Introduction

With Crowdfunding (both debt and equity) accounting for approximately $16bn globally in 2015 (Crowdsourcing, 2015) and FinTech being strongly populated with start-ups operating in the Lending space. The question needs to be asked, can the big banks take a piece of the action? Before answering that question, what is the threat posed to banks?

The Threat

In isolation, Crowdfunding is very unlikely to ‘disrupt’ banks but it does contribute towards a wider erosion of relevancy banks have to customers.
With the emergence of ‘Challenger Banks’, the boom in FinTech and start-ups challenging functions that banks were typically known for, such as international money transfer or payments, Crowdfunding needs to be considered in the wider FinTech context and in this contexts it’s a real threat

Internal to Crowdfunding, there is an additional threat to banks in the form of Crowdfundings ecosystem which allows businesses to enter the ecosystem not only to seek finance but also benefit from the publicity and marketing the platforms provide. Some platforms are providing additional services such as incubators, affiliate schemes, legal advice and media production services.

An Opportunity for Banks?

What makes this an opportunity for banks? They already have the customers, required capabilities along with the overheads and would have no problem implementing what is a somewhat nimble business model. The main obstacle would be brand perception. Crowdfunding has always been considered anti-establishment, in response to banks becoming stricter with credit with businesses struggling to obtain financing from their once trusted bank.

To avoid this mistrust from the outset, banks have a range of options of acquiring an existing platform, setting up a joint venture with a current participant. Alternatively banks could independently seek to create a new legal entity or ideally (and the option to be discussed) is ‘spinning off’ a new subsidiary with completely different market positioning and more importantly, branding. Think of the FMCG sector where its common place for different brands to operate in isolation but still fall within control of one of the major FMCG companies such as Nestle, P&G, Unilever etc. A recent example of this is the fund supermarket Hargreaves Lansdown who have recently setup a P2P lending platform.

The Opportunity: It’s not about being the first to market, it’s being the first to scale

The old mantra of ‘first mover advantage’ no longer applies. Think of examples like MySpace and Hi5 whom had both received strong market traction and had received significant funding in the early 2000s. MySpace receiving $38mn in a Series A round and being acquired by News Corp for $580mn six months later. However Facebook came along and was able to accelerate through the S Curve, thus dominating the Social Networking market, upending MySpace (which ended up being sold again in 2011 at a bargain price of $35mn)

Despite a proliferation of platforms across the globe. the market leaders of Crowdfunding such as Crowdcube, Funding Circle, Seedrs, Lending Club haven’t quite scaled internationally yet, partly down to regulatory challenges (MiFID passporting has somewhat helped Equity Crowdfunding but is still problematic). This regulatory hurdle crowdfunding platforms are experiencing isn’t necessarily a problem for the larger banks whom already have a footprint and experience in foreign markets.

With the bigger banks already operating in almost every country, and having experience of deploying systems and processes with scalability in mind; there’s a golden opportunity waiting with a number of synergies between crowdfunding and banks. This global presence provides banks with the opportunity to present a new brand or product to customers on the front end but leveraging the already existent infrastructure on the back end. More importantly, it allows banks to tap into an already established customer base of both people looking for business finance and seeking to invest. This is a key advantage that a bank would have over any crowdfunding start-up or new entrant

But aren’t banks already exiting from these non-core offerings?

This does go against the trend of banks in recent times divesting operations that aren’t part of the core business and / or where they aren’t market leaders. Take for example HSBCs recent strategy of divesting a number of business lines no longer considered to be part of the core business and exiting from some countries altogether. Or Credit Suisse in recent months looking to divest the US Private Banking arm. But this can be slightly misleading and can become an excuse to avoid innovating.

Where banks have a strategic direction of only focusing on core businesses, the Crowdfunding model can be added as an extra product on offer to customers (added to existing product portfolio) and not as a separate entity with a separate business model.

As a point of reference, ‘sticking to non-core offerings’ should not be an excuse for inertia. Think of technologies such as banking apps or contactless payments which commentators just a few years ago thought were just a ‘fad’. Or the countless start-ups such as Air BnB, Facebook, Uber etc who no one believed would succeed. A refusal to innovate will continue to expose banks to ‘disruption’ in the long term.

From [Lender] to [Lender + Facilitator]

If a similar model to conventional debt and equity crowdfunding is followed, banks can benefit from an additional revenue stream by taking a small percentage of the amount raised for facilitating the deal (think of a miniaturised version of the Corporate Finance service banks offer).

The argument against this would be cannibalisation of banking services on offer. However when the % fee Crowdfunding platforms charge is considered coupled with the minimal risk compared to banks offering a loan which comes with risk of default and liquidity issues. The fee from crowdfunding provides immediate cash once a business has successfully raised money on the platform. This is particularly attractive in a climate where banks have regulatory pressures to increase capital adequacy and liquidity. Crowdfunding could be an attractive (relatively) risk free revenue stream in addition to the existing lending banks offer to customers.

Conclusion

So in summary, banks should get involved with Crowdfunding, especially before the industry starts to scale internationally (some individual examples of this already, UK based Crowdcube and ShareIn operating in Spain and China respectively). Banks can use their extensive experience and infrastructure to gain an advantage internationally and expedite any potential mistrust by creating a newly branded entity for the Crowdfunding element. It won’t make banks incredibly wealthy but provides an additional (relatively) risk free revenue stream and still be perceived to be relevant to customers.