Finance / Dr Simon Ashby: Why alternative finance has history on its side

Dr Simon Ashby: Why alternative finance has history on its side

I have always been amused by the label “alternative” and the things it is applied to. Perhaps that is because for most of my life I have been attracted to anything that resides out of the mainstream: alternative music, alternative living (my wife and I try to be as self-sufficient in food as time allows), alternative energy and, of course, alternative finance. But it is also because the things that are considered alternative are rarely as oddball as they seem.

Simon Ashby1The term alternative is typically used to refer to anything considered outside the mainstream, but this is a moving feast: today’s alternative is tomorrow’s mainstream and vice versa. In fact, much of what we call alternative finance today is based on financial, economic and social principles that predate the modern financial institution.

Long before there were banks, finance companies and insurance firms, people found their own local solutions to the problems of lending, savings and investments and loss financing. We have evidence from the Bible that wealthy merchants were lending to those less fortunate than themselves in religious temples, something we really would consider alternative today, but it was arguably logical (if not entirely ethical) at the time, because it was a place most people visited. We also had the coffee houses in London, which formed the basis for modern insurance markets – again, a place where those in need of 18th century financial services frequented on a regular basis.

Then, over the last 200 years or so, we saw the rise of what we might call the traditional, or mainstream, financial institution – where people went to a specialist financial intermediary located in a dedicated building (odd that so many of these look like temples or similar monuments – even new ones like the European Central Bank) to fulfil their financial service needs. Now, over the last 20 years or so this has changed, first via telephone and postal distribution networks and more recently via the internet – opening the way for the growth of alternative finance.

Traditional financial institutions have typically been slow to exploit the full potential of new distribution channels. Their approach has primarily been to give us more flexible access to traditional financial services products, but they have not generally thought outside the box in terms of new product development. Plus, following events like the financial crisis and all the increased regulation that has followed, it is becoming more difficult for many households and businesses to access established financial institutions – especially bank lending. So they are now using these new distribution channels to find new sources of finance and investment.

In recent years a bewildering array of so-called alternative finance options have emerged, aided by the internet and social media to help connect those in need of finance with those who have money to invest. This includes the growth in peer-to-peer lending, crowdfunding initiatives and Dragons’ Den-style business angels. Such options are not necessarily more expensive than traditional bank products and can provide greater returns for investors at a lower cost for borrows – thanks partially to more efficient business models, sophisticated IT systems and lower levels of regulation.

So if you have money to invest, or are a business in need of finance take a look at the alternatives, although remember that they are not as alternative as they might seem. People have been investing and lending without the aid of financial institutions for far longer than they have been using them. The internet has simply increased the scope of our social networks. Will this mean the end of traditional financial institutions? Probably not, but perhaps we will consider them the alternative option sometime soon.

Dr Simon Ashby is Associate Professor of Financial Services at Plymouth Business School


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