Exploring the Determinants of Crowdfunding: The Influence of the Banking System

• Author: Elisabeth Paulet,Francesc Relano
• DOI: http://doi.org/10.1002/jsc.2119
• Published date: 01 March 2017
• Date: 01 March 2017

RESEARCH ARTICLE

Strategic Change 26: 175–191 (2017)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2119

Copyright © 2017 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2119

Exploring the Determinants of Crowdfunding:

The Inuence of the Banking System1

Elisabeth Paulet

Institut Commercial de Nancy‐CEREFIGE, France

Francesc Relano

Institut Commercial de Nancy‐CEREFIGE, France

The development of European crowdfunding is directly connected to the prevalent

structure of the banking system in the different member states.

Crowdfunding is a burgeoning industry. According to Massolution’s latest report

(Massolution’s, 2015), the worldwide volume of funds raised via this online alter-

native nance system experienced a 167% annual increase in 2014. Forecasts say

that this trend is not likely to lose momentum in the near future. So much so

that, in the most developed markets, like the USA and the UK, the core business

of crowdfunding is already moving into the logic of mainstream nance. Profes-

sional investors are increasingly participating in crowdfunding platforms and

corporate partnerships are not exceptional any more. e fact that Lending Club

is now listed on a stock exchange is clear evidence that the crowdfunding industry

is pushing established boundaries. Most importantly, crowdfunding still has plenty

of potential to further change the role of conventional nancial institutions.

e two main reasons driving this exponential growth of crowdfunding are

fairly well known. First, the shortage of capital due to the recent nancial crisis

of 2007–8, which resulted in serious liquidity constraints for small and medium

enterprises (SMEs). It is also to be noted that, in a context of low interest world-

wide, this scarcity of credit for entrepreneurial projects is accompanied, at the

other end, by a big number of savers eagerly seeking higher yields than those

oered in the traditional nancial system. Crowdfunding would then be the result

of supply and demand interplay in the wake of the crisis. Secondly, the momentum

gained by the crowdfunding industry would never have been possible without the

parallel development of Web 2.0 technologies, Internet access by a critical mass

of the population, and the recent boom in the sharing economy.

Obviously, the full range of factors shaping the contours of the crowdfunding

industry is much wider, going from cultural aspects to national legislation. Within

1 JEL classication codes: C38, G21, G23.

In the wake of the recent global

crisis, all indicators show that

small and medium enterprises

(SMEs) are having serious

difculties in nancing their

projects from traditional

intermediary institutions.

Crowdfunding appears as one of

the most promising alternative

sources of external nancing for

SMEs, but the importance of

distinct cultural and economic

traditions at a national level

results in strong cross‐country

heterogeneity of crowdfunding in

Europe.

The nature of the banking system

in a given nation helps us to

understand the prevailing business

model of its crowdfunding

industry.

176 Elisabeth Paulet and Francesc Relano

Copyright © 2017 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

this context, the present article examines in depth one of

these factors: the structure of the banking sector. In par-

ticular, we explore how the heterogeneity of banking

systems in Europe helps to explain the diversity of its

crowdfunding industry.

e remainder of the article is structured as follows.

e rst section discusses the diculties faced by SMEs

in accessing credit facilities within the traditional inter-

mediation system. e second section focuses on crowd-

funding as an alternative source of external nancing and

addresses the main methodological issues concerning the

present study. In the third section, the central question of

the relationship between banking systems and crowdfund-

ing is analyzed in the light of econometric data. efourth

section concludes by summarizing the main ndings and

suggesting directions of future research.

General background: Accounting

for the SMEs’ nancial gap

Banks are necessary nancial institutions to channel funds

from savers to rms. is is at least what basic intermedia-

tion theory explains, since the seminal contributions of

Akerlof (1970), Spence (1973), Benston and Smith

(1976), Leland and Pyle (1977), Diamond (1984), and

many others. Nevertheless, the macroeconomic context

may seriously disrupt this credit channel, as has been the

case during the subprime crisis (2007–9) and the sover-

eign debt distress that followed.

With the benet of hindsight, we now know that the

nancial turmoil which started in mid‐2007 with the

bursting of a housing bubble in the USA had severe con-

sequences in very dierent spheres of the economy. But

rst and foremost, it impacted the banking sector. e

initial liquidity diculties of some nancial institutions

soon became a more important issue of insolvency, as

illustrated by the bankruptcy of Lehman Brothers in

2008. Money market interest rates then rose sharply, and

there was a virtual freeze in interbank lending due to fears

that more banks would be allowed to fail. Eventually, only

the intervention of government‐led bailouts across the

world prevented the nancial system from imploding.

As regards nancial intermediation, banks responded

to the crisis by deleveraging their balance sheets and

restricting credit supply (Ivashina and Scharfstein, 2010;

Kwan, 2010). eir whole lending policy had to be

reviewed. So, facing a shortage of capital and greater risks,

banks raised their interest rate margins and tightened the

lending standards to unprecedented terms. In addition,

the crisis revived the debate about reforms in the nancial

system. Under the auspices of the Financial Stability

Board and the Basel Committee on Banking Supervision,

a new regulatory framework for banks (Basel III) was

drafted in September 2010. is new set of rules imposed,

among other measures, higher capital and liquidity

requirements on banks. As a result, banks were further

encouraged to concentrate their resources on the best‐

performing loans.

Unsurprisingly, the above‐mentioned circumstances

brought about a sharp contraction of credit facilities to

households and businesses. As regards the latter, the ratio

of bank credit to non‐nancial rms as a fraction of gross

domestic product decreased worldwide, with a downward

trend particularly prominent in countries like the USA

and the UK. e Eurozone was also concerned about a

prolonged decline of bank funding to European rms

(ECB, 2011). It is worth noting, however, that this situ-

ation may reect not just changes in the supply of credit.

e hypothesis of an eventual reduction in credit demand

given the weaker economic climate should also be consid-

ered. Additionally, it is worth highlighting that the declin-

ing contribution of bank loans in the total funding of

corporations is progressively being replaced by an increas-

ing level of other sources of nancing, such as issuance of

debt securities and quoted shares. e fact that this

replacement strategy is particularly noticeable since 2009

raises the question of whether using these instruments

reects a real preference of rms, or they were compelled

to do so as a reaction to more dicult and costly loans.

Generally speaking, one may also wonder to what extent