Microfinance, fractional ownership and crowdfunding

We’ve described service alignment, ecosystems and how these impact trust in previous articles.  In this article we explore the impact of technology on community financing, and in particular how technology can support disintermediation of financial services and serve to empower communities in taking back control of their financial arrangements.  This is an opportunity for developing economies, where many people are poorly served by the financial system and exploited as a result, but also in developed economies where there’s a real opportunity to rebalance the power of individuals and small businesses.

We believe an effect of this empowerment will be to encourage communities to make more sustainable choices about how their environments are managed; community ownership will allow longer-term and more community focused decisions to be made, while practical applications of fractional ownership and cryptocurrency rewards for sustainable energy production will reduce need for fossil fuels and costs.

Community based finance

Many years ago, communities were self-financing.  Local merchants lent to local producers, with whom they had a personal relationship.  The emergence of large banks has broken this relationship, with standardised lending products and credit risk management.  One of the results of this standardised approach is the exclusion of a large number of small and micro-businesses from access to financing, as they represent a higher risk than larger businesses, and may find it harder to prove their sustainability.  However, thanks to several platforms supporting peer to peer (P2P) lending and crowdfunding, there are now opportunities for small, individual investors to choose their investments based on personal criteria and to invest directly into their project of choice.

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Microbusinesses in developing economies such as smallholdings and small trading outlets  suffer from a number of challenges achieving scale and sustainability.  Many lack access to financial systems because they can’t prove credit history or lack formal identity or land ownership documentation, while small producers are often exploited by middle men artificially depressing prices.  Peer to peer lending now enables small loans or microfinance supporting individual businesses in developing economies, helping microbusinesses break through the credit barrier to achieve scale.  Today, most of these loans are asynchronous, with lenders typically coming from larger corporations or developed economy countries.

This type of peer to peer and crowdlending offers two further potential sources of capital for these microbusinesses, and by extrapolation to SME communities in developed economies: First, unlocking smaller savings into working capital, where these would typically have been held by a bank and used for market based wealth creation in the large bank model.  Given the current imbalance in economic power between the microbusiness and the lender, this model is likely to grow first, and we then anticipate there will be a second evolution in microfinance and crowdfunding as the economic impact of these growth opportunities starts to spread, where the businesses themselves reinvest in their own peer community.

Community based financing makes sense for a number of reasons – individuals are investing in businesses that they understand and in whom they have a personal stake as a customer or as a community member; the growth of businesses within a community is likely to lead to the creation of wealth in that community and the growth of other businesses; and of course there’s the personal connection.  However we also anticipate that peer-based community financing is likely to lead to communities focusing on longer-term outcomes for that community, rather than short-term profits.  This could include focusing further on local markets and sustainable production of crops, rather than short-term profit-driven crops for export, for example.

Provenance, fractional ownership and energy

Meanwhile, blockchain technology brings opportunities to demonstrate provenance and identity to microbusinesses and individuals, and to support alternative ownership paradigms.  We’ve covered the trust and identity opportunities and how these could support greater empowerment elsewhere, however proving provenance plays an important role in empowering smaller producers, both for proof of ownership or other usage rights, and for proof of supply.  The ownership of land in developing economies is routinely subject to corruption and seizure by powerful business or authorities, while similarly shared resources such as water can be exploited by big business or authorities at the expense of local producers.  As we noted above, smaller producers are also typically exploited by middle men setting low fixed prices, because individual producers don’t have access to supply chains at scale.

Blockchain based provenance can address both of these issues, removing the need for middle men and enabling communities to work collectively to prove ownership of resources or land, and to  manage supply chains.  Blockchain based usage and production records are immutable and incontestable, so producers can validate their ownership and access to resources, while setting a fair price for goods and working together with other small producers to sell collectively.  This has potential to rebalance supply chains significantly, reducing the opportunity for corruption and ensuring both that suppliers get a fair price, and that consumers have validation that their goods are genuine.

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Smart contracts over blockchain also give communities the opportunity to collectively own assets, which again rebalances the power between small and large businesses, enabling smaller and micro-businesses to exact greater control.  Fractional ownership is growing across communities and there are a number of fintech businesses already supporting this in developing economies.  This means that rather than paying a third party for use of, for example, a tractor, communities can collectively own equipment which would be beyond their individual budget, and return value to the community.  In addition to having a right to use the equipment, there’s also the opportunity for collectively owned assets to be leased to third parties in fallow periods.

This is exciting enough for small producers needing to use agricultural or engineering equipment, but when applied to renewable energy sources, the potential for communities to collectively own sources of power and to profit from their use, could have an even greater impact.  As well as providing the environment for longer term goals for sustainable agriculture, the sustainability of energy production makes more sense to communities than short-term for-profit activities.  There are a number of fintechs exploring how renewable energy sources can both be collectively owned over blockchain and return profits to the community, in the same was as other fractionally owned assets.

Applications in developed economies

Of course, microbusinesses in developing economies aren’t the only underserved communities struggling with unequal relationships to markets, suppliers and sources of finance.  If we apply the same principles to small business communities in developed economies, the benefits of peer to peer community finance are also obvious – the same principles of knowing your investor apply, while the opportunities for fractional ownership of assets and renewable energy sources are even greater.  Communities may be localised, or they may be geographically distributed but form a community based on common business activities or other interests; from a financing perspective this enables very broad communities to become involved in peer to peer funding, still confident in their shared knowledge and objectives, even in different geographies.

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Provenance and taking corruption out of the supply chain also present a potential to revolutionise trade in developed economies, with significant fraud and corruption still blighting the estimated USD 8 trillion of annual global trade finance and shipping.  Blockchain applications and particularly smart contracts bring enormous opportunities in these areas, addressing the very high cost of fraud in trade finance and the inefficiencies of typical supply chains.  Meanwhile, fractional ownership of renewable energy production can apply to geographically remote facilities, for example with an inland business having an interest in offshore wave energy production, but still benefiting both from reduced power cost and a return on sale of surplus energy.

Conclusion

We’ve explored some potential and existing applications of community financing and fintech to supporting communities in both developing and developed economies, rebalancing financial power and influence and reducing the opportunity for corruption and exploitation.  While these present financial benefits for communities, we are confident that the end result will be empowerment of communities to make sustainable choices for their own futures, encouraging long-term thinking including sustainable agriculture and energy production.

The technology supporting these opportunities is maturing, but already capable of providing communities with sustainable financial support.  We think that now is a good time to start.