Although various forms of alternative finance have long existed, the combination of weaker financial institutions following the financial crisis, disruptive disintermediation-enabling technology and underlying socio-economic as well as cultural shifts, is challenging the paradigm of how finance will be provisioned in the future.
Several economies and industries, particularly in the US, Europe and emerging markets, are already witnessing the emergence of alternative financing channels and instruments, outside of the traditional regulated bank and capital markets financial system. Our research indicates that the online UK alternative finance industry in 2015 was worth £3.2 billion. This is the beginning of a broad and long-term structural change – other studies suggest that direct European corporate lending, as a strand of the shadow banking industry, is worth over $50 billion, whereas the alternative (virtual) currency market globally is worth $60 billion.
The way in which the digitisation of the finance industry is transforming access to finance for individuals, start-ups, SMEs or social enterprises – for example through online platforms for crowdfunding, marketplace (peer-to-peer) lending, and third-party payment systems – has already gained prominence and attention. This digitisation is lowering barriers to entry, with the result that corporations and institutions whose activities have not traditionally encompassed finance provision, are being drawn into the arena – for example, social media companies which possess huge volumes of data as well as the expertise to analyse it.
However, the grassroots origin of some alternative financing models has meant that the structures and activities have emerged without an accompanying research framework. Our knowledge of what various forms of alternative finance are, or how they are functioning, substituting or complementing existing financial intermediaries, is sparse. There is a growing need, and a call from academics, policymakers, regulators and industry alike, to underpin these shifts with fundamental knowledge.
For example, why do funders invest, lend or donate through alternative finance channels? How do these channels compare with traditional ones? Is alternative finance expanding the existing pool of capital/credits or merely rechannelling it? Are alternative finance developments therefore a threat or an opportunity for incumbent financial institutions? What is the socio-economic impact of alternative finance in terms of job creation, revenue generation and community engagement at local, regional and national levels? How will public policy and regulations affect the trajectories of alternative finance? Will the acquisition of more behavioural data about individuals introduce new security and privacy issues?
Many of these questions are broad and extend beyond the economic sector and financial innovation to encompass socio-technological and cultural-political aspects. They have implications for regional economic development, asset pricing, innovation, and corporate finance, but also for trust, reputation, and consumer behaviour. Therefore, the study of alternative finance lends itself to a multi-disciplinary research approach.
To study this global shift in how finance is provisioned, which we believe is structural rather than transient, the Cambridge Centre for Alternative Finance has been established to conduct cutting-edge, interdisciplinary, rigorous and critical research on all aspects of alternative finance. It aims to have high impact not only on academic thought leadership, but also on policy decision-making and business practice globally.