Emerging trends in alternative finance in Europe and the role of the PSP

Alternative finance, which offers innovative financing solutions to businesses and individuals alike, has grown significantly in Europe in recent years. Since the 2008 financial crisis, this sector has continued to develop, transforming traditional practices thanks to the increasing integration of new technologies. Between 2021 and 2022, the European crowdfunding market is expected to grow by 17% (Source: European Crowdfunding Market Report 2023), confirming the growth of these alternative financing models.

Among the major trends, crowdfunding, crowdlending and financing via investment funds are essential pillars. In this rapidly changing landscape, payment service providers (PSPs) are strategically securing and facilitating financial transactions. We take a closer look at the main trends in alternative finance.

Alternative finance: what to expect?

Alternative finance encompasses financing solutions outside traditional banking institutions. These tools give companies and individuals access to more flexible financing while offering investors diversified portfolio management options. Constant innovation in this sector creates new investment and financing opportunities, particularly digitalisation and financial disintermediation.

Alternative investment funds 

Alternative investment funds (AIFs) are different from traditional equity platforms. They target specific companies, usually start-ups, SMEs or mid-caps, and invest in non-traditional assets such as real estate, commodities or infrastructure. These funds, subject to the European Alternative Investment Fund Managers Directive (AIFMD), offer investors diversified investment opportunities outside the traditional financial markets.

Leverage buyouts (LBOs), which involve buying companies through a combination of equity and debt, are an example of the strategies used by these funds. Although LBOs are standard practice in mergers and acquisitions, they are also essential for entrepreneurial financing in the context of alternative finance. In addition, the emergence of impact funds investing in companies with a social or environmental vocation shows a growing trend towards more responsible finance.

Crowdfunding: an ever-expanding ecosystem

Crowdfunding is emerging as a key financing method in Europe, offering project owners the opportunity to raise funds directly from a community of investors via online platforms. This innovative model comes in three primary forms dominating the European market: crowdequity, crowdlending and donation-based crowdfunding.

Crowdequity

Equity crowdfunding allows investors to acquire a share of a company's capital in exchange for their financial contribution. 

This model is particularly attractive for start-ups and SMEs wishing to raise funds without going through traditional channels such as banks or institutional investors. By using this method, companies can obtain funding more quickly and create a committed community around their project.

For investors, it allows them to participate in the entrepreneurial adventure from the outset, hoping to make significant gains if the company grows and prospers. It also allows them to diversify their portfolio by investing in innovative projects that match their personal convictions or sectoral interests. 

Crowdfunding platforms are crucial in facilitating this interaction between entrepreneurs and investors. They ensure transaction security and regulatory compliance through payment service providers. By relying on partners like Lemonway, platforms can offer their users a seamless experience while guaranteeing the protection of funds and compliance with legal obligations. This strengthens investor confidence and contributes to the sustainable development of the crowdfunding sector.

Crowdlending

Crowdlending, or participatory lending, is another form of financing also growing in popularity. It allows individuals to lend directly to businesses or other individuals via online platforms. In return, lenders receive interest on the amount lent, making this financing alternative to traditional bank loans.

It's ideal for SMEs with difficulty obtaining bank financing, often because of their size or lack of collateral. However, the main advantage of crowdlending is that it cuts out the middleman. By avoiding banks, costs are generally reduced, which means that more competitive interest rates can be offered. 

Crowdfunding through donations

Donation-based participatory financing offers a different approach, centred on solidarity and community involvement. Platforms dedicated to this model allow donors to support projects, charitable causes or individuals without expecting a return on their investment. The funds raised can be used for various initiatives, from artistic projects to humanitarian actions and solidarity campaigns. 

The rise of participative real estate financing

Property crowdfunding is emerging as one of Europe's most dynamic branches of alternative finance. This model allows individuals to invest in property projects via specialised platforms, even with small investment amounts. Property, historically the preserve of investors with substantial capital, is becoming more accessible thanks to this new form of financing.

Returns are often attractive, and although this type of investment involves risks, the relative safety of the property sector makes it popular with investors looking to diversify their portfolios.

Sustainable financing initiatives 

Green bonds and sustainable finance initiatives are increasingly important in today's financial landscape. Green bonds are financial instruments issued to finance projects with a positive environmental impact, such as renewable energy, energy efficiency or sustainable resource management. These financial products are attracting a growing number of investors who are concerned about their investments' impact on the planet.

Sustainable finance initiatives encompass various practices to integrate environmental, social and governance (ESG) considerations into investment decisions. Crowdfunding is also part of this dynamic, making it possible to finance sustainable and ethical projects through collective participation. Crowdfunding platforms specialising in positive-impact projects are multiplying, allowing investors to support initiatives that align with their values while hoping for a financial return.

The impact of European regulations on alternative finance

The development of crowdfunding and crowdlending in Europe has been primarily encouraged by European regulations that harmonise practices and make transactions more secure. 

The PSD2 (Payment Services Directive 2) strengthens the security of online transactions, in particular by requiring strong customer authentication (SCA), thus guaranteeing better protection against fraud. The directive has also encouraged the growth of payment service providers (PSPs) such as Lemonway, which play a central role in managing financial flows for alternative finance platforms.

The ECSP (European Crowdfunding Service Provider) status, which comes into force in 2021, provides a harmonised regulatory framework for crowdfunding platforms across Europe. It aims to enhance transparency and security for investors while enabling platforms to fund projects in several European countries with unified rules. 

The regulation of European Long-Term Investment Funds (ELTIFs) also contributes to the development of alternative finance. ELTIFs channel investments into long-term projects, such as infrastructure, real estate or unlisted SMEs. This regulatory framework gives institutional and retail investors access to assets previously reserved for large investors while supporting sustainable economic growth in Europe.

The rise of innovative technologies

Blockchain and smart contracts

Blockchain technology has revolutionised the alternative finance sector by making transactions more secure and transparent.

Monitoring and validating transactions in real-time, decentralised and without an intermediary is now possible. In alternative finance, blockchain simplifies the complex processes involved in managing loans and investments while reducing transaction costs.

Smart contracts are self-executing programs based on the blockchain. These contracts ensure that transactions, such as the transfer of funds or the payment of interest, are carried out automatically when certain conditions are met. In alternative finance, they can be used to automate processes such as the repayment of loans in crowdlending or the distribution of dividends in crowdequity.

Security tokens and secondary markets

With the rise of security tokens and secondary markets in Europe, alternative finance is gaining depth and diversity. Security tokens enable financial assets (securities, debt) to be digitised for transparent and secure transactions on the blockchain. This model promotes liquidity via secondary markets, where investors can exchange digital securities, enabling early exits - a key factor in attracting retail investors.

The role of payment service providers (PSPs)

The sector is evolving rapidly, and legislators, for example, are continually working to adapt the regulatory framework to meet these challenges. PSPs also play a central role in alternative finance, managing financial transactions while ensuring regulatory compliance.

Securing transactions

Therefore, one of the main challenges of alternative finance is ensuring the security of transactions between investors and project promoters. PSPs, such as Lemonway, use secure payment systems that comply with European regulations (PSD2 for instance), guaranteeing secure money transfers.

In addition, Lemonway offers Know Your Customer (KYC) and Anti-Money Laundering (AML) solutions, which are essential for securing transactions on crowdfunding platforms. Automating these processes using AI reduces verification times and improves the user experience.

Regulatory compliance management

PSPs also ensure compliance with the regulations in force, particularly regarding fund management and transaction traceability.

Thanks to their approval by the ACPR (Autorité de contrôle prudential et de résolution), PSPs like Lemonway enable alternative finance platforms to comply with PSD2 requirements without developing their payment infrastructures.

Automating commissions for investment funds

Investment funds face high management costs due to the commissions paid to numerous intermediaries, such as asset managers and brokers. Lemonway, by offering solutions for automating commission splitting via digital payment systems, enables investment funds to reduce these costs significantly.

Simplifying cross-border payments

Another significant advantage of PSPs is the simplification of cross-border payments, a crucial aspect for platforms operating on a European scale.

Lemonway offers a multi-currency payment solution, facilitating transactions between investors and companies in different countries. This enables alternative finance platforms to open up to new markets without worrying about the barriers associated with international payments.

Alternative finance in Europe is booming and driven by innovative technologies and evolving regulations. As alternative finance grows, PSP support will be essential to secure transactions, encourage innovation and enable the sector to expand globally.

Lemonway, European leader in payment solutions for marketplaces and alternative finance platforms, supports over 400 marketplaces, including 200 alternative finance platforms, such as Estateguru, Funding Circle, Wiseed, Enerfip, Blast, Bricks, Lendosphere, Mpourtoujours and Profitus.

Contact us to learn how Lemonway can help you manage your payments on your alternative finance platform.