“Alternative financing,” “marketplace lending,” “crowdfunding” -- these buzzwords are here to stay, so we think it’s time to define them. As these financial products have grown in popularity, the awareness of how vast this landscape stretches has remained flat. Here’s a breakdown of what these terms mean and the countless opportunities they provide.
What is alternative finance?
The alternative finance revolution came about because the banking industry tightened its lending practices after the Financial Crisis. Unfortunately, demand for loans during the post-crisis economic recovery exploded, and borrowers were forced to start looking for alternatives to traditional financing. Marketplace lending, crowdfunding, and alternative investing are just three examples of modern products and services that technology and innovation have now made available to customers for the first time.
Marketplace lending involves the use of online platforms to obtain loans from sources other than traditional banks. Marketplace lending directly connects potential borrowers with potential lenders online instead of the typical trip to the local bank to apply for a loan. There are marketplace lending platforms geared toward consumers (Prosper, Avant, Upstart) as well as platforms focused on small business (Kabbage, LendingClub, On Deck). In addition to marketplace lending, another new source of alternative finance is crowdfunding. Crowdfunding involves pooling the capital of a number of small investors to reach a fundraising goal. Borrowers can use crowdfunding sites such as Indiegogo, Kickstarter and EquityNet to fund anything from weddings to home improvements to small business ideas.
Alternative investing: Motifs, robo-advisors and more
Alternative finance is not all about lending. In recent years, a number of new non-traditional investment opportunities have sprung up as well. One of these new alternative investment strategies is motif investing. The popularity of ETFs has exploded in the past decade, and the company Motif Investing takes the idea of an ETF one step further. Like ETFs, “motifs” are collections of stocks that represent a common theme. However, unlike ETFs, Motif Investing customers can hand-select their own basket of up to 30 stocks for each motif. In that sense, motifs are like homemade ETFs. Robo-advisors are another modern alternative spin on traditional financial advisors. Platforms like Betterment and Wealthfront offer customers automated money management services, including the use of algorithm-based trading advice. Robo-advisors typically offer customers low-cost financial advice by eliminating the middle man and providing customers direct access to the same statistics that human financial advisors typically use to make investment decisions. With robo-advisors, modern investors no longer have to pay exorbitant fees for the “human touch.” Robo-advisors use the same underlying market principles that human financial advisors use.
Perhaps no innovation sums up the spirit of the alternative financing revolution more than neo-banks. Neo-banks are a new breed of banks that lack physical brick-and-mortar branches and instead offer mobile and technology-centric banking services to modern customers. Banking is done via mobile phones or local ATMs, and the savings that the neo-banks log by choosing not to operate branch locations can be passed on to the customer in the form of lower fees or invested in superior digital support and 24/7 customer service. Top neo-banks are all FDIC insured and include names like Moven, Simple and GoBank.
Doing better than the status quo
The terminology of alternative finance can be confusing at first, but the ideas behind it are elegantly simple. The simplest idea of all is the driving force behind all alternative finance ideas: doing better than the status quo. The Internet and mobile age has ushered in the first major challenge to the traditional big-bank model. With all the modern alternatives out there, why should bank customers be satisfied with the way things have always been done?
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