Alternative Finance: A New Reg-Generation For A New Disruptive Phenomenon
For a new marketplace
Bank lending is the most common source of external finance for several actors that are reliant on traditional debt to fulfill their cash flow and investment needs.
While it is commonly used by mid and large cap companies, SMEs, in particular newer, innovative and fast growing companies, with their higher risk-return profile, pose some challenges to traditional bank finance.
In an effort to circumvent the challenges of conventional financing, alternative finance schemes have arised to mobilize private investments.
Hence, crowdfunding has become an alternative source of funding across many sectors, and it is increasingly used to support a wide range of for-profit activities and businesses.
If peer-to-peer lending is attractive for small businesses that lack collateral or a credit history to access traditional bank lending, crowdfunding platforms are evolving into more sophisticated intermediaries.
From home projects to pro finance
It’s interesting to notice, that there’s been a shift lately towards larger corporate organizations and venture capitalists getting involved in bigger scale crowdfunding operations.
Raising an external finance from a large audience, rather than a small group of specialized investors is an attractive way to complement their own investment in big-scale campaigns, bringing in extra money while also operating as a marketing tool to boost customer engagement.
Besides, crowdfunding is evolving from simple donations to securities offer, where investors can receive a bond or a share. Indeed, it has become necessary to broaden the range of financing instruments available to SMEs and entrepreneurs, in order to enable them to continue to play their role in investment, growth, innovation and employment.
In addition to these simple shares and fixed-rate bonds, some crowdfunding platforms have obtained from their local authorities the right to offer a new range of securities: convertible bonds, participatory securities, preference shares etc…
A Citizen’s Re-appropriation of Finance
”Companies and investors around the world play a leading role tackling climate change.” J.Taylor (Vice president of the EU investment Bank)
Furthermore, against the critical environmental issues we are currently facing, the Finance is in need to reconnect with the real economy and to take steps towards low-carbon investments.
Although this ecological transition is a macro-financial challenge it has to be translated into smaller unitary investment needs than in the past.
Indeed, sustainable finance has to evolve from the financing of large projects to a whole variety of green efficient initiatives that remain to be aggregated and provisioned with the market.
Alternative finance has obviously a role to play, especially as an answer to financing and saving needs by providing a meaningful offer to these Societal stakes.
Some measures to increase carbon cost, to encourage all stakeholders to reduce their ESG emissions and to develop low carbon solutions are starting to emerge.
And putting a price on carbon means making the « green » projects more profitable and therefore financeable.
In this context, strong monitoring of prudential environmental regulations and transparency of information on the carbon content of project portfolios are essential prerequisites to boost this reorientation of actors towards ecological issues.
A two-speed evolution
On the other hand, and within the current technological environment, crowdfunding seems not be appropriate to fund firms for which business information and financial details are too sensitive to be shared with a large number of potential investors, as it is either impossible or legally very difficult to arrange non-disclosure agreements with all of them.
Besides, a lack of information on issuers and of standardized documentation, illiquid secondary markets and differences in laws across industry players and jurisdictions currently limit the development of these markets.
Finally, the regulatory environment has limited the expansion of peer-to peer platforms, especially for securities-based crowdfunding, which is still not legal in some countries. Hence, in recent years, crowdfunding has received close attention by regulators which, if they are aiming to ease the development of this financing channel, are struggling to address the concerns about transparency and protection of investors.
RegTech 2.0: Beyond Regulation
While current RegTech solutions are more about streamlining and automating regulatory compliance, RegTech 2.0 should be built in a forward-looking manner.
The focus of RegTech going forward has to shift away from the efficiency gains it has provided to date, and look instead to its potential as a transformative tool for Finance Infrastructure that can become the regulation itself.
This Regulatory mindset shift is crucial, as we move from a too-big-too-fail paradigm whereby risk and contagion are sought to be mitigated to a ‘small-enough- to-try’ paradigm whereby failure is anticipated and planned for from the start. Indeed, 90% of startups will fail and their size makes the mapping of their risk (e.g liquidity, market, reputation, technology etc…) relatively easy given their simpler technological and corporate structures.
Because data and models yield better decision
To help building this new model and transform investment culture, RegTech solutions need to be backed up with disruptive technologies.
Harnessing technology and innovation: Big data and analytics have climbed to the top of valuable technologies. And as data-driven strategies take hold, they are becoming an increasingly important point of competitive differentiation.
Data Driven Analytics and Machine Learning offer a large panel of layouts:
- Build advanced-analytics models for predicting and optimizing investment with customized information in regards to risk appetites, primary fields and product types.
- Analyze the market to give strong and reliable key attributes (ratings, scorings…) to make the participants take the right decisions and know how to use this information.
- Give companies both more panoramic and more granular views of their business environment. The ability to see what was previously invisible improves operations, customer experiences, and strategy.
- Provide systemic risk situation by simulating several stress test scenarios by adjusting key variables in real time, in order to evaluate the resilience of several institutions simultaneously and to give guidelines and anticipate potential deficiencies.
This multilateral system, based on the democratization of investment, will decide who can freely lend, borrow or invest. This is exactly what local stock exchanges have never been able to do when the need and the demand are there;
In this context, WeeFin Regtech is using disruptive technologies to create a new decentralized alternative finance, which is transparent, safe, accessible to as many people as possible and that is willing to be a driver for sustainable development.
Building a Regtech platform in 2 months
by Pierre Bittner | 01.01.2018 | Report
How last generation Big Data architecture make possible agile and scalable regulatory platform