

The signification of crowdlending is growing rapidly
The crowdlending volume brokered in Switzerland grew by a whopping 35% to CHF 607 million last year. The forecast for this year: Further growth of 30 to 40 percent. In this article, we briefly show the success story of crowdlending in Switzerland.
The Crowd-Thought
The idea of the crowd is to make use of the skills of a large number of individuals. These are usually much more far-reaching than the abilities of an individual or fewer individuals. The term was coined by the American journalist Jeff Howe. In 2006, this illustrated four different ways of involving a swarm in different processes.
- Crowdwisdom: (swarm intelligence) uses the intelligence of a community. In this area, the crowd is asked to activate and reflect on their knowledge.
- Crowdcreation: aims to use the creative potential of a crowd. The ideas collected from the masses are used, for example, in the form of texts, audio files or graphics.
- Crowdvoting: the opinion and judgment of the crowd are used. The aim is to evaluate ideas or content. The opinions structured in this way then form the basis for decision-making for the crowd. Crowdvoting can thus be used as a forecasting tool, for example.
- Crowdfunding: The use of the internet and the crowd is also central to crowdfunding. In contrast to the categories mentioned above, however, the focus is not on the knowledge or creative potential of the crowd, but on raising capital for projects. The fundraising phase is called a campaign*
*out of Dietrich, A. Amrein, S. in Crowdfunding Monitor Schweiz 2022
We deal with crowdfunding. Again, this can be subdivided. The distinction is made based on the type of consideration for the capital provided.
Figure 1. Subcategories in Crowdfunding.
Figure 1 shows that there are several other types of crowdfunding besides crowdlending. Within crowdlending there is in turn a subdivision into consumer loans (consumer), SME loans (business) and mortgage loans (real estate). In terms of volume, crowdlending is the largest sub-area of crowdfunding. The first crowdfunding platform in Switzerland was also a crowdlending platform and was founded in 2008. Since then the market has grown steadily. Especially in the years 2014 to 2017, when 30 new crowdlending companies entered the market. Among other things, Crowd4Cash. Various companies have left the market since 2015. However, the remaining players were able to broker more volume from year to year. So does Crowd4Cash. In 2021 we were able to finance around twice as many projects as in 2020. This growth is proof that crowdlending offers advantages over traditional credit institutions and that the offer covers an open need on the part of both borrowers and investors. Until a few years ago, crowdlending was a completely unknown concept to most people, but this business model has received a lot more attention in recent months. Investors are looking for safe investments that still yield returns, while borrowers are looking for lower interest rates.
Figure 2. Entries and exits in Crowdlending
Figure 3. Volume from the different subcategories.
Still a lot of potential
The higher level of awareness has a corresponding effect on growth. The growth figures in Figure 3 may seem impressive, but crowdlending in the consumer credit sector is still rather insignificant compared to the total amount of consumer credit granted. One possible reason for this is that the investors on the crowdlending platforms, who are still largely small private investors, prefer short durations, whereas many consumer loans are granted with durations of 48 to 120 months and more. Crowdlending platforms therefore sometimes broker these long-term loans directly to banks because the demand for these loans on their own platform is too low. This is probably still due to the risk appetite of investors, as the risk increases in the context of longer maturities. Accordingly, the field of long-term loans is largely left to the classic banks, which, thanks to the matching durations and the interest differential business, find a better starting position here. However, the percentage that is financed via platforms is also increasing here. Because more and more private as well as institutional investors and funds are discovering crowdlending for themselves and thus increasing the financing power of the various platforms year after year. Institutional investors can achieve an extremely high level of diversification, so that the failure of a single loan project can be more than compensated for by the high interest rates of the other projects. The increasing number and volume of loan projects on offer make crowdlending platforms more and more attractive for institutional investors who want to achieve the greatest possible diversification.
Figure 4. Share of crowdlending in the total consumer credit market.
Do crowdlending platforms manage to provide SMEs with the loans they need?
An interesting segment for platform providers are SME loans. In some conversations one hears again and again that SMEs would not get any loans from the banks. Many SMEs that need financing do not even try to apply for a loan, even if statistically only 3% of all SME loan applications are rejected. Every tenth SME in Switzerland can be counted among the “discouraged” group. The discouragement often arises from lengthy and complicated loan application processes at traditional banks. The group of discouraged SMEs offers great potential for the crowdlending community. Although their lending guidelines are no less restrictive, they are less complicated, simpler and cheaper than traditional banks thanks to the high level of digitization. In addition, modern FinTech companies are now strongly networked and in many cases are able to bring together the right lenders and borrowers.
Development of the crowdlending market
Although awareness of crowdfunding and crowdlending is slowly but surely increasing, the relative shares of crowdlending in the overall credit market are still small, as already mentioned. Crowdlending plays a niche role in both SME and consumer lending. Will the market outgrow this niche? The investment criteria of institutional investors provide an indication of this. So far it has been difficult for them to justify large investments in a relatively small market. The crowdlending market in Switzerland has grown steadily in recent years. If this growth continues, the threshold will be reached in the foreseeable future at which investments in crowdlending will be part of the allocation for many institutional investors. As soon as this point is reached, with an estimated annual volume of CHF 1 to 2 billion, a strong acceleration in growth can be expected. This will enable crowdlending providers to broker larger amounts with longer durations. And thus they will be able to better manage precisely that segment which is still largely used by the banks today. The platform providers are becoming a serious alternative to the current big players on the credit market due to their greater awareness and the advantages that cannot be neglected compared to classic bank loans.
Impact on the development of Crowd4Cash
The crowdlending platform Crowd4Cash, which brokers both SME and consumer loans, is already feeling the increasing financing power today. As the sourcing partner of a fund created for institutional investors, we will be able to finance subordinated mortgages for private individuals and SMEs of up to CHF 1 million in the future. With this extended offering, Crowd4Cash can address an even larger customer segment. In the field of PoS-loans (consumer credits that are agreed directly with the retailer for payment in installments), Crowd4Cash-Easy will be offering a 0% financing solution this year. The customer only pays the price in equal installments without having to accept any additional interest or commissions. Private investors or institutional investors are compensated by the specialist dealers with a pre-financing fee. Crowd4Cash expects a further increase in the loan volume brokered by the platform. This also generally increases the supply of loan projects. It is important for Crowd4Cash to continue to be able to offer attractive projects for private and institutional investors. So there will be many interesting projects in store for our investors in the future. A challenge for Crowd4Cash is to find the balance between the growth of investors and borrowers. Because the following applies: without investors, no loans and vice versa. It is also important for us to remain attractive to investors even in times of increased inflation. It is therefore possible that interest rates will also increase for our loan projects. Parallel to the entire credit market. However, these are very long-term forecasts, which require a long-term increase in interest rates. However, investors are already finding attractive risk-return profiles at Crowd4Cash. You can find our current projects here.
Sources:
Dietrich, A. Amrein, S. in Crowdfunding Monitor Schweiz 2022
Figures:
Dietrich, A. Amrein, S. in Crowdfunding Monitor Schweiz 2022