EVOLUTION OF BANKING

CROWD
FUNDING AND
INVESTING
Crowd funding is making it easier to raise capital. There has been a consistent growth in the number of crowd funding
platforms across the globe in recent years. They address a niche but growing segment of the market that no other financial
system has been able to address well. Some of these crowd funding platforms are now moving from crowd funding to
becoming crowd investing (in lieu of equity). What has been surprising, is that banking institutions have not led the way and
adopted this model so far, but considered these as competition or a threat. This service sits somewhere between an SME
business bank and the bank’s stockbroking arm offering customers access to IPOs and AIM listed companies. For investors,
crowd funding has opened up new opportunities and simplified the traditional investment process.
Banks already have access to:
• Customers who have cash and could be potential investors.
• Prospective customers who want money and are seeking business funding.
By launching a crowd funding or crowd investing platform, the bank could:
• Use the platform for all lending below a specific threshold, providing credit checks and payment mechanism.
• Establish a ‘social banking concept’ which manifests itself through the hosting of P2P lenders and other crowd-financing.
• Open up the non-secure lending market by routing all such requests via this platform.
• Use the ‘wisdom of crowds’ to decide which projects get funded and which don’t.
• Even go to the extent to commit to fund an amount equal to the amount that the project secures from the other investors.
The current market in the UK is growing quickly from £310M in 2011 to £940M, with continuing growth projected to £1.6bn
in 2014.
This approach could potentially spread the risk on such investments and open up a new large market for the bank. As a
bank, it would be easier to launch in terms of regulatory approvals in place, so that the entire model could scale much faster
than it has so far, as investors have greater trust with a known bank brand. Volksbank Buhl, for example, one of the 1,100
cooperative Raiffeisen banks, has become the 1st German bank to offer their customers a regional crowd funding platform.
Crowd funding models are emerging for property investing, scientific research and angel investing. It is possible that within
five years, crowd-funding could provide around £15 billion of finance per year in the UK.
Tim Heasley of Artesian Capital Management has commented that in Australia, the year of 2014 has seen a number of startups
and great investment grow momentum. He identifies that the restrictions for Australia developing the same growth in
this sector as the UK are not only legislative but also and associated with the lack of education of investors as well as the
risks and opportunities. Crowd funding is available to sophisticated investors only – those with a $250,000 gross salary over
two years, or $2.5 million in net assets. If retail investors were to be empowered and enabled to participate in the benefits that
could flow from crowd funding, these restrictors would need to be addressed.
The Australian government is turning its attention to this topic as crowd funding becomes a potential means of sourcing the
venture capital required for technology start ups in this country. As Australia embraces the digital economy, innovation is a
necessity that needs to be encouraged. Innovation based on digital interactions, will continue to challenge banks and other
financial services providers to find new ways to stay relevant and profitable.
The Evolution of Banking and Financial Services | 29