Banks Threatened by Crowdfunding According to a Recent Study

Written by Beatriz —  July 20, 2013

alone bank

Young people will no longer go to the bank to ask for some services: we were born in the technological era and we prefer new solutions to ordinary problems 

Disruptive technologies are changing the interaction between banks and their clients. Crowdfunding: this is what banks are afraid of. Months ago we wrote the post “Can the Internet replace Big Banks?”. These days, BBVA Research published the “BBVA Research Economic Outlook 2013” for the US that you can read below. They pursue adapting economic research to the needs of an international banking group and to respond to the challenge of evaluating increasingly globalised economic developments.

The “JOBS Act” law is expected to facilitate the access to capital markets for small businesses (defined as emerging growth companies with total annual gross revenue of less than $1 bn at IPO registration). The IPO is the first sale of stock by a private company to the public; they are usually issued by small and young companies, and can be a risky investment. In the US 3 out of 4 jobs are supported by this sector, and that’s why the JOBS Act takes it very seriously. The SEC is working on the last rules to allow small businesses to meet their capital needs through equity crowdfunding.

So what does it mean for banks?

“Lending and equity-based crowdfunding are disruptive technologies for the banking industry with the potential to displace banks as the primary source of funding for personal and small business loans.”

BBVA Research, US Economic Outlook 2Q-2013

Banks vs. Crowdfunding Platforms: the ring

Crowdfunding is simple: platform’s terms of use are affordable to everybody and there are no complicated contracts to sign before backing a project. On the other side we have banks: long fine print contracts specially designed to not fully understand them. So, what is the value proposition of crowdfunding platforms? Simplicity. Both for regulation and technology. Crowdfunding is about relying on people, meeting business needs with individuals. Also, only the equity-based crowdfunding is regulated, but not the entire industry, and it makes everything easier.

Crowdfunding key: reaching the bottom of the market

Banks know what their niche is, and it excludes segments unprofitable for them. Crowdfunding platforms are serving these segments with relative success. The report shows the example of Kiva, who is giving access to credit and overcoming poverty: nearly a million people have contributed with $452,802,425 in loans.

Besides NGO’s sector, crowdfunding is also covering the needs of small businesses: instead of asking for loans to dinosaur banks, entrepreneurs are increasingly featuring their needs on online platforms in a total transparent exercise for their startups and companies. “This is what I do, what I need, and what I offer you in exchange. Will you join me?” As opposed to banks, creators establish a close relationship with local borrowers and people supporting them.

Crowdfunding platforms are able to serve this market since they have a different approach to risk management: risk is diluted from a single financial institution to the crowd, who has more tolerance to risk and is interested in other stuff, rather than the economic issues: involvement or environmental concerns are important for the crowd.

Where is Crowdfunding going?

Banks are aware crowdfunding hasn’t exploded yet. We know where we are, surrounded by light regulation, high impact and growing interest.

“Crowdfunding platforms could naturally evolve to become the primary source of financial services for young generations.”

BBVA Research, US Economic Outlook 2Q-2013

Crowdfunding platforms are currently serving the bottom of the market, but they’re starting to reach upper segments, so banks know they have to do something if they don’t want to arrive late to mainstream customers. On the other hand, products offered by crowdfunding platforms are expected to become more complex, so the pillars that holds the value proposition of crowdfunding platforms (simplicity, both for regulation and technology), could change. BBVA Research notices that overregulating this market at an early stage could destroy a new way to connect savers and borrowers.

“There is a real risk that banks stop being the primary source for personal and small business loans.”

BBVA Research, US Economic Outlook 2Q-2013

The report concludes Banks should get ready for this trend, in case the crowdfunding industry pushes too much to displace commercial banks in the retail and small business segments

Photo Credits
Herr Olsen
  • Reese Austin

    I totally believe the Banks do not feer but will embrace Crowdfunding as an important addition to their discussion with their clients. So far the meetings we at SCORE Memphis with community banks have had excited positive reception as we make banks aware of the benefits of adding an equity product to loans in their portfolo’s .

  • Crowdfundingguide

    Excellent article about banks vs. crowdfunding. I hadn’t thought about CF serving the “bottom of the market.” I have to wonder what will happen when the CF explosion does come…

  • Santaklaus Klaus

    Al Gobierno del PP tampoco le gusta. Por eso quieren limitar las cantidades que se pueden donar y recibir; para que se sigan pidiendo préstamos a los bancos. Todos sabemos que el PP es un partido de lacayos de los banqueros.

  • kals

    El crowdfundig es un riesgo para los bancos:

    “Existe el riesgo real de que los bancos dejen de ser la fuente de financiación principal para los préstamos personales y las pequeñas empresas.”

    Ahora ya sabemos cual es la estrategia de los bancos en España: La limitación. Tal y como dice el informe:

    “El BBVA Research advierte que una regulación excesiva este mercado en una etapa temprana puede destruir la nueva manera de conectar los ahorradores y prestatarios.”

    Más claro no puede estar según este informe de un banco como el BBVA: el crowdfunding es una amenaza y la regulación excesiva puede destruirlo.



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