Alternative Finance Categories - financing models | Alternative Finanzierungsformen
Defining a constantly evolving and rapidly growing sector, such as MPL, is not an easy task, as platforms are aggressively seeking to come up with new ways of funding and to carve out new niches. Therefore, MPL goes by many different names and has many different meanings. For example, U.S. investors usually use the term “marketplace lending” whereas European investors would prefer “crowdfunding” or “P2P lending”. Considering the fact that nearly 65 percent2 of capital in MPL came from institutional lenders, “Peer-to-Peer” has become a misnomer and hence “Marketplace Lending” is a more suitable term.
HJCO Capital Partners classifies MPL as a subcategory of Alternative Finance, which is divided into three categories: Marketplace Lending, Crowdfunding, and Micro Lending (see Figure 2). They have one thing in common: Financing is arranged through a platform and those providing capital know where their capital finally arrives. The platform is therefore a facilitator or an intermediary. Marketplace lending is the process by which investors (both individuals and institutions) lend money online, usually to individuals or to SMEs, without the use of traditional financial intermediaries such as banks.
Crowdfunding is a method used to raise monetary contributions from a large number of people to support a specific project or a business rather than to provide individuals with loans as done by MPL. Historically, crowd-funding has been used for political campaigns, disaster relief, governmental support, and public projects. More recently, it refers to equity-based crowdfunding, reward-based crowdfunding, or donation-based crowdfunding through sophisticated online platforms. Investors that invest through reward-based and donation-based crowdfunding platforms such as Kickstarter or Indiegogo usually receive the finished product, gifts, or discounts instead of return on equity, compared to those who invest via equity-based crowdfunding platforms (e.g., Crowdcube and Syndicate Room).
Micro Lending or Micro-Financing specifically refers to the financial help to low-income households in poverty areas and countries that do not have well-developed banking systems. Many of these loans are used to help finance medical bills, small businesses, education, and agricultural development. The most popular micro-lending institution in the U.S. is Kiva.
As stated above, MPL keeps evolving and its model has expanded to various credit spectra, including the invoice financing3 (e.g., Market Invoice and Platform Black), student loans refinancing (SoFi and Upstart), mortgage loans (LendInvest), auto loans, and healthcare financing. Nevertheless, this study will focus on unsecured consumer credit (non-student) loans and business loans due to their more attractive risk premium and well-developed lending models.
HJCO Capital Partners. "Alternative Finance Categories." In WHEN FINANCE MEETS INTERNET - The Marketplace Lending Industry, 7-8. Netherlands, 2016. PDF.