Towards new forms of financial intermediation?
A. Sciarrone Alibrandi, G. Borello, R. Ferretti, F. Lenoci, E. Macchiavello, F. Mattassoglio, F. Panisi
FinTech n. 5 - July 2019 [PDF] (Italian version)
Marketplace lending is one of the most interesting phenomena in the FinTech area, not only for the registered growth rates in terms of volumes in the last few years, especially in countries other than Italy, but also and especially for the innovative character of the business models deployed: models able to cast doubts on the traditional sectorial separations and categories of the financial sector, therefore raising relevant issues from the point of view of regulatory strategies.
It represents an alternative form of financing which can be reconnected, on the one hand, to the application of digital intermediation techniques developed in the e-commerce area and, on the other hand, to the more general crowdfunding phenomenon. In fact, marketplace lending is characterized, within the crowdfunding genus, by realizing the collection of financing by private entities (individuals or firms), through a digital platform (generally accessible by the internet). We have decided to refer to such phenomenon with the term ‘marketplace lending', which allows to underline the most peculiar feature of this business model, i.e. being an activity organized in such a way to put together (in a new and original way, compared to traditional intermediaries' models, thanks to the presence of platforms) the lending perspective with the one of capital markets and trading venues.. We are in fact observing a new business model, which - thanks to technological innovation and, in particular, to the use of enabling technologies (such as platform structures and big data analytics) – allows the fulfillment of classical financial needs (e.g. the financing needs of individuals or legal persons and investment needs), but with models and structures different from traditional ones. Furthermore, considering the incredible and constant growth in size of marketplace lending worldwide, such new models and structures seem, at least at first sight, to effectively respond to concrete financial needs, with the platform presence creating a range of advantages both for crowd-borrowers and for crowd-investors. Nonetheless, the same also creates potential new risks, endangering in particular the same interests traditionally grounding and protected by financial regulation (depositor and investor protection and, more generally, client protection; reduction of asymmetric information, moral hazard and adverse selection problems; stability, correct functioning and competitiveness of the financial system; trust in the financial system). This highlights the need, not only to place marketplace lending within the scope of financial regulation, but also to do so in consideration of the peculiar features of this business model, through an ad hoc regime, designed employing an activity-based approach and a functional (therefore, also reflecting the particular functions performed by digital platforms) and proportional perspective (in consideration of volumes, complexity of activities and products) as well as able to protect both crowd-investors and crowdborrowers.
The present contribution is organized in three sections.
In Section I, a first description of marketplace lending and overview of the main regulatory issues raised by the same are presented. It starts by analyzing, first, the digital platform model, which represents the fundamental structure of lending marketplaces, highlighting the peculiar features of the same and the current debate about the need to regulate such operative model per se (irrespective of the specific market and sector in which it operates), before moving more specifically to crowdfunding platforms.
Section II, instead, aims at offering an analysis of marketplace lending from an economic perspective through the analysis of the main business models deployed by lending marketplaces and activity volumes, distinguishing between (and separately analyzing) international and national markets. Considering the central role played by the assessment of crowd-borrowers' creditworthiness among the services offered by lending marketplaces to their users, we will reserve to such topic an ad hoc paragraph, with special regard to the innovative instruments deployed.
Section III will be dedicated to a comprehensive legal analysis of the structure and functioning of lending marketplaces. We will evaluate, first, the activities conducted by platforms in relation to the activities reserved to authorized operators – mostly in connection with a prescription in this sense at EU level – by financial regulation (e.g. collection of reimbursable funds and/or lending, payment services, investment services); second, we will assess the applicability to lending marketplaces of additional disciplines in the financial sector area (e.g. anti-money laundering and usury) as well as of rules of broader scope (e.g. consumer protection and data protection disciplines), verifying, moreover, the compatibility with the activity conducted by lending marketplaces; third, in consideration of its central relevance among platforms' services, we will focus again on the above mentioned service of creditworthiness assessment, this time from a legal perspective.
The legal analysis will then move to the international sphere, examining the ad hoc regulations on marketplace lending (and often on equity crowdfunding, too) adopted by certain European Member States, as well as the recent Proposal for a regulation on European Crowdfunding Service Providers (ESCPs) for businesses.
This contribution will conclude by presenting some thoughts and suggestions about the opportunity to regulate marketplace lending in the framework of a more general rethinking of existing regulatory and supervisory strategies in the financial sector, in order to adequately deal with the opportunities and risks entailed by technological innovation.
Antonella Sciarrone Alibrandi - Università Cattolica del Sacro Cuore di Milano (firstname.lastname@example.org)
Giuliana Borello - Università di Verona (email@example.com)
Roberto Ferretti - Studio Legale Bonora e Associati e Arbitro Bancario Finanziario (firstname.lastname@example.org)
Francesca Lenoci - Università Cattolica del Sacro Cuore (email@example.com)
Eugenia Macchiavello - Università degli studi di Genova; assegnista di ricerca, Università degli studi di Roma Tre (firstname.lastname@example.org)
Francesca Mattassoglio - Università degli studi di Milano Bicocca (email@example.com)
Federico Panisi - Università degli studi di Brescia (firstname.lastname@example.org)
The authors thank Giuseppe D'Agostino and Pasquale Munafò (Consob) as well as the other members of the FinTech working group for useful comments to an earlier version of the paper. We are also grateful to the FinTech operators participating to the interviews and answering to our questions. The authors are the only responsible for errors and imprecisions. The opinions expressed should not be referred to the affiliated institutions.
JEL Classifications: D18, E51, G21, G23, G24, G28, G29, G38, K12, K20, K22, K24, L14, L22, O16, O17.
Keywords: FinTech, crowdfunding, marketplace lending, marketplace investing, credit scoring, Prospectus, financial instrument, investment product, investment services, credit intermediary, banks, investment firms, consumer credit, business credit, institutional investors, securitization, secondary market, financing, investor protection, sharing economy, digital platforms, product governance, business model, algorithms, EU law, functional approach.