In 2015, crowdfunding accounted for around $16bn around the world, according to Crowdsourcing. And that number has been steadily rising ever since. With banks still not willing to help finance small business as much as they should, crowdfunding is taking more of a foothold. Questions need to be asked, for example, does crowdfunding pose any kind of threat to big banks? Or can banks get onboard and share the rewards? Crowdfunding is a relatively new concept when compared to the long history of banking, so, is this merely a question of banks falling behind in the times, or crowdfunding being a step into the future? This is what we are to try and find out.
What threat does Crowdfunding pose to banks?
The reality is, that crowdfunding alone poses no real threats to banks. Banks have a solid foundation and history which people know. And whilst society may not always trust banks, less is known, in today’s market, about crowdfunding for it to be a genuine threat right now.
On the other hand, the rise of “Challenger Banks” which offer better exchange rates and international payments can be a plausible threat. If crowdfunding could make the most of these emerging banks, then real banks could come under threat by crowdfunding.
Furthermore, crowdfunding is giving businesses a gateway into the ecosystem for more than just to seek finance. Many platforms are also offering additional services such as incubators or affiliate schemes alongside the benefits of marketing and publicity they already provide.
The European Commission has recognised that crowdfunding is a great way to help SME business and investors, where banks haven’t helped or won’t help.
How can banks get involved?
For a bank to get involved with crowdfunding, it would not require much. A bank already has the clients, the infrastructures, the capabilities, and the business model is not a complicated one, so implicating it would not be a problem. However, one issue would be brand mistrust. Why? Because crowdfunding was and is an anti-establishment way of getting funds. It is a response to strict bank regulations and how complicated it can be to get any sort of support from the bank you have been a customer of all your life.
To overcome this initial mistrust, there are several options banks can consider. According to Bart Vanhaeren, the managing director at KBC Securities/Bolero banks can “inform their clients about it, refer to another platform or they can engage themselves”. Looking at how banks could possibly engage themselves in the world of crowdfunding, you are looking at two options. One option is pairing up with an existing platform. This would help diminish the initial insecurities people may have by working alongside a trusted crowdfunding platform. Another option is for the bank to create a separate entity or subsidiary with a completely different branding and marketing objectives.
Vanhaeren seems to believe that banks have an advantage when it comes to sorting deals and investor database. He further explains that a bank can find better potential opportunities through a deep involvement with organisations, alongside a good branch network. In addition, they can easily find investors through their retail and clientele databases.
What banks can do for crowdfunding
This is not a case of first come first serve, but a case of global reach. Imagine a UK based crowdfunding platform pairing up with an international banking powerhouse such as HSBC or Santander? The number of potential investors for the crowdfunding campaigns has all of a sudden been multiplied by millions. Large banks have the infrastructure and the knowledge to help crowdfunding platforms take the step to becoming an international phenomenon.
While it can be argued that the bank would then have a large hold over the platform they have helped expand, it is still a good move for the platform. It could take years, possibly decades for a platform to reach that kind of scale, while a bank already has everything in place. It could be labelled as a new enterprise that the banks can offer the customers. While the bank may hold an advantage over the platform, it would not necessarily be a complete take over.
Banks falling behind or crowdfunding is a step into the future?
There is no simple answer to this question. It is common knowledge that crowdfunding platforms and banks are both here to stay. Digitalisation is key for both enterprises, and we can see banks keeping up to date every day, with mobile banking apps, contactless payments and much more. But banks are traditional, built on a long history or rules and regulations. In contrast, crowdfunding was made to help the little guy who couldn’t rely on traditional banking to get his business off the ground.
In modern times, you can see the distance between banks and crowdfunding platforms shrinking. As banks get more accustomed to the idea of crowdfunding platforms being here to stay and they try to get on board.
Can banks and crowdfunding platforms work hand in hand?
Based on the evidence and studies that have been done, the answer is yes. It won’t happen in a day, as banks would have to undergo serious changes in order to avoid mistrust, but a partnership is possible and is not too far away. For the banks, it is about having a good reward and exit strategy. Because crowdfunding has an emotional attachment, that is something a bank would need to tackle and understand very well. It is because of this that a pairing between an established platform and an established bank would be the best solution. While the bank would need to perform the rebranding or create a separate entity to advertise the crowdfunding aspect, the platform could benefit from more potential investors and a larger scale market to operate in.
Whether or not this all happens, it is still an interesting thought and possibility. Without a doubt, the merging of a bank and a crowdfunding platform could potentially change the future of both.