Pebble Watch is a smartwatch that works with Android phones and uses an e-Ink screen for a longer battery life. Oculus Rift is a virtual reality headset that is now owned by Facebook. The Nikola Tesla Wardenclyffe Science Centre is an institute in New York in honour of Tesla. Taxi Fabric is an initiative in Mumbai where prominent visual artists create their designs for the local black and yellow taxis. So what is common amongst all of these? Well, they all have come into existence thanks to crowdfunding!
Crowdfunding is described by the Oxford Dictionary as “the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.”
The types of crowdfunding include donation based (for social causes), rewards based (mainly used for creative projects in which the borrower rewards the lenders through innovative ways), lending-based (which includes micro financing and this type currently dominates the crowdfunding industry, having raised $11.08 billion in 2014) and equity based (mainly used by startups).
Globally, crowdfunding is growing at an enormous rate. According to a report by the research firm Massolution, by 2016 the crowdfunding industry will account for more funding than venture capital. In 2014, $16 billion was crowdfunded, and the amount is expected to reach more than $34 billion by the end of 2015. Till last year, the US and Europe were the two biggest markets for crowdfunding, but now Asia is emerging as a massive market too, driving a lot of growth into the sector. While in India, crowdfunding is still used for small creative projects or for social causes, it is expected to pick up steam in the coming few years.
While at the face crowdfunding may seem like a threat to banking institutions, it is really not. In fact, crowdfunding and banking have the potential to get along fabulously. First and foremost, there is nothing like crowdfunding to vet the feasibility and potential of a project, which can thereby help the process of getting a bank loan. Once the idea is discussed in the public domain, public’s acceptance, rejection or simply the feedback can really help a project prove its merit or improve itself. Banking institutions could use/collaborate with the crowdfunding platform to get a report card on any project that needs a loan. Banks could also let the first round of funding happen through crowdfunding and then get involved. This will not only make them feel more secure, but will also lead to more loans for small and medium- sized businesses.
Banking institutions could also form a bridge between borrowers and lenders through the digital platform. This way, banks can get involved in promoting and funding of a lot of local projects and also for projects which cannot usually apply to traditional funding platforms for many reasons including being too risky. Banks could give a part of the funding needed, with the rest coming in from the potential investors/lenders. This minimizes the risk and test the viability of the project.
If you think that this sounds too futuristic. Well, think again! Santander Bank in the UK started a collaboration with peer-to-peer business lending platform Funding Circle in 2014. Under the agreement, Santander refers SME customers who do not meet the criteria/requirements for its loan services to Funding Circle. Funding Circle, on the other hand, helps promote Santander’s day-to-day banking services such as international banking expertise, cash management and support for growth. Union Bank in San-Francisco tied up with peer-to-peer CFP Lending Club. The bank would procure loans through Lending Club and they will together also work on creating credit products that are available to both bank and Lending Club’s customers. Early this year, Royal Bank of Scotland (RBS) also announced that it would recommend Funding Circle and Assetz Capital to its customers, with the aim to give many small British businesses greater access to finance. All these are absolutely great examples of how a traditional channel and an alternative finance platform can work together towards increasing the prospects for SMEs and give rise to more innovation in the world.
These are just some of the ideas. In India, especially, the possibilities of collaboration between crowdfunding platforms and banks are endless. The currently fragmented model of crowdfunding, skewed towards social causes and creative projects, can be consolidated with banking sector’s involvement. This can inspire more confidence amongst the usually cautious Indian borrowers and lenders both.
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