Bank Economists Warn Crowdfunding Will Disrupt Banking

Bank buildingBank economists from BBVA Research USA warn that lending and equity-based crowdfunding and disruptive technologies have the potential to displace banks as the primary source of funding for personal and small business loans. In the report just released by BBVA Research USA, BBVA’s economists argue that lending and equity-based crowdfunding are disruptive innovations for commercial banks.

Somber Outlook for Traditional Banking

The study points out that bank revenue depends on credit growth and overall economic activity. “In this regard, the outlook is somewhat somber as loan demand will expand at a slower place,” the economists observe. They stress the importance of of banks adjusting their business model, including the adoption of new technologies and the implementation of consumer-centric strategies.

Simplicity of Crowdfunding

The economists point out that the value proposition of crowdfunding is its simplicity.”Contrary to banks, crowdfunding firms don’t offer elaborated  financial products such as credit cards, mortgages, insurance or mutual funds. Instead, they limit their offer to a simple product offering either a basic personal loan that can be used for different purposes or brokerage services for companies seeking capital through equity selling.” Crowdfunding only relies on Web access, while backs offer a combination of internet services, mobile services, traditional services and ATMs.

Another important characteristic of disruptive innovations is that they start by serving the “bottom of the market.” Small businesses tend to be at the “bottom of the market” too. “Because it may take a couple of years before new small businesses generate a stable stream of cash flow, they need several capital injections at their early stages in order to expand and operate in a highly competitive environment,” stress the economists.

Defusing Risks

Lending and equity-based crowdfunding platforms have become attractive alternatives for small businesses who would find very difficult to get a bank loan. One of the great advantage of crowdfunding is that it can defuse risks. As noted in the study:

“In lending-based crowdfunding, the risk of financing a project is not assumed by a single depository institution (and its clients), but by investors who willingly decide which projects to finance based on their tolerance to risk and other considerations such as community involvement, geography, industries or environmental concerns. . . crowdfunding break down the risk into small pieces and sell them to a potentially large group of investors. In other words, risk is passed from the financial institution to the “crowd”, where it is diluted.”

The report predicts that crowdfunding platforms will become more sophisticated over time, and it raises the question of whether crowdfunding platforms could naturally evolve to become the primary source of financial services for young generations. “From here on, they will face a new competitor with lower operating costs, a different approach to risk management and a simpler product offering. To what extent crowdfunding platforms will displace commercial banks in the retail and small business segments remains to be seen,” the study concludes.

Article by A. Brian Dengler. Mr. Dengler is an attorney, instructor at Kent State Univeristy, and former Vice President of AOL. Feature image (c)

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