Collaborative finance is a category of financial transaction that occurs directly between individuals without the intermediation of a traditional financial institution. This new way to manage informal financial transactions has been enabled by advances in social media and peer-to-peer, business-to-business and even peer-to-business on line platforms.
However, collaborative finance is just a category inside collaborative economics that refers to organizations and initiatives that value cooperation, ecological sustainability and social justice. These include community supported agriculture, collaborative consumption, and transportation solutions among many others.
Before the industrial revolution, the typical standard of living had changed little through history. The industrial revolution brought sustained economic growth for the first time to the developed nations. But ecological constraints and limited human needs threaten to stop growth. We need to ask when growth should end because people have enough and/or because we have reached our full production potential.
The efficiency factor is an important ingredient of economic growth. The economy must use its resources in the least costly way (productive efficiency) to produce the specific mix of goods and services that maximizes people’s well-being (allocative efficiency). The efficiency factor is the capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors of growth make possible. As Albert Cañigueral, Spain & LatAm Connector at OUISHARE, said: “we must ensure that what we produce as a society flows more and faster because we cannot produce more”.
Collaborative economics enables people to rent, share or swap goods and services. Promoting values such as integrity and solidarity, this new model has extended to every social and economic field including companies’ organization, culture, manufacturing or finance. In fact, TIME Magazine recently called Collaborative Consumption one of the “10 Ideas that will change the world”. One of the main factors enhancing the sharing economy is the technological breakthroughs we are attending to. “This technology has created the needed efficiency and trust to connect thousands of people” remembers Rachel Botsman, one of the most influential writers about collaborative consumption, and adds “the currency of the new collaborative economy is trust”.
During these years of economic crisis and instabilities, the lack of trust in the financial markets and banks has become evident. As Philippe Gelis, CEO at Kantox, said: “it seems that companies feel much more comfortable trading FX between themselves than with banks”. Trust is one of the principles of collaborative economics and individuals and companies trust more unknown people than banks. This is breaking the existing dependency on banks.
We describe below various categories and examples of initiatives of collaborative finance. We selected an example per category but there are many other initiatives in each group with different characteristics, impact and business models.
- Peer-to-peer lending and crowdfunding platforms. Zopa is a UK-based company providing an online money exchange service, allowing people who have money to lend it to those who wish to borrow, instead of using savings accounts and loan applications at traditional banks.
- Virtual currencies. Bitcoin is a cryptocurrency first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution.
- Time banks and bartering platforms. Timebanking.org connects 250 timebanks across the UK. Timebanking is a means of exchange used to organize people and organizations around a purpose, where time is the principal currency. For every hour participants ‘deposit’ in a timebank, perhaps by giving practical help and support to others, they are able to ‘withdraw’ equivalent support in time when they themselves are in need. In each case the participant decides what they can offer.
- Peer-to-peer trading platforms. Kantox is a web platform which allows companies to directly find counterparties (others companies) to match and net their future cash-flows in foreign currencies, at an agreed fixed exchange rate (mid-market rate), and thus hedge their foreign exchange risk. By netting cash-flows in foreign currencies without the intermediation of banks, Kantox is able to offer companies a fairly priced FX hedging solution which does not require any margin deposit nor credit line.
- Multilateral netting platforms. LICUOS is a global B2B payment platform where businesses can compensate and pay their commercial debts. The platform provides netting, payment and funding services for accounts receivable and payable for businesses, allowing them to reduce their dependence on the traditional banking system alternatives so that they can significantly improve their working capital and cash flow management.
LICUOS is a disruptive initiative in the collaborative finance spectrum where companies can compensate and pay their commercial debts and provides them with a non-banking liquidity fund offering some services included in other categories such as “the peer-to-peer lending and crowdfunding platforms” category. On the one hand, the netting processes enable companies to reduce the funding needs as their working capital is reduced and provides them with a non-banking liquidity channel that allows buyers to borrow money, to early pay their accounts payable. On the other hand, the LICUOS patent pending technology generates multilateral payment proposals for the companies, reducing the amount of debts in the chain and allowing for an optimized and minimized movement of cash.
Collaborative economics and finance are not new, but the current economic crisis, along with technological advances, has boosted its growth. Following a clear trend of banking disintermediation, a huge number of peer-to-peer electronic platforms have emerged in every area, including finance.