Alternative finance (AF), or crowdfunding, is a blanket term denoting a subsector of the fintech industry. It consists of enterprises, namely platforms or originators, using electronic means to match supply from investors or donors with the demand for funds, represented by promoters (individuals or enterprises) who have specific projects to be funded. In the simplest AF model, demand and supply for funds are communicated through an “open call.” Promoters, typically on social media through a “campaign”, post such funding needs.
The open call means that any person with broadband access, already signed up on the platform, can promote a project using a campaign, which often contains a description and a visual depiction of the project.
Multiple independent investors or donors electronically deliver collective monetary offerings to fund a selected project, possibly posted on the Internet or through mobile apps by a promoter in search of funds.
The open call also means that anyone searching for returns, or otherwise willing to donate excess liquidity to a project, can access such platforms.
AF is still relatively small in the region, and hence non systemic, and very new and changing, which increases the need for a proper framework to regulate the subsector.
Some recommendations about the core of the business can be derived for regulators to act prudentially, letting the business grow as a complement to the traditional credit and capital market channels.
Platforms might not be alone in the business in some of the Latin America and the Caribbean (LAC) countries. Supplementary electronic enterprises from the fintech space can perform collection, risk scoring and securitisation, among a large list of activities.
Alternative finance is a growing business worldwide, accounting for almost US$16.2 billion in money raised to fund projects through platforms as of the end of 2014.
According to BBVA, the Spanish banking group, by the end of 2013, these platforms were financing one cent per every US$100 financed through traditional channels. These numbers can vary according to the source of information, and since platforms are starting to be regulated, the data are in the process of consolidation.
AF in LAC countries is still small in volume, reaching around US$110 million in total in 2015. The number is basically zero per cent when measured as a ratio of LAC gross domestic product.
For instance, domestic credit to private sector in the region is measured around 53.3 per cent in the region. To put this in context, in the Americas, AF reached US$36.49 billion for the same year.
However, and since the base is small and it is a continually growing market, AF in LAC has reached year-on-year growth rates of 164 per cent for 2014 and 97 per cent for 2015. It is important to note that 66 per cent of the total volume is directed towards enterprises, reaching almost US$73 million.
AF is a disruptive industry, serving banked and unbanked populations and delivering financial services hand in hand with technology.
The services offered by this emerging industry can be an efficient channel to move capital from savers/investors to projects/borrowers. However, this business is still young, very complicated, and evolving fast.
With this in mind, regulators have a huge responsibility in dealing with AF to strike a balance between requirements and enforcement on the one hand, and sustainable and responsible growth on the other.
Diego Herrera is a member of the Inter-American Development Bank staff and is based in Buenos Aires, Argentina.