Just before Christmas we took a big step toward launching a new way for Kiwis to fund the things they care about. Applying for a peer-to-peer lending licence was the first public step we’ve taken toward offering a new product: PledgeMe.Debt.
To get this far it has taken months of research, picking brains, and blending ideas, now our application rests in the capable hands of the Financial Markets Authority. So while we wait for them to go over all the paperwork we wanted to give you a heads up about what this means because it’s not at all as scary as the name implies!
What is it?
PledgeMe.Debt will allow organisations (more on what that means below) to reach out to their crowds so they can fund bigger and better campaigns. An organisation’s crowd can lend it money and the organisation pays their crowd back with interest. It is a really simple way PledgeMe can further democratise what gets funded in New Zealand and offer an alternative to big ol’ banks.
It is going to work similarly to our existing project and equity platforms. Organisations will offer a campaign, their crowd will pledge, and if it is successful they’ll receive the money to go do the thing they said they were going to do. The difference with PledgeMe.Debt will be that the organisations will pay back the money they receive plus interest (and potentially other rewards).
The back story.
Debt crowdfunding is a growing space. Internationally it makes up two-thirds of the crowdfunding market — a market that’s doubling every nine months.
Modern debt crowdfunding started in the UK in 2005, with Zopa launching the first personal lending platform. After the Global Financial Crisis in 2008/9, debt crowdfunding platforms started popping up to provide fairer, more accessible and more transparent ways of funding. Moving into the twenty-teens, there has been further developments, the emergence of specialist platforms, IPOs for a handful of platforms, traditional institution buy-in, and government endorsement — particularly in the UK.
So this new way of lending is a growing space that is allowing a whole bunch of organisations to do amazing things.
Why we’re excited
We think we’ll be the first platform this side of the equator to run project, equity and debt crowdfunding campaigns on the same site!
We truly believe that crowdfunding is the future of making things happen; raising money, growing crowds, and making decisions that serve communities, big and small. Debt crowdfunding is a large unserved piece of the New Zealand crowdfunding pie and the time to sate the hunger is now.
Adding debt crowdfunding to our platform strengthens our ability to help Kiwis fund the things they care about. While equity is just for companies, debt allows a broader range of campaign creators raise larger amounts of money. It’s a more transparent way to raise money, compared to traditional avenues. Having this choice in crowdfunding options gives PledgeMe an edge when it comes to Kiwis seeking funding.
How is PledgeMe.Debt different from what’s happening already?
In 2014, debt crowdfunding began to trickle into New Zealand. Harmoney launched its peer-to-peer lending service which matches individual borrowers and lenders anonymously through their marketplace.
PledgeMe.Debt is going to do debt crowdfunding a little differently.
We’ll be offering a transparent campaign-led platform. Campaigners will be able to reach out directly to their crowds of friends, family, supporters, and customers.
This means growth companies, social enterprises, not-for-profits, schools, co-operatives and communities — organisations wanting to involve those around them to achieve their purpose — could be able to borrow from their crowds.
Unlike many peer-to-peer platforms, PledgeMe isn’t backed by a bank. This means borrowers will have a greater say over what, when and how they borrow and their crowds will be the decisive factor. This means the relationship campaigners will have with their lenders will be a lot different and, we believe, a lot more beneficial.
Who will be able to raise money?
Put simply, any organisation that can prove they will be able to repay the loan will be able to use PledgeMe.Debt.
One of the reasons we want to offer debt crowdfunding is that there is a demand for alternative funding sources. We’re seeing that in all sorts of organisations from companies to social enterprises, not-for-profits, schools, co-operatives and community projects. PledgeMe.Debt provides an attractive and realistic option for any of these groups.
Here’s the kind of scenarios that PledgeMe.Debt will work for.
Companies
Companies with a strong customer base and a few years of success in their back pockets, with intentions to grow their product/service. Using PledgeMe.Debt they will be able to serve new markets and achieve a new level of engagement. They may be looking to bridge a gap between equity raises, buy new equipment or bring in new expertise that will enable them to do more good. SMEs in New Zealand already borrow a significant amount from banks every year for these same reasons. For many it makes more sense to go out to friends, family, supporters, and customers for this money and activate a crowd rather than borrow from a bank!
Social enterprises
Social enterprises which are changing our world by activating communities and changing perceptions could really capitalise on PledgeMe.Debt. For many social enterprises, especially early stage ones, selling a large chunk of the company through an equity raise doesn’t fit with their values and borrowing from a bank seems like a misfit with their motives.
Charities / not-for-profits / NGOs
Charities, NFPs and other NGOs wishing to educate and serve more people, scream their cause from the rooftops and grow and strengthen their relationship with their funder base may be eligible to debt crowdfund. Currently options for raising money are very limited for these groups.
Schools
Schools which want to improve facilities, become more self-sufficient and help teach students about basic economics and business can use PledgeMe.Debt too.
Co-ops and communities
Co-ops and communities that have a plans to reinvigorate their area and build capacity are perfect candidates for PledgeMe.Debt. If their vision is for sustainable communities, eco-villages and sharing economies built on pooled resources, trust and interdependence crowdfunding will support and reinforce their efforts.
When will we be launching PledgeMe.Debt?
We’re waiting on approval of our licence from the FMA. Once this is (fingerscrossed) granted, we’ll be rolling out the tech side of things for testing. It’s being worked on currently, so we’ll be ready to hit the ground running.
We’re already looking for organisations and campaigners who will benefit from PledgeMe.Debt and hope to have our first campaigns up later this year.
If you think debt crowdfunding might work for you or if you’re curious about how it works, drop me an email. Looking forward to hearing from you.
International debt crowdfunding stories that have inspired us
What originally caught our eye were the Burrito Bonds of London Mexican food chain, Chilango. They raised £2m from 700 investors and garnished the bonds with extra burrito rewards. Still a bit peckish for growth, they followed it up last month with a £3.4m equity raise.
Gibbon, the simian name synonymous with slacklining, decided to shift away from bank borrowing to fulfil demand for their product Stateside by going out to their crowd of devoted followers.
Pod Point wants to make moving around less damaging for the earth. A social enterprise making electric vehicle chargers, they’re Open Charge Bond raised £385,000 to fund the roll out of their Open Charge network of public, electric vehicle chargepoints.
Not technically a crowdfunding campaign but rather an insight into the power of debt for not-for-profits, Autism Plus, a charity that supports adults and young people with autism, learning disabilities and mental health conditions, borrowed from Charity Bank to transform derelict barns into a chocolate factory and horticulture enterprise, run by people with autism and other disabilities.
A Seattle adventure and nature travel tour company borrowed US$25,000 through Community Sourced Capital to design and fit an adventure hub for travellers to come together to learn, chat, share and plan. What’s more is that they provide proof of the model, having repaid their loan fully over 18 months.
A Californian school district issued municipal bonds (loans to fund state organisations) through a Neighbor.ly campaign, using the money raised to renovate and upgrade thirteen schools.
Peer-to-peer lending – opportunities and challenges
Most banks are now highly centralized bureaucracies. That’s OK if your needs are shaped like their cookie cutter. If not, which is often the case for smaller, growing businesses and those who want to get acceptable returns on savings, the big banks can’t help you.
Fortunately, there are alternatives. Non-bank lenders are leveraging crowdfunding and loan platforms to supply credit in the niches banks ignore. Peer-to-peer lending (P2PL) connects people and businesses that need to borrow money with investors who have money to lend. Investors can spread their funds over numerous fractionalised loans, diversifying their risk and return.
Of the four currently registered P2P lenders in New Zealand, two are operational and is great news that PledgeMe.debt is soon to launch. Technically it could be argued that these are not lenders, but intermediary online platforms facilitating loans between borrowers and lenders.
P2P lending will interest the many Baby Boomers who are approaching retirement, especially those with inadequate savings. An extra yield can make up for some of time lost over the past 8 years or so as fixed interest rates have dramatically declined.
There are many underfunded public and private pension plans. Their managers should be all over this opportunity. They should have no problem giving up liquidity, and the extra yield will bring them closer to meeting their obligations.
Modest risk is not the same as no risk but risk-free investing pays you little or nothing. It doesn’t pay 5% or more. Peer-to-peer lending through these platforms can earn a substantially higher income than a corporate bond fund with similar maturity.
The difference is liquidity. One might escape the corporate bond fund or ETF any time the markets are open. You can’t do that with P2P. Giving up that liquidity earns you a higher return.
Banks are fully aware of this challenge. As Bill English said at the recent Technology Investment Network presentation, the four big banks in New Zealand constantly worry about companies they’ve never heard of doing things that they hadn’t thought of!
Some banks in the US and UK have begun to partner with private lenders. Such partnerships represent traditional banks’ attempts at remaining relevant. Regulators have made it harder for them to make money in commercial lending to large businesses and low-cost private-credit lenders are locking them out of smaller loans.
However, there may be initial challenges in uptake. Research reveals a high degree of financial apathy amongst the NZ population. IRD figures (May 2015) show 66 per cent of those originally defaulted into a KiwiSaver scheme have never changed provider. It’s been reported that zombie accounts are common where banks have dropped interest rates sometimes to zero without informing customers. Kiwis have millions of dollars tied up in these accounts and are often too apathetic to do anything about it. Only 10 % us changed our bank last year looking for a better deal and globally roughly a third of us have bought stocks and shares only to leave them to their own devices and not trade for better returns.
Gary,
Some really good comments. I worked for a finance company in the dark ages, with a very large retail deposit base. I think something like 95%+ of all deposits were rolled for the same terms almost regardless of interest rates. There was massive inertia in the consumer market in NZ, possibly less so now but still a major challenge.
The opportunity in the P2P lending space is that the market size is very large so even a small percentage of the market moving can create an opportunity, as shown by Harmoney to date – although it would be interesting to understand what % of their lending activity is P2P verses instiutional investment (i.e. funding coming from the banks).
I think PledgeMe is at least looking to differentiate its offering so will be interetsing to see how it all goes for them.
This Horizon poll
https://horizonpoll.co.nz/attachments/docs/horizon-research-peer-to-peer-lending-and-crow.pdf
is a little dated (April 2015) but it suggests 396,300 kiwis are likely to borrow in the next 24 months.
Amounts to be borrowed are primarily either under $15,000 or in the $100,000 to $499,999 range. Respondents who indicated they were definitely looking to borrow, regardless of the timeframe, were more likely than average to be looking to borrow in the $500,000 to $999,999 range and were looking to borrow, on average, twice as much as those who said they may borrow.
Amounts to be borrowed are primarily either under $15,000 or in the $100,000 to $499,999 range. Respondents who indicated they were definitely looking to borrow, regardless of the timeframe, were more likely than average to be looking to borrow in the $500,000 to $999,999 range and were looking to borrow, on average, twice as much as those who said they may borrow.
There is quite a bit of detail in the report but interestingly in March 2015:
• Harmoney had by far the highest awareness, with 44% of respondents aware of it. It was just ahead of Pledge Me for usage.
• Pledge Me was in second place for awareness, with 20% of respondents either aware of it or having used it.
• Snowball Effect was in third place, with 12% awareness.
• Lendit had 10% awareness, and the other two organisations had less than 10%.
Thanks for your insight Gary. You’ve hit many nails on their heads.
It’s true that banks aren’t suitable for everyone. Besides their typically bureaucratic structures, they are somewhat penned in by regulations that shift their attention away from small organisations towards higher return (personal credit cards & overdrafts) and lower risk lending (mortgages & large corporations). We see a gap that can be filled and in a way that’s fairer and more involving for everyone.
Investing decisions, like most choices made in life, are made by trading off risk with return. We’ll strongly be encouraging investors to absorb as much as they can from our no-nonsense material, as well as other helpful sources, so that they can make clear decisions on what’s best for them.
I believe that much of the financial apathy you’ve mentioned is down to two things: firstly, investors and savers becoming lost in jargon and unnecessarily complicated sytems when dealing with traditional institutions; and secondly, being uninspired by the bland nature of traditional investments. Just like PledgeMe.Equity, what Pledge.Debt will provide is investment with greater meaning. Being involved in Kiwi ingenuity and purposeful causes — to support the hard-working leaders who are making a real impact.
Bill is dead right. The lending landscape is changing.
Yes, new regulation, an outdated business model and old school communication have combined to make them unsuitable for many who seek meaning and purpose to their financial activities.
I saw this and thought it was interesting.
Prediction: Peer to Peer lending will grow-up
As the peer to peer landscape evolves, regulatory surveillance will increase, pressuring players to do their due diligence with respect to assessing borrowers. Solely using traditional metrics like credit rating scores and annual income to determine creditworthiness will become antiquated. Regulators will be convinced that information such as a borrower’s social media presence, educational background and financial behavior are viable ways to assess an individual.
Robo-advisory platforms are taking the fintech world by storm and very popular among millenials – is a Robo advisory function in the future for PledgeDebt?
See http://resources.narrativescience.com/h/ for more
Hey Gary,
We’ve come across some fascinating stuff in the “robo-advisory” space as we’ve been developing PledgeMe.Debt — particularly, as you mentioned, around assessing borrowers (a shining example is Lenddo.com, who’re doing some pretty cool stuff with social credit scoring). We’re watching closely to see how different ideas emerge and evolve.
On the other hand, we believe it’s important not to let automation completely replace the personability of PledgeMe. He tangata, he tangata, he tangata.
Very interesting and inspiring, would love to be kept informed of progress and find / learn more of how this could possibly assist us in our project which has been on the back burner for 5 years due to lack of funding for land and greenhouse.
We own a (commercial mini system with accessories) and increased the growbed capacity to 8, so basically ready to go, but no land or greenhouse. We searched many aspects including visiting many sites, however the cost was out of reach for our pockets and is now further away, but there maybe someone out there whom maybe interested to share this with us, and help us get this off the ground. The first 3-4yr period we feel is spent collating the required data for all vegetable varieties/family for New Zealand climate, than moving this same concept towards, Fruit Trees, and Flowers thereafter, plenty of scope but our main project is to collate the data and record all findings.
We would welcome the opportunity to share our ideas with those who could help us make this a reality.
Aquaponic’s is the way for future gardening, a sustainable eco method above ground without the chemicals involved, which sadly our lands are so consumed of!
Thank you for anyone out there who would like to help us, put this together financially, produce proceeds to be donated to community Foodbanks, including restaurants for testing purposes for value and quality.
Thank you
Hey there,
Would you like to give Barry an email (barry at pledgeme.co.nz)? He’s happy to chat more about this with you!
Cheers,
Anna
Dear Pera & Turoa
Your project sounds very interesting and a great fit for PledgeMe with its support for community foodbanks and sustainable eco methods “without the chemicals involved” . I think you could share more detail with the PledgeMe crowd 🙂
best wishes,
Gary