Microfinance institutions probably go back to the emergence of monetised societies themselves. In the Western hemisphere, we know of a long tradition of mutual insurance, burial clubs and credit unions. More recently, microfinance initiatives in developing economies have caught the imagination of the international public, and we have seen a resurgence of interest in credit unions. During the past decade, new forms of financial intermediation have sprung up online, lead by ZOPA in the area of unsecured personal loans and more recently complemented by startups catering for business credit (e.g. Funding Circle). It is gradually becoming clear that online credit exchanges are but part of a wider process of re-intermediation in the financial services sector. This process is increasingly addressed under the broad label of ‘crowdfunding’. While originally associated with crowd funded media projects in the widest sense (Kickstarter), crowdfunding as a term is increasingly used in a much more traditional sense. Two alternative forms of online funding models are gaining foothold under the same label of crowdfunding, but behaviorally with quite different implications, not the least from a regulatory point of view.
On the one hand, there is an originally charitable tradition in crowdfunding, whereby donors commit funds to projects that they feel are worthy of support in their own right. These funds might be pure gifts, or they may take the form of non-commercial and non-collateralised loans that are more or less written off in case of default, or they may amount to de facto lines of credit offered to a prospective seller, again with little practical scope for come back in case of default. On the other hand, there is a tradition best summarised as neoliberal in orientation. Here, crowdfunding rests on an underlying commitment not to charitable giving or reciprocity, but to hard-nosed market exchange. It is in the context of this tradition that the recent turn to equity crowd funding needs to be understood. In equity crowd funding the crowd no longer lends but assumes asset ownership, ironically in quite the same way as it already does on the stock market via online trading platforms, but extended to essentially unregulated small to medium-sized startups.
It is debatable whether a new term for the latter is really warranted. Kevin Lawton and Dan Marom’s Crowdfunding Revolution brings this to the point when suggesting that the rise of crowdfunding is, in principle, a return of natural market forces to less competitive and transparent areas of financial intermediation.
Behavioral framing is be important here. Social crowdfunding, in the charitable and reciprocal tradition, taps into quite different motivations to lend compared to equity investing. While ‘caveat emptor’ should rightly be written on the mast of equity crowdfunding, social crowdfunding tends to prosper where funders feel sufficiently confident to suspend their caveats.