Guide to Collaborative Finance

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2 01 Title Guide to Collaborative Finance By Maria Fonseca

3 02 Table of Contents 01. TITLE 02. TABLE OF CONTENTS 03. ABOUT THE AUTHOR 04. GUIDE TO COLLABORATIVE FINANCE A. B. C. What is Collaborative Finance Peer to Peer Lending What is Social Saving? 05. ABOUT INTELLIGENTHQ.COM 06. POWERED BY YOUPUBLISH

4 03 About the Author Maria Fonseca Maria Fonseca is a London based writer, thought leader, researcher and filmmaker. Maria writes about the sharing economy, postcapitalism, social innovation and futuristic ideas. She is the editor of IntelligentHQ, which is a social business network that provides intelligence + education about social business, cutting edge economical trends and innovation. She completed her arts based PhD in 2015, taken at the University of Westminster and is now preparing her arts based Post Doc that will explore the links between creativity and novel post capitalist economic alternatives. She is the author of the project and coming book: Dream Economics, to be launched in As an artist, she has exhibited her work in

5 various international exhibitions such as Manifesta 5, São Paulo Biennial, Photo España. She has given talks about her work in numerous conferences and events for the past 10 years. She is visiting lecturer at Groupe INSEEC in London and Lusófona University.

6 04 Guide to Collaborative Finance WHAT IS COLLABORATIVE FINANCE Recently a lot attention has been given trying to understand how technology is enabling a whole new phenomenon of person-to person and crowd driven funding, lending, currency and investment services. These services, according to various experts, promise to decentralize and democratize the access to finance, money and banking. The umbrella term that is being increasingly used to name these operations is collaborative finance. What is Collaborative Finance Collaborative finance is an exciting new concept that allows individuals to be funded without a financial institution such as a bank being involved in the traditional way. This new way to proceed to informal financial transactions is now possible due to the latest advances in and peer-to-peer on line platforms. The term collaborative finance was first approached in the book MacroWikinomics: rebooting business and the world, written by by Don Tapscott and Anthony D. Williams. They write:

7 " A new movement is beginning, and it s inspired by the public anger at a host of things, from the behavior of Wall Street and massive bank bonuses to the widening gap between the interest rate offered to savers and the rate charged to borrowers. It s enabled now by the growth of mass collaboration via the Internet. " This new idea was born from collaborative consumption which is also known as the sharing economy. The concept behind collaborative consumption is that people can share what they have to help other people out. One very simple example of this is car pooling where individuals share rides in cars to cut the costs for everyone that has to make the same journey. However, the advance of the internet has led to many applications of this idea being developed online, and one famous example of this is Airbnb where people rent out their spare rooms. Characteristics of Collaborative Finance Collaborative finance leads to the possibility of informal financial transactions to be able to take place. The possibilities for achieving this type of transaction have been vastly improved by the advent of social media websites and peer-to peer online platforms, according to site CollaborativeFinance.org. Such interactions are flexible and adaptable and are particularly appealing to those with lower incomes as the means of achieving collaborative finance means that it is often

8 cheaper per transaction, making these options highly economic and attractive to many. Peer-to-peer decisions are made between borrowers and those borrowing money in terms of purpose of the loan, collateral needed to secure the loan, interest rates, maturity periods and debt rescheduling. collaborative finance landscape - Intelligenthq There are a number of benefits of collaborative finance that mean that it is appealing for low income households, states CollaborativeFinance.org. One such benefit is that there is no need

9 for a license for suppliers, and another is that collateral is frequently not required. This is important because low income households may well not have collateral that is required to secure more traditional forms of financing, making it impossible for them to access funds. Instead of collateral there is peer pressure to repay, and those that borrow tend to be in the same community as the people that they are borrowing from. This localised approach means that community pressure is more achievable. It has been found that these types of approaches are good for achieving high repayment rates. CollaborativeFinance.org explains that one form of collaborative finance is created through microfinance. This is excellent for very poor families as it offers them the opportunity to be able to gain access to good financial services that they would otherwise not be able to reach. This provides them the opportunity to save, get insurance policies, raise credit and deal with fund transfers. The goal is to assist poor people to get out of poverty. Traditionally this is a business area that has not been touched by banks since " Either these entrepreneurs don t have the capital or cash to back the loan. Or as the large banks argue, their credit needs are too small. " Microfinance has benefited from social media websites, and organisations like Kiva provide micro lending through social approaches. There are also social lending sites, or peer-to-peer lending sites that remove the need for financial intermediaries.

10 Rebuilding Trust Through Collaborative Finance Rachel Botsman (2014) also describes some of the benefits of collaborative finance. In particular, Botsman focuses on the trust and hate issues that exist between consumers and the banks, most common in Generation Y and younger. For example, Botsman argues that figures show that 71% would prefer to go to the dentist than listen to a bank, while 33% think that they do not need a bank at all.there is a general lack of understanding in society regarding what banks do and a move towards trusting other people more than large corporations. This may have been fostered by the economic downturn around the world, which it could be argued was created by these very same large corporations. All of this, writes Botsman, has driven people towards websites like Lending Club, Prosper and Society One. Indeed, social lending by 2025 is argued to be likely to have grown tremendously. Lending Club and Prosper issued $2.4 billion in loans in 2013, says Botsman, and growth in this area especially in the USA can be seen to be phenomenal. All of this bodes exceptionally well for those that have been traditionally excluded from finance and kept in a resulting cycle of poverty. Maybe this has the power to really change the world.

11 PEER TO PEER LENDING Peer to peer lending is a relatively new approach to finding money to advance projects, and it has also been termed as crowd lending. There are websites of this genre springing up all over the place and understanding them can be helpful, especially for people that are looking to invest and make some money, or those that need to borrow some money and want to go through alternative means other than a bank. One of the great advantages of peer to peer lending for the borrower is that rates tend to be lower because there is no institution (such as a bank) sitting in the middle. The websites that offer peer to peer lending solutions charge a fee and make their money that way, and savers or investors benefit from better rates. As Martin Lewis of Money Saving Expert explains:

12 " Lending isn t willy nilly though; borrowers are cherry picked by credit checks and rated according to risk. " Additionally, the websites carry out all of the repayment chasing, which makes it somewhat of an easy option for investors/saver, asserts Martin Lewis. Of course, peer to peer lending is not without its risks and those that are lending should be aware of those before they get started. Lewis recommends starting off small until you re used to it, as well as gaining an awareness of the different ways in which the different sites work so that there are no nasty surprises. Martin Lewis explains that with peer to peer lending, tax is paid like savings. The interest that is derived will be taxed as income tax, the same way in which it would for normal savings. Savers or investors that use these sites will pay tax on all of the interest that they are paid, regardless of whether there are bad debts as well. This YOUTube video, explains us what is peer to peer lending:

13 Link: Looking more closely at the risks, one of the main ones that Martin Lewis outlines is the fact that there is a chance of not getting repaid. The different sites all have different kinds of approaches to try and reduce this risk, so Lewis recommends exploring these and understanding them properly before selecting a site to lend through. However, there are also some other considerations. One is that cash might not be lent immediately and in this case it will not earn any interest while it is sitting there waiting to be lent to someone or an organisation. There are also no savings safety guarantees. Lewis describes how in the UK generally speaking there is a Governmentbacked Financial Services Compensation Scheme. With this, individuals will get the first 85,000 of their UK savings back per financial institution if the institutions fail. However, this is not something that peer to peer lending sites benefit from. Another definite risk is that if the site ceases doing business you will be responsible for getting the money back from the person that it was lent to. This could be very difficult to achieve in reality. Lewis reviews some of the peer to peer lending websites that have sprung up. One of these is Zopa, which is a site that has been running for the longest (since 2005). On this site there are 52,000 lenders and 550 million has been lent so far. The website spreads the impact of bad debts across all savers and uses a Safeguard fund to achieve this. Lenders through this site get paid back monthly, but if you need your money back urgently you will have to wait three to five days and pay a 1% fee on it. Ratesetter is another option and at the current time over a five year period it offers better rates than Zopa. It uses a Provision Fund that is similar to the Zopa Safeguard approach. So far the organisation has lent 252 million and there are 13,248 lenders. A third option reviewed by Lewis is Funding Circle. This website has lent 290 million so far and has 30,000

14 lenders active on its site. You choose how to mitigate your risk by lending over the number of businesses that you choose to, however, Funding Circle recommends that lenders spread their risk by lending to a minimum of 100 businesses. Working with this site, if you need your money back quickly you can get it back in a day for a 0.25% fee.

15 WHAT IS SOCIAL SAVING? Saving is hard, especially for people that are not good with money, or people that do not have a lot of money that they could potentially save anyway. Social saving is a new concept that aims to help people to save through providing support to help people to achieve their goals. The idea behind it is that people are more likely to do what they say they will if a person will hold them responsible for it. As Collaborative Finance explains:

16 " In terms of goal setting, accountability does not need to be formal just the fact that someone knows about my goal and will think poorly about me if I don t complete it is enough to encourage me. " According to Collaborative Finance this is equally true of financial goals as it is of any other goal. One example of such a service is SmartyPig. This organisation helps the saver and their friends and family to all engage in the saving process. Friends and family are informed of the saver s goals, and the site even suggests ways in which the saver can get friends and family to donate. While this might be a bit much for some people, just the level of engagement that friends and families know what they are doing will bring appears to be of benefit, providing the pressure that the person needs to stick to their targets. Another great thing about SmartyPig is that social networking tools are offered, and savers can exchange money saving tips with one another. Even better, SmartyPig gives out rewards to those individuals that are able to meet their targets. Account holders that achieve this can, if they wish, buy gift cards that allow a cashback reward of up to 14% to be received. This may be deposited into a new savings account or added to the card. By providing goals and rewards in this way, social saving does seem to be paying off for some. These types of approaches (goal savings) are designed for short and medium term savings rather than longer term savings plans.

17 Savings Groups Collaborative Finance also argues the case for Savings Groups which it believes to be a revolutionary approach. Savings Groups are explained to be groups that are self-selected of people that get together to save and borrow. Usually somewhere between 15 and 30 people are involved. This is particularly helpful for the very poor, such as people living in villages in developing societies. The Savings Group may also offer loans to members of the group through the collective savings in some scenarios. In this case usually all participants in the group have to agree with the loan and the loan is made only if the borrower is completely trusted. Collaborative Finance explains that there are limits on how much a person can borrow, and commonly this is no more than three times what that particular member has saved. Money Go Rounds is explained by Collaborative Finance to be a social network that helps people with group saving. It shows how peer to peer services can be used. Within there are rotating savings groups (RSG) that meet and work together to save and borrow. Members contribute the same amount at each meeting, describes Collaborative Finance, and then at each meeting one member takes the whole sum. This is an interesting and innovative form of saving money. The RSG helps to provide people with the self-control needed to save, and helps to tie people in and commit them to saving. The following video, done by Fidelity Labs explores another possible operating method of social saving connecting it with investing:

18 Link: Saving through goal visualisation, social commitment and technology Yet another approach provided by Collaborative Finance is Piggymojo. This website offers the chance to use goal visualisation, social commitments and technology to increase saving. Piggymojo focuses on stopping impulse buying and helping low income earners to increase their saving. Rather than impulse buying they are encouraged to impulse save. It does this by increasing the link between spending avoidance and savings. In times that are economically challenging for many, encouraging saving through social saving is an important approach that can help people to improve their financial standing, and ultimately their choices and lives. Concepts being applied to social saving are relatively new but it will be interesting to see which direction these take, and if goal based saving and commitment through peer pressure really does help people to achieve their saving goals.

19 05 About IntelligentHQ.com ABOUT INTELLIGENTHQ.COM IntelligentHQ is a platform that provides digital business insights, growth, executive education and change through the social media innovation lens to business both startups and corporations. IntelligentHQ is a thought leadership platform for Businesses, professionals, senior managers and industry sector drivers. It offers CEOs, CMOs, CTOs, CIOs, COOs, Startups, small, big enterprises and experts across industries, Tech, Finance, Markets a 360 degree business intelligence platform with a digital and social lens focus. It presents 360 degrees Business Intelligence solutions and insights. IntelligentHQ is a a platform for authors. IntelligentHQ authors section is a fast growing place for thought leaders in different industry sectors and will be technological continuously updated to become a profile for thought leaders and showcase for their papers, articles and thinking. IntelligentHQ partners with Business Schools and Organisations worldwide identifying new ways, trends, and offering effective strategies, resources and a peer to peer unique digital and social media growing digital platform space. IntelligentHQ leverages innovation, scale of content, social digital technologies, analytics, news, data and its respective distribution and

20 syndication to create an unparalleled premium digital platform and social business network. IntelligentHQ, is made for and by innovative Thought Leaders, experts and visionaries, Companies and Startups across the globe in a vision of creating jointed value proposition. IntelligentHQ was founded by a group of experienced independent industry professionals and thought leaders within the business world, executive education, digital media, marketing, technology, finance, capital markets and financial services verticals. Follow and Interact with intelligenthq community linkedin.com/groups/intelligenthq facebook.com/intelligenthq pinterest.com/intelligenthq/ scoop.it/t/intelligenthq IntelligentHQ is open for contributions. Contact our editorial team if you want to write / contribute for IntelligentHQ through editor@intelligenthq.com. Send us your bio, social media profiles and topics you want to write and we will get back to you ASAP. IntelligentHQ is an 100% editorially independent project owned by Ztudium group.

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