Democratising finance: Exclusive interview with P2P expert Dr Mark Davis
P2P regulation veteran Dr Mark Davis talks to Marc Shoffman about how finance is facing a crisis point
Dr Mark Davis may not be the best-known name in peer-to-peer lending but he is perhaps one of the most influential.
He has played a role in defining regulation of the sector since its early days and helped construct community municipal investments that have raised millions of pounds for local authority renewable projects through the Abundance crowd bonds platform.
Dr Davis, an economic sociologist at the University of Leeds, has now teamed up with Abundance’s Bruce Davis – no relation – to write a book highlighting P2P lending’s role in democratising finance.
He discusses how the P2P lending sector has changed and the importance of the new book, Crowdfunding and the Democratization of Finance.
Marc Shoffman (MS): How did you get involved with P2P lending?
Dr Mark Davis (MD): I have long been interested in challenging the idea that there is no alternative to the mainstream financial system.
I was interested initially in ethical consumerism, people making conscious decisions on where their products were coming from.
I realised there was a gap in thinking on how people were buying things.
They were proud of their bamboo toothbrushes but may still be using mainstream financial products that drive poor outcomes.
In around 2015 I went hunting for alternatives and got involved in researching the UK’s alternative finance sector.
I interviewed platforms for research funded by Friends Provident Foundation on barriers to growing the sector.
This report led to a project with the Cambridge Centre of Alternative Finance commissioned by the Financial Conduct Authority (FCA), exploring if there were sufficient market protections in place for crowdfunding and P2P investors.
It led to rule changes on regulation marketing and investor protections.
MS: How has the P2P industry changed?
MD: It has become more ambitious, which is good.
The most impressive thing to me to date has been its ability to remain true to its core mission of providing alternative finance.
In 2015 there was a nervousness that there was a growing entanglement with mainstream finance and a thinking that platforms would need venture capital investment.
A lot of platforms have remained protected from that mission.
There has been a growing public appetite for ways of moving money more transparently in support of ventures that align money and morality better.
People have become very focused on the outcomes of what their money is doing and are less willing to leave it sat in high street savings and investments.
Crowdfunding and P2P lending have narrowed that gap between investor and outcome.
MS: Is there still space in P2P lending for retail investors?
MD: The work I did for the FCA looked very much at the retail end of the market.
We spoke to sophisticated investors in the research and the purpose of improving investor protections was so the retail side could grow.
From the data we have gathered in various projects, there is a clear trajectory for investors to only start by investing a certain percentage of their whole portfolio.
They may experiment with different platforms to see what works best and will then gradually grow their investment.
I don’t think the retail side is being shut out.
MS: Is institutional investment a good thing?
MD: The biggest appeal of crowdfunding and P2P lending is that it is outside of the mainstream.
Since 2008, people have been distrustful of banks, there is a reluctance to pass on any decent rate of return through mainstream products. That is clearly a sign of how banks view customers.
There is still a risk of growing entanglement of mainstream and alternative finance. Separation is important to maintain the integrity of the sector, but platforms are in the position where they need to get money from somewhere.
Platforms need to be wary of mission drift and the extent that it compromises their business model and offering to the public.
There is potential that by becoming more integrated with the mainstream, that may change some power structures but won’t offer a credible alternative to the overall financial system.
If we are looking at democratising finance, we need more alternatives that give people greater agency of making decisions.
MS: Why did you write the book?
MD: Bruce and I met in 2009 and the book is the outcome of our conversations since then.
We have each been involved in the sector for a long time and felt as if we were using the same scripts with lots of different people all the time.
We thought it would be useful to combine my research with Bruce’s professional experience into a narrative that situates crowdfunding and P2P in this long tradition between finance and democracy.
The work points out the urgency of reconnecting finance with a sense of purpose, rather than becoming a bit too obsessed with the technical.
P2P lending helps remember what finance is for, if not for people and planet then what is the point of all this innovation?
We see finance as facing a crisis point, a decision needs to be made over finance and its social licence.
One version is going down the crypto route and taking the human decision-making away.
This is versus a crowdfunding and P2P model that is arguably more inclusive and democratic.
You are empowering the public to take decisions on their money.
It is a more transparent way of moving money.
MS: Are you anti crypto?
MD: I am sceptical of crypto’s claims of being a democratic way of using money.
Relying on algorithms and smart contracts removes the human element rather than closing the gap between people and money.
I am less convinced that it is a democratic alternative when you have a more mature P2P lending sector.
There is a crisis in terms of the legitimacy of finance and we face a decision in terms of the growing power of crypto.
I know people with Bitcoin and non-fungible tokens but they know less about P2P despite it being more mature.
I don’t think crypto is going away.
What seems to have happened is an attempt by mainstream institutions to assimilate it within their business models and practices.
It is a view of finance that sees it as separate from and above the body politic – that we need to take human beings out of finance altogether.
Crowdfunding and P2P is a more viable alternative that seeks to trust people to engage with money in a more meaningful way that has already begun with more forms of ethical and sustainable consumption.
MS: What is the future of P2P regulation?
MD: I am very keen that the sector carries the appropriate risk warnings for investors so they know their capital is at risk.
Marketing messages should be clear, particularly around withdrawals.
I would caution the regulator against being hypersensitive to P2P lending though.
It needs to speak to and learn from those engaged in the sector from the platform and investor side so they regulate it appropriately and don’t lump it into a large blob that looks like things that aren’t usually regulated so must be bad.
You lose a lot of benefits when that happens.
A lot of people who invest in P2P are incredibly savvy and want to be trusted.
I think the regulator should listen to the data and hear from investors rather than taking a position that they already know what they want to do.