EF5177-Week2_0250d7204a65cb5e0ede6936cd5cf8ec

Introduction

• Course Title: Financial Technology & Innovation

• Topics: Crowdfunding & P2P Lending

• Instructor: Dr. Aref Mahdavi Ardekani

• Institution: Dublin City University (DCU) Business School

Overview of Crowdfunding and P2P Lending (Page 2)

• Crowdfunding: Raising funds from multiple individuals and institutions through online facilitation.

• Peer-to-Peer (P2P) Lending: The largest segment of crowdfunding.

• Significance: Essential evolution in the FinTech sector.

The Role of P2P Lending Platforms (Page 4)

• Initial Role: Facilitators of loan funds and interest repayments.

• Auction-Based Markets: Early platforms enabled market-determined interest rates.

• Change in Strategy: Leading platforms now set interest rates through internal procedures, moving away from market setting.

• Advantages:

  • Greater diversification of loans, reducing risk for lenders.

  • Platforms resemble investment funds more closely now.

• Disadvantage: Loss of unique P2P features, such as lender autonomy in choosing investments.

Competition with Traditional Financial Institutions (Page 5)

• P2P Lending Growth: Significant competition for banks.

• Regulatory Landscape: Initially unregulated; recent shifts towards regulation.

• Innovation: Early cost advantages allowed rapid service expansion.

P2P Lending in Practice (Page 6)

Lender Risk

• Lending Club: Allows manual investing with diverse borrower assessments.

• Funding Circle: Converted to a risk-category model for retail investors; eliminated manual assessing to mitigate confusion.

  • Investment Types: Balanced (across credit bands) and Conservative (lower risk credit bands).

Borrower Risk (Page 7)

• Main Risk: Inability to secure requested funding.

• Funding Strategies:

  • All or Nothing: Full loan must be subscribed; ensures collective lender confidence.

  • Keep it All: Loans funded even if not fully subscribed; offers less assurance.

Loan Assessment and Interest Rates (Page 9)

• Interest Rate Setting:

  • Fixed-Rate Systems: Rates determined internally; faster loan filling but higher default rates.

  • Auction-Based Rates: Rates set by market dynamics, potentially lower but slower.

• Impact on Borrowers: Fixed rates higher, and faster filling of loans may increase defaults.

Performance of P2P Platforms (Page 10)

• Key Metrics: Total loans extended & market valuation of platforms.

• Trends:

  • Slowing growth in loan origination despite increasing platform activity.

  • Institutional investors exerting pressure on interest rates and increasing default rates.

Advantages and Risks for Lenders and Borrowers (Pages 11-12)

Benefits for Lenders

• Direct lending opportunity to individuals/corporations.

• Ease of investment similar to online shopping.

• Access to managed funds and potential risk mitigation options.

Benefits for Borrowers

• Quick and convenient access to credit, especially for those with poor credit histories.

• Efficient funding for small business needs.

Default Risk Mitigation (Page 13)

• Information Asymmetry: Lenders operate with incomplete borrower information.

• Types of Information:

  • Hard Information: Structured data like income and credit history.

  • Soft Information: Informal, harder to quantify data like personal references, valuable yet risky.

Determinants of Default in P2P Lending (Pages 14-16)

Information Asymmetry

• Borrowers possess more knowledge about repayment likelihood than lenders.

Factors Influencing Default (Page 15)

• Factors impacting Probability of Default (PoD):

  • Loan purpose, borrower housing situation, credit history, and borrower indebtedness.

• Findings suggest demographic characteristics and financial behaviors significantly related to default risk.

Credit Scoring Models (Pages 17-20)

Traditional Logistic Model

• Uses variables associated with default to estimate probabilities.

Machine Learning in Credit Scoring

• Using algorithms like deep learning to analyze borrowers’ credit data to predict defaults and assign scores.

• Complexity increases through multiple hidden layers processing diverse borrower information.

Crowdfunding Types (Pages 21-22)

Equity Crowdfunding

• Selling shares in non-listed companies for swift public funding; includes disclosure of crucial business information.

• Benefits: Early investment opportunities for individuals.

Donation and Reward Crowdfunding

• Donation Crowdfunding: Meshing individual altruism with fundraising.

  • Likely driven by emotions rather than rational gain.

Startup Stages and Crowdfunding (Page 23)

• Pre-startup: Focus on viability; generally Adoption of donation crowdfunding.

• Startup: Transition to lending crowdfunding for capital during development.

• Growth: Utilize equity crowdfunding for scale in market expansion.

Pecking Order Theory in Crowdfunding (Page 24)

• Firms prefer internal financing over debt; equity financing often indicates financial distress.

• Empirical findings suggest equity seekers are less profitable and burdened with higher debt.

Crowdfunding vs. Venture Capital (Page 25)

• Crowdfunding offers entrepreneurs direct access to investors, contrasting with VC’s restrictive processes.

• Lower fees associated with crowdfunding poses a challenge for traditional VC.

Conclusion

• Crowdfunding and P2P lending are reshaping financial landscapes, offering diverse options for lenders and borrowers alike, along with unique challenges.