Variation in Forms of Trust Between Germany and the UK

The analysis of indicators of trust discussed in section 6.1 revealed variation in the forms of trust present in the mini-bond and P2B lending channels, which is summarised in Table 6.14. In the mini-bond lending channel, there are different trust forms present in each market. The analysis focused on the unlisted segment of the mini-bond market to enable a direct comparison of trust forms between the two economies. Characteristic-based trust appeared to have a stronger presence in the German market while process-based trust was more dominant in the UK market. The development of the listed mini-bond market, unique to Germany, appears to have benefited from institutional-based trust which investors relied on. There was little evidence of either process-based or characteristic-based trust forms present in the P2B lending channel in the UK. However, institutional-based trust produced by intermediary mechanisms such as regulation of the P2B lending platforms was relied on by investors. These differences are discussed in more detail in the following sections.

Table 6.15: Trust Forms Present in P2B and Mini-bond Lending

6.2.1 Comparison of Process-Based Trust

There are distinct differences in the types of firms that had issued mini-bonds in the UK versus Germany. A summary of the UK mini-bond issues completed since 2009 is contained in Appendix 10, and all of the UK issuers are either a consumer-facing business or in the business of producing renewable energy. Twenty of the twenty-eight UK issuers were engaged in consumer-facing business activities, and seventeen of them offered a ‘coupon bonus’ designed to provide an additional reward to investors that were also customers of the issuers’ products and services. As such, there was a very high proportion of investors that were also customers of these issuers as was illustrated by the analysis of the UK3 data. Possibly the

P2B$Lending

Unlisted Listed

Product(usage Weak Strong Weak Weak

Reputation Weak Weak Strong Unknown

Social(relations Weak Weak Weak Weak

Proximity Weak Weak Strong Unknown

Institutional3 based

Regulatory(

authorisations Weak Weak Weak Strong

Categorical(

membership Weak Weak Strong Strong

Intermediary$ mechanism

Regulatory(

authorisation Strong Weak Weak Strong

Process3based Characteristic3 based Firm3specific Forms$of$Trust Indicators Mini3bond$Lending UK UK Germany

most-cited example of this UK trend was the ‘Burrito Bond’ issued by Chilango, a UK chain of Mexican restaurants, which gave its 700 mini-bond investors the right to redeem a coupon for a ‘free’ burrito every month during the lifetime of the bond.

In contrast, the vast majority of both listed and unlisted mini-bonds issued in the German market were not consumer-facing business. Most were producers of industrial products in

traditional industry sectors110, followed by renewable energy companies seeking funds for

projects taking advantage of the generous feed-in tariffs designed to increase the production of renewable energy. As a result, few German investors had direct or indirect experience consuming the products or services of the mini-bond issuers. However, in the case of the G5 issuer the analysis revealed that there was a relatively large proportion of investors that relied of referrals and recommendations about the bonds provided by prior investors in the bonds. This suggests that the reputation effect accumulating over the 35 bonds issued by G5 produced process-based trust relied on by investors.

6.2.2 Comparison of Characteristic-Based Trust

The analysis of pre-existing social relations did not indicate the presence of characteristic- based trust in the mini-bond or P2B lending channel in either country. There was local bias evident in the analysis of investor-borrower proximity in the German mini-bond channel but not in either the mini-bond or P2B lending channel in the UK market. Local bias could be an

indicator of two potential sources of trust111 _{that could help investors overcome the information}

asymmetry they face in purchasing mini-bonds issued by a particular firm. As mentioned previously, the presence of local bias suggests that investors in close proximity to an issuer could rely on the shared values and beliefs producing characteristic-based trust. An alternative explanation is that investors in close proximity to the issuer have access to soft information about the firm and the informational advantage over investors living further away that is relied on, which is closer in association to process-based trust. The analysis of the geocoded address data for the German investors finds that the degree of bias is related to both the size and type of firm, with the largest bias for bonds issued by smaller Mittelstand firms that do not produce consumer products. Only a very small proportion of the German investors responding to the survey indicated they had a direct or indirect connection to the issuer, which suggests that the local bias is more likely to be associated with characteristic-based trust rather than process- based trust produced by direct or indirect experience transacting with the issuer.

110 _{While a higher proportion of German firms are in traditional industry sectors relative to UK firms, the proportion}

of mini-bond issuers was larger than the broader industry composition.

111 _{This follows Zaheer et al. (1998) in using the term organizational trust to describe the extent to which individuals}

trust an organization, and which depend, in part, on an expectation about the future behaviour of relevant actors within the relevant organisation.

6.2.3 Comparison of Institutional-Based Trust

The comparative analysis of P2B lending data indicates the regulatory environment for P2B lending in the UK is a relatively strong source of institutional-based trust. It is trust produced by the regulation of the P2B platforms as intermediaries, rather than by the borrowers, that the investors relied on in making investments. As mentioned previously, the P2B platforms in the UK play an important role in selecting the investments on behalf of a growing number of P2B investors using automated investment allocation tools which de-couple the relationship between investors and borrowers. The analysis of mini-bond data did not identify sources of institutional-based trust for mini-bond lending.

The indicators of institutional-based trust in Germany appear to be present in mini-bond lending and not P2B lending and firm-specific rather than intermediary related. The analysis of survey data indicates that German investors have greater trust in Mittelstand firms relative to other types of organisations. The UK investors’ relative trust levels for SMEs is quite different, with lower trust in SMEs than coop banks and no statistically significant difference in the level of trust in SMEs relative to other types of organisations.

In the context of Zucker’s conceptualisation of institutional-based firm-specific trust, the analysis suggests that a firm categorised as a ‘Mittelstand firm’ benefits from a form of trust credentialisation produced by shared cognition amongst Germans regarding the trustworthy attributes of Mittelstand firms. The following section investigates the foundations of this trust production.