupy key positions in the US and worldwide. The Chicago Approach to Management Education is distinguished by how it leverages fundamental knowledge, its rigor, and its practical application to business challenges.
The school offers full and part-time MBA programs, a PhD program, open enrollment executive education and custom corporate education with campuses in Chicago, London, and Hong Kong.