Terminology
Essential definitions and concepts spanning four centuries of collective financing evolution, from historical mechanisms to contemporary digital platforms.
Tontine
Historical collective financing instrument where participants contribute capital to a shared pool and receive returns based on survival. As members die, their shares redistribute among survivors, combining investment with longevity risk-sharing. Named after Lorenzo de Tonti who introduced the system in 17th century France.
Cooperative
Member-owned organization that pools resources for mutual benefit, operating according to democratic principles where each member typically has one vote regardless of capital contribution. Cooperatives apply collective ownership to various sectors including finance, agriculture, housing, and consumer goods.
Credit Union
Financial cooperative owned by members who share common bonds such as employment, geographic location, or association membership. Credit unions accept deposits and provide loans to members, operating on cooperative principles rather than profit maximization for external shareholders.
Microfinance
Provision of small loans and financial services to individuals or groups traditionally excluded from conventional banking, often in developing economies. Microfinance institutions frequently utilize group lending models where borrowers guarantee each other's loans through social collateral rather than physical assets.
Crowdfunding
Practice of funding projects or ventures by raising contributions from many individuals, typically via internet platforms. Crowdfunding encompasses various models including donation-based, reward-based, equity, and lending approaches, each with distinct characteristics regarding contributor expectations and regulatory treatment.
Peer-to-Peer Lending
Direct lending between individuals through online platforms that match lenders with borrowers, bypassing traditional financial institutions. Platforms typically handle credit assessment, loan servicing, and payment processing while enabling individuals to fund loans or portions thereof based on risk preferences.
Equity Crowdfunding
Fundraising model where companies offer securities to investors through online platforms, enabling retail participation in early-stage investments. Equity crowdfunding operates under securities regulations, with frameworks varying significantly across jurisdictions regarding investor limits, disclosure requirements, and platform obligations.
Reward-Based Crowdfunding
Crowdfunding model where contributors receive non-financial rewards such as products, experiences, or recognition rather than monetary returns. This approach proves particularly effective for creative projects and product development, allowing entrepreneurs to validate market demand before full-scale production.
Social Collateral
Non-physical guarantee mechanism used in group lending where borrowers' social relationships and peer pressure substitute for traditional collateral. Members of lending groups guarantee each other's loans, creating accountability through community ties rather than asset pledges.
Rochdale Principles
Foundational cooperative governance framework established by the Rochdale Society of Equitable Pioneers in 1844. Principles include voluntary open membership, democratic member control, member economic participation, autonomy, education, cooperation among cooperatives, and concern for community.
Crowdlending
Alternative term for peer-to-peer lending emphasizing the collective nature of funding where multiple lenders contribute portions of loans. Crowdlending platforms enable diversification by allowing lenders to spread capital across many borrowers, distributing default risk across portfolios.
Platform Risk
Risk that a crowdfunding or peer-to-peer lending platform ceases operations, experiences technical failures, or fails to properly manage loans and payments. Platform risk differs from credit risk of underlying borrowers and represents operational and business continuity concerns specific to intermediary platforms.
Secondary Market
Marketplace where peer-to-peer lending participants can sell loan portions to other investors before maturity, providing liquidity that would otherwise require waiting for loan repayment. Secondary markets improve flexibility but introduce pricing complexity and may not guarantee immediate sales.
Accredited Investor
Individual or entity meeting specific income or net worth thresholds, permitted to participate in certain investment opportunities restricted from general retail investors. Equity crowdfunding regulations often distinguish between accredited and non-accredited investors regarding investment limits and access to opportunities.
JOBS Act
United States legislation passed in 2012 creating regulatory pathways for equity crowdfunding and relaxing certain securities restrictions. The Jumpstart Our Business Startups Act established frameworks allowing companies to raise capital from retail investors through registered online platforms under specific conditions.
Loan Origination
Process of creating new loans including borrower application, credit assessment, loan approval, and fund disbursement. In peer-to-peer lending, platforms handle origination while funding comes from individual or institutional lenders rather than the platform's own capital.
Default Rate
Percentage of loans where borrowers fail to meet repayment obligations, representing realized credit risk. Default rates vary significantly across borrower risk categories, with platforms typically providing historical default statistics to help lenders assess expected returns and risks.
Donation-Based Crowdfunding
Crowdfunding model where contributors provide funds without expecting financial or material returns, typically for charitable causes or social projects. This approach functions similarly to traditional fundraising but leverages internet platforms to reach broader donor bases and reduce transaction costs.
Grameen Model
Microfinance approach developed by Muhammad Yunus and Grameen Bank emphasizing group lending to women in rural communities, weekly repayment schedules, and progressive loan sizes based on successful repayment history. The model demonstrated that poor borrowers could achieve high repayment rates through appropriate structures.
Mutual Benefit Society
Historical organization where members pool contributions to provide mutual insurance, emergency assistance, and social benefits. These societies preceded modern insurance and social welfare systems, operating on principles of reciprocity and collective risk-sharing among members with common interests or backgrounds.
Regulatory Sandbox
Framework allowing fintech companies including crowdfunding platforms to test innovative products with real customers under regulatory supervision but with certain requirements relaxed. Sandboxes enable regulators to observe new models before establishing permanent rules while protecting consumers through oversight.
Provision Fund
Reserve maintained by some peer-to-peer lending platforms to cover borrower defaults, providing lenders with additional protection beyond diversification. Provision funds function similarly to insurance but differ in structure, funding sources, and legal status across platforms and jurisdictions.