CE26 - Innovation, Travail

Technology and financial (dis)intermediation – Fintech

Technology and financial (dis)intermediation

Our project focuses on the two main types of crowdfunding platforms: loan-based crowdfunding and equity crowdfunding. Loan-based crowdfunding connects directly lenders and borrowers and is often presented as an alternative to traditional banking. We will also contribute to the study of equity crowdfunding platforms that connect directly investors and start-ups and are seen as an alternative to venture capital.

Exploration of the role of technology in the financial intermediation

The objective of the project is to understand whether platform-based financial intermediation could lead in the future to a more efficient and stable financial intermediation or whether it would suffer from the same information asymmetries problems as traditional intermediaries. In particular, we address the following issues: <br /> <br />1. Lending-based crowdfunding platforms enter market with large incumbent banks and our aim is to model competition between these two different business models. <br /> <br />2. Lending-based crowdfunding platforms face severe adverse selection problems because they target borrowers and projects that were often rejected by traditional banks. Our aim is to explore the ability of loan-based crowdfunding platforms to overcome these informational asymmetries and to improve firms performance. <br /> <br />3. Since crowdfunding is a new phenomenon, there is a lot of experimentation in what concerns their design. Lending-based crowdfunding platforms experiment with different interest-rate setting mechanisms for listed loans. Equity-based crowdfunding platforms experiment with a wide range of different mechanisms to raise equity (testing-the-waters policy, keep-it-all vs. all-or-nothing, reference values, network effects, secondary markets, investor rights). Our objective is to evaluate the success of these different design mechanism. <br /> <br />4. The ultimate objective of the project is to evaluate the current regulatory stance towards lending-based and equity-based crowdfunding and to provide policy recommendations.

The theoretical part of the project analyzes the equilibrium on the credit market when a bank and a platform compete to offer credit to borrowers. The platform does not manage deposit accounts, but acts as an intermediary between a borrower and a lender, offering a risky contract to the lender who is only reimbursed if the borrower is successful. The theoretical framework allows to describe an optimal contracts proposed by the platform and to study the impact of bank-platform competition on the average risk of bank loans and the relative level of interest rates.
The empirical part of the project requires the collection of data on individual projects of the crowdfunding platforms (lending, equity, reward). To address our research questions, we have to account for the selection bias because entrepreneurs that rely on crowdfunding platforms are different from those that that do not. There is also a selection bias, when fundraisers have a possibility to choose between different designs of the funding mechanism. To mitigate these endogeneity problems, we rely on a range of matching techniques (Propensity Score Matching and Mahalanobis distance matching) as well as instrumental variable estimations.

Our main results are the following:
1. The theoretical model of Biancini and Verdier (2020) describes the competition between a bank and a platform. The resulting impact on repayment rates for borrowers and returns for investors is highly dependent of the regulatory framework in which platforms are allowed to operate. If platforms need to rely on banks for their activities, banks have more incentives to open the retail credit market to competition, as long as the rents that they extracts from depositors compensate for lower revenues from lending transactions.
2. Schwienbacher et al. (2020) show empirically that banks are significantly more likely to form alliances with fintechs when they pursue a well-defined digital strategy and/or employ a chief digital officer. Moreover, in line with incomplete contract theory, they find that banks more frequently invest in small fintechs but often build product-related collaborations with larger fintechs.
3. Preliminary results of the empirical work by Havrylchyk and Mahdavi (2020) suggest that lending-based crowdfunding platforms attract borrowers with less cash and collateral, higher funding costs, but with higher growth prospects. Borrowing via platforms increases firms’ leverage and interest rate burden, but only has a limited impact on their performance, as well as their employment and investment decisions.
4. The design of the crowdfunding mechanism has a significant impact on the campaign success and risks. For example, Schwienbacher and Cumming (2020) compare “Keep-It-All” , where the entrepreneur keeps the entire amount raised regardless of achieving the goal, and “All-Or-Nothing”, where the entrepreneur keeps nothing unless the goal is achieved. They find that “All-Or-Nothing” yields a separate equilibrium with higher quality and more innovative projects with greater success rates.

Our future research will take two main directions.

• First, we are currently exploring new data sources. Lending-based crowdfunding platforms target small firms that are not required to publish their financial accounts and, hence, commercial data sources lack data on most borrowers. This represents an important challenge not only for researchers, but also for crowdfunding platforms and investors that need to evaluate the creditworthiness of borrowers.

• Second, we plan to publish a policy paper that explores the state of crowdfunding in France and provide policy recommendations.

1. Bonneau, T., 2020. Regulation bancaire et financière européenne et internationale, 5° éd. Bruylant
2. Bonneau T., and T. Verbiest, 2020. Fintech et Droit, 2° éd. Banque éditeur
3. Havrylchyk, O., 2018. Regulatory framework for the loan-based crowdfunding platforms, 2018. OECD Working Paper No. 1513.
4. Schwienbacher, A. “Equity Crowdfunding: Anything to Celebrate?” (2019), Venture Capital: An International Journal of Entrepreneurial Finance 21 (1), 65-74.
5. Schwienbacher, A., D. Cumming, F. Hervé and E. Manthé “Testing-the-Waters Policy with Hypothetical Investment: Evidence from Equity Crowdfunding,” Entrepreneurship Theory & Practice, forthcoming.
6. Schwienbacher, A., L. Hornuf, M. F. Klus, and T. S. Lohwasser, “How Do Banks Interact with Fintech Startups?” Small Business Economics, forthcoming.
7. Schwienbacher, A., H. Bollaert and G. Leboeuf, “The Narcissism of Crowdfunding Entrepreneurs,” Small Business Economics, forthcoming.
8. Schwienbacher, A., D. Cumming and G., 2020. “Crowdfunding Models: Keep-it-All vs. All-or-Nothing,” with Leboeuf, Financial Management 49, pp. 331-360.
9. Schwienbacher, A., F. Hervé, E. Manthé and A. Sannajust 2019. “Determinants of Individual Investment Decisions in Investment-Based Crowdfunding” , Journal of Business Finance and Accounting 46 (5-6), pp. 762-783.
10. Pedagogical video : Lending-based crowdfunding through the prism of the theory of financial intermediation Link: mediatheque.univ-paris1.fr/video/1369-fintech-01/

In this project we propose to focus on the two main business models of crowdfunding platforms: loan-based crowdfunding and equity crowdfunding. Born in the wake of the global financial crisis, these platforms are seen by some as an opportunity to increase competition in the banking industry that suffers from too big to fail problems, opacity and inefficiency. At the same time, these new entrants represent problems similar to banks, such as adverse selection and agency problems. The objective of our project is to explore differences between traditional banks and crowdfunding platforms to understand under what conditions platform-based financial intermediation could improve efficiency and stability of the financial sector.

The French market merits our attention for two main reasons. First, France is home to the largest crowdfunding industry in the continental Europe. Second, Bank of France has recently opened access to the French credit registry which is a rich source of data that will allow researchers in our team to address exciting research questions that cannot be investigated in larger markets, such as the UK and the US, where credit bureau data is private and closed to researchers.

In the theoretical part of our project, we propose to model a loan-based crowdfunding platform and then to study the interaction between a large incumbent banks and a small platform. We assume that platforms have a better intermediation technology to solve adverse selection problems and, hence, are able to lend to riskier firms and projects than banks. Importantly, this assumption will be tested in the empirical part. We would like to understand the conditions under which the emergence of loan-based crowdfunding platforms improves the welfare of borrowers and investors and how the competition between banks and platforms impacts the interest rates that are charged to borrowers and the rates of return to investors. Furthermore, we will analyze how the regulatory framework impacts the interest rates charged to SMEs.

In the empirical part of the project, we will explore how platforms and banks compete between each other and how platforms compete with each other. First, we will attempt to explore adverse selection problems faced by platforms that are likely to receive borrowers that were rejected by banks. To do so, we will model the decision of businesses to switch to online platforms. This will allow us to understand whether banks and platforms compete for the same borrowers and/or whether platforms are filling the funding gap by financing SMEs that are underserved by banks. Second, we will evaluate the intermediation technology of crowdfunding platforms by testing if they are able to relieve borrowers’ credit constraints and lead to faster firm growth and higher profitability. We will also compare interest rates and credit conditions between banks and loan-based crowdfunding platforms, while controlling for differences in business characteristics. We will also explore the interest rate formation on loan-based crowdfunding platforms with different interest rate setting mechanisms (fixed or auction) to understand which business model leads to lower interest rate.

The ultimate objective of our project is to propose guidelines for the regulatory framework for new Fintech players. The first step would be to do a review of the existing regulatory practices in the OECD countries. In cooperation with the Economics Department of the OECD, Olena Havrylchyk has already created a questionnaire that has been sent to regulators in all OECD countries. Second step would be to identify ‘best practices’ for the regulation of online platforms.

Project coordinator

Madame Olena Havrylchyk (CES - Centre d'économie de la Sorbonne)

The author of this summary is the project coordinator, who is responsible for the content of this summary. The ANR declines any responsibility as for its contents.

Partner

EA3046 INSTITUT DE DROIT COMPARE
CES-UMR8174 (CNRS/UP1) CES - Centre d'économie de la Sorbonne
SKEMA BUSINESS SCHOOL
LEO Laboratoire d'économie d'Orleans
CREM CENTRE DE RECHERCHE EN ECONOMIE ET MANAGEMENT
CRED CENTRE DE RECHERCHES EN ECONOMIE ET DROIT

Help of the ANR 294,300 euros
Beginning and duration of the scientific project: - 36 Months

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