"Fintech and access to finance" Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher Flashcards
What are the problems with traditional markets?
Information asymmetry.
Agency problems.
Difficulties allocating residual control rights through contracts.
These can prevent access to finance for some firms (especially for seed-stage start-ups).
Could digitalization of finance help to overcome those traditional market problems?
The digitalization of finance provides opportunities to overcome the issue.
There are a few new mechanisms developed:
Peer to peer (P2P) lending;
Crowdfunding;
Initial coin offerings (ICOs).
Name the fintech funding sources.
● Crowdfunding
● Fintech lending (including P2P)
● Initial Coin Offerings
What is crowdfunding?
Many investors pool their resources to invest in a specific project/company.
Main types of crowdfunding:
● Lending-based (loans through a special platform, used when start-ups can sustain paying interest, analysed together with P2P)
● Reward-based (backers receive a pre-determined reward if the project is successful, like a unit of product)
● Equity (start-ups issue shares or convertible notes, typically when cannot pay interest yet)
● Royalty-based
● Real estate
What is fintech lending?
Crowdfunding and other P2P lending platforms connect investors and firms directly, eliminating the intermediaries.
Fintech lending has risen to be popular recently, and the growth is expected to be sustained.
What are ICOs?
ICOs do not rely on traditional platforms, they rather utilize Distributed Ledger Technology (DLT) to raise funds.
Utility tokens are sold (like an IPO, although more restricted) at a very early stage in an exchange for future services provided. It is typically used by DLT start-ups and is quite a small market, as compared to P2P loans.
What is the impact of these new financing possibilities on firms?
These new types of financing do provide a better access to different firms, creating an opportunity to eliminate inefficiencies, where interesting projects lack funding.
● High competition in the lending market can improve the access for a marginal firm
● Fintech can beat traditional debt/equity providers by offering low costs, lower risk-adjusted interest rates and create a better understanding of the product
In general, fintech allows for better financial inclusion, reaching firms that are credit-rationed or underserved, located in areas doing poorly economically, or where banks are more concentrated.
What is the impact of these new financing possibilities on investors?
● Retail investors can gain exposure on asset classes that are generally available only to institutional or accredited investors
o Access may not be large tho: international investments have regulations, high minimum tickets, lack of info
● ICOs have larger access: are fully digitalized, little barriers to entry
o But, may be costly or restrictive to exchange them
What are the issues with democratizing investments?
The goal of democratizing investments through fintech was aimed at retail investors, but the nr of institutional investors is rapidly increasing (especially in crowdlending).
Democratization should allow access to everybody, yet fintech investors may discriminate based on appearance and perceived trustworthiness.
What is the problem with fintech and how could it be improved?
Fintech suffers from a lack of regulation, which might lead to limited scalability of technological innovations and uncertainty.
Solutions:
● For investors: Create a fair playing field for domestic and international investors, but also introduce limits how and who can invest
● For firms: Require firms to publish white papers before ICO to avoid scams, improve project-level governance, clear disclosure rules
● For intermediaries: Require to carry out checks on firm/project quality or investor profile
Regulation might take away certain freedom, but authors argue that it must be done to eliminate obvious risks.
