Paradigm Change in Financing Sources: Transition From Traditional Finance to Platform-Based Finance to Ensure Financial Sustainability

Introduction

The effectiveness of the financial system is measured by increased productive investment, which increases economic growth and improves sustainable living standards. Fundamental elements of the financial system are providers of funds, users of funds, financial markets (intermediaries and instruments) and regulatory-supervisory institutions. In this sense, in order to interpret the effectiveness of the financial system, a broad and social perspective that affects all these factors together can be useful. In this chapter, the major changes that have occurred in the structure and functioning of financial markets and the provision of financial services in the last 100 years are examined, because the changes in the social relations system are a reflection of the changes in the financial system (Kurt-Cihangir, 2019). The main contribution of the study is to reveal how the financing sources and financing composition used by a firm at various stages of its life cycle changes and develops. Therefore, the study provides a bird's-eye view of the last 100 years of the international financial system. It is expected that the determination of the paradigm shifts in the financial system and their consequences will contribute to both those who are interested in the subject and policymakers in their evaluations.

Until the 1970s, value-creating fields such as industry, agriculture, and mining were largely financed by loans, and the productivity of labor had to increase in order to repay these loans. With the collapse of the Bretton Woods System in 1971, the excess money created was loaned to developing countries and/or used to buy assets instead of directing it to production. The value of these assets has been determined according to the income stream or scarcity situation it will provide in the future. On the one hand, excess money commodities real estate, land, etc. when transferring to assets; on the other hand, futures markets are created to manage/distribute emerging systematic risks (Harvey, 2015). Liberalizing interest rates of countries and the flow of international capital as part of financial liberalization have relaxed financial markets' rules. In addition, the significant increase in the innovation capability of the system with the computerization of finance has led to financialization. Financialization is the increasing role of financial instruments, financial actors, financial markets and financial institutions in national and international economies (Epstein, 2005; Palley, 2009). On the other hand, there is growing evidence in recent years that private finance has withdrawn from financing long-term productive investments in the “real economy”, as the combination of financial innovations with regulation makes it easier to profit from speculative investments in financial assets (Wray, 2011; Kay, 2012). Therefore, it can be said that financialization, with its increasing profitability and short-term perspective, distanced companies from their main fields of activity and intermediaries from their basic operational activities.

Platform-based financing continues to affect traditional forms of financing, posing a new competitive risk, especially for commercial banks, due to its functions such as cost reduction, disintermediation and elimination of information asymmetry. Platform-based financing models, based on the use of special online platforms or ecosystems, provide various advantages such as speed, simplicity and accessibility compared to financing through banks or capital markets (Rubanov & Marcantonio, 2017). The emergence of these technology-based modern financing methods in terms of corporate finance allows small investors to invest without the need for financial intermediaries (Vismara, 2016). The negative aspects of platform-based financing methods can be listed as the formation of a kind of shadow financial system, which may be caused by the exclusion of online financial institutions from the regulatory framework, the inability to control credit quality, the relative difficulty of investor protection, and the existence of risks related to digital data security.