Can Social Dynamics Be Channeled from Offline to Online Communities?: Commitment, Compliance, and Cooperation from Microfinance to Crowdfunding

Introduction

Three types of reasons have been suggested to explain the state of being unbanked: lack of basic and financial literacy; high level of transaction costs to provide, monitor, and support lending activities; and the poor’s inability to provide collateral to reduce risks related to information asymmetries (Armendàriz & Morduch, 2005). Considering the small size of the loans, conventional banks simply do not think it is worth the risk or the high cost of appraising the loan (Akula, 2010). In addition, the inability of the poor to provide financial collateral leads to their exclusion not only from most economic activities, but restrain their integration in social groups. The majority of unbanked populations are located in underdeveloped countries (Chaia et al., 2009).

Microfinance institutions platforms curate and organize the financial sourcing and inclusion by designing control mechanisms and reinforcing conformity rules. Microfinance provides credit to entrepreneurs and business owners who lack access to traditional banking services due to the absence of financial collateral. By strengthening social ties among individuals, microfinance institutions (MFIs) leverage social (groupal) collateral to replace conventional asset-based collaterals. For doing so, MFIs reinforce group conformity rules within social arena. The Grameen Bank in Bangladesh (Yunus, 2003) demonstrated how engaging social groups could deal with the unbanked problem. The key contribution of Muhammed Yunus was to overcome the asset-based collateral barrier by encouraging members to support each other for the financial risks associated with individual loans. Members’ commitment toward peers reduces the cost of carrying out economic transactions and oversight.

With the expansion of information technologies, individuals explored the possibilities of transmitting offline opportunities online. Crowdfunding, like microfinance, relies on the willingness and commitment of groups, rules of compliance among individuals to encourage cooperation within social networks and interest groups for addressing the investment needs of those who have limited access to financial collateral. Crowdfunding carries out via online platforms different forms of financing including credit, donation, equity, and reward. While, crowdfunders may be viewed as lenders and investors who provide financial backup to a wide array of borrowers, yet the question remains whether the rules of traditional group lending and social collateral can be applied to the online crowdfunders? Can the innovative principle of social lending, its managerial practices and organizational dynamics be transposed to the virtual world of Internet?

The transposition from offline to online is not evident because members in offline group know each other while those in online groups have no previous acquaintance (Boxenbaum & Battilana, 2005). It should be noted that conventional social groups and internet-based groups are formed differently. In the case of conventional offline groups, members generally share cultural codes, comply by common rules and behave with a greater degree of homogeneity and predictability. In the case of the internet-constituted groups and online communities, individuals come together from different social and economic horizons, engage in virtual interactions without knowing each other personally, but showing the desire to engage in mutually beneficial economic and social ventures.

In this perspective, we distinguish between “Ex-Ante” communities, who host individuals who are born and grown in the community, and “Ex-Post” communities that coalesce purposefully and operate on the Internet platform. We seek to shed further light on the importance of social ties and the pivotal role of networks in diffusing and translating the economic and social missions of the groups and crowds. Placed within the context of social networks that amplify social interactions, we investigate the collaborative and cooperative nature of group members and crowds who comply with the norms, rules and practices of microlending and crowdfunding. The organization and the functioning of communities is affected by networks’ configuration and members’ ability to comply with pre-designated goals and common objectives. Consequently, understanding the dynamism of social collateral is crucial not only as a solution to the problem of the unbanked, economically poor and marginalized populations, but also as a source of inspiration for the fast growing social and peer-to-peer lending activities on the Internet. We believe that group pressure and compliance in the case of offline conventional groups can be equally applied to online microlending and crowdfunding.