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.