At the beginning of 2019, Russia’s largest bank announced its entry into the crowdfunding market. A trendsetter not only in rates, but generally in finance, Sberbank predictably triggered a surge of interest in crowdfunding. For state financial corporations and large retailers, crowdfunding provides an opportunity to diversify the business, reduce credit risks and expand the customer base. However, experience and skills are important in any type of business; technology cannot be replicated just like that. Even Sberbank has not yet produced a solution, despite the announcement made in the first quarter of 2019. Interested investors still use solutions from Fan.Money, Penenza.ru, Alfa-Potok, and Starttrek. At the same time, large banks mainly contact them to purchase software, or even a stake, which is also a good option for diversification.
This is something that largely hampers the development of crowdlending. Most potential investors (in case of crowdlending, any competent citizen is an investor) do not know that there are alternatives to bank deposits, and just follow the habitual practice. The only exception is white-collar residents of million-plus cities. They are the main testers and consumers of crowdlending solutions. Most of them prefer to invest in understandable and simple businesses such as retail, catering, and services. This is easily explained: the development of big cities requires the development of infrastructure, and the risks of pooled investment are eroded. At the same time, the threshold for entering the market is very low, at RUR 5K ($80).
Fraud and reputational risks
Reputational risks arising from platform misconduct are still critical for the entire segment. Major cases of fraud do not just make headlines, but can deal a serious blow to the industry’s appeal. I usually notice declines in investor activity at times of major scandals. But I hope cases such as the high-profile Gold Reserve scandal will be neutralized once the law on investment platforms takes effect from 2020. Another important point to consider is the risk of the borrower’s default – this may be a problem for those who invest in one or two projects. There is a possibility of high losses. In this regard, we recommend that investors significantly diversify their investment portfolio. Fan.Money has an auto invest tool and a loan fund to facilitate this process.
Reducing rate of return
I predict a decrease in the rate of return from 20% per year to an annual average of 15%. The simple reason for this is that money is getting cheaper, which is only facilitated by declining inflation rate: in August, Russia’s Federal Service for State Statistics (Rosstat) even reported a 0.2% decrease in prices. According to forecasts by Russia’s Central Bank, annual inflation rate may reach 4%-4.5%. The period of high returns is running out everywhere, including the crowdinvesting sector. Yet, business development loans will bring 2-4 times as much return as deposit rates.
Further mergers with banks, IFIs and retail businesses
In this regard, everything is predictable: the merger is profitable for crowdlending platforms as a big business will provide competencies, connections and direct investments. I think it will not be long before VTB and Rosbank will follow Alfa-Bank and Sberbank. Also, alliances are possible between crowd platforms and major online retailers such as OZON and Wildberries, which will first ‘test’ loans on their customers and suppliers, and then allow everyone to follow.
Crowd platform specialization
There are new highly specialized platforms that allow investing not just in any business but in its narrow segment or for some specific purpose. For instance, we attract finances primarily for businesses from the consumer sector such as bars, cafes, and food production services. The module is used solely for executing contracts, while Penenza.ru solutions are used for taking part in tenders. I predict the emergence of platforms that will specialize in commercial real estate.
Crowdlending is uberization of finance and investments, with intermediaries removed from the process, which results in investors receiving more dividends and borrowers provided with convenient services and favorable conditions. Yet, crowdlending definitely will not kill banks. Rather, it will naturally complement them and provide greater opportunity, with citizens receiving a new comprehensible investment tool and businesses gaining money.
By Sergey Cheremush, CBDO of Fan.Money crowdlending platform