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2.3.3 Investing and Financing

Conventional banking advice with regard to savings and financing activities faces competition from specialised, web-based advice given by various different providers. This web-based advice, or decision-making support, ranges from the replication of the share portfolios of start investors to the analysis of successful private investors and the replication of these portfolios as exchange traded funds (ETF), right up to the financing of loans by means of a wide range of private persons via special online platforms. Increasingly, customers are managing their own portfolios, and they compare their investment decisions with those of other investors. It can be expected that the willingness of investors to shift their money to other, cheaper and more comfortable providers, will continue to grow.

Peer-to-peer lending and borrowing is based on a similar business model to that of eBay. In each case, the customer is provided with a platform for exchange relationships without the involvement of classic intermediaries. Peer-to-peer lending enables direct bank transactions between private investors who wish to invest money and those who require credit; no bank is involved. As the term is quite cumbersome and long, the acronym P2P is mostly used.

The English company Zopa (zopa.com) is a pioneer in the area of online lending. Private individuals can borrow and lend money here quickly and easily. Customers determine the sum and the conditions under which they wish to invest. Borrowers do the same, and as soon as the conditions intersect at a “zone of possible agreement” (hence Zopa), the transaction can take place. For the sake of security, each investment sum is divided among at least 50 borrowers, and a credit reporting agency check is made. Lenders can choose between debtors with different credit rating categories, and receive more or less interest accordingly. Zopa is financed by a fee amounting to 1% of the loan sum, which is paid by the debtor, and a 0.5 % charge for investors. The interest margin required by banks is twice as large (Zopa 2013).

The advantage for the participating parties is the partial omission of the bank margin. The anonymity and simplicity of the transactions can also be an attraction. Many customers are not keen on telling their bank about their financial difficulties in order to get money. Others do not even have the opportunity of receiving money from a bank. In patchwork careers it is not uncommon for phases of good earnings to alternate with other phases in which little or nothing is earned. Those who find themselves in need of money during a phase of low income often cannot expect to receive a bank loan due to a lack of security and no regular income. And even if it is possible, the conditions are very poor. Under certain circumstances, internet platforms solve this dilemma.

The attractiveness of P2P lies not only in the cheaper conditions. While Zopa aims to make a profit, the American internet platform Kiva (kiva.org) has a different approach. Here, start-up founders and young entrepreneurs in developing countries can be supported with loans to help them out of poverty. The importance and necessity of such concepts was made very apparent by the awarding of the Nobel Peace Prize to the economist Muhammad Yunus. In 1983 he founded the Grameen Bank (grameen-info.org) in Bangladesh, in order to improve the situation of the poor. After a famine he realised that the poor people required only very little capital in order to buy materials for their craft businesses. Yet despite this small capital requirement, hardly any profit was left over. They paid usurious interest rates to moneylenders or were dependent on suppliers. Established banks refused them loans because of a lack of security. Yunus developed a system in which the borrower felt obliged to repay the money due to personal solidarity. His bank paid out loans only when small groups joined together in the villages and vouched for each other. The model now supports people in more than 60 developing countries.

Thus an old idea is revitalised: P2P is not a new phenomenon. As early as 300 AD people in China loaned and borrowed money by organising themselves into groups. The idea remained successful for hundreds of years. Now there are Rotating Savings and Credit Associations (ROSCA) in many countries and cultures. These are alliances between people who save jointly and equally and give loans to members. Zopa developed this idea further, taking it to its logical conclusion with Web 2.0 technologies.

Other new financial instruments in combination with social media and social communities are crowdinvesting or crowdfunding, microfinancing and donation. With crowdinvesting or crowdfunding, a large number of people directly finance a single project. As well as repayment and interest, investors also receive, for example, the finished work, individual gifts or supporting advertising with the help of the cooperation partner.

In donation or rewards-based funding the idea of financing is combined with a donation. On the platform Indiegogo (indiegogo.com), for example, donations can be given to a wide range of projects, many of which provide some kind of return.

 
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