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Digital banking Act. 22 Aug 2017

Crowdfunding and traditional banking, complementary rather than mutually exclusive models

Robbed piggy bank resource bbva

Collaborative models in the social and economic realms are coming of age through the Internet and the use of new technologies. In the financial market, crowdfunding platforms are at the forefront of this trend in collaboration.

“We have seen an explosion of interest in crowdfunding among political figures, academics, governments, and think tanks all over the world”. This is how Richard Swart, director of Research on Crowdfinance at the University of California, Berkeley, opened a symposium on crowdfunding in late 2014. It is neither a tendency nor a new fashion in the funding sector, it is a very significant new funding system.”It is transforming entrepreneurship, innovation, and venture capital first rounds”.

This spirit of transformation is linking crowdfunding and the traditional financial system, converting them in two complementary, rather than mutually exclusive, models. In recent years the economic turmoil has severely impacted markets, leading to a surge of collaborative alternatives that also reached the finance world through crowdfunding. We therefore analyze herein those aspects in which, more than mere differences between both systems, one can find formulas where the two can complement each other in their mutual growth:

Securing deposits

Probably one of the main differences between the two models is that the crowdfunding platforms are not an authorized bank operating under the protection of the corresponding deposit guarantee funds, or licensed as a credit entity. In fact, these platforms do not receive deposits, so that the financial liability investors acquire is not a deposit. For this reason, the two systems might become complementary.

Innovation

From the point of view of the investor, the traditional system offers greater experience: it possesses more information on the projects of its customers and it is governed by a market regulation that in the case of crowdfunding is still developing. However, in light of this experience value, crowdfunding is placing new ideas on the table that are spurring innovation in the financial sector. The development of online banking, mobile banking, and customer experience strategies is taking place while new models are increasingly being used–such as crowdfunding–whose foundations lie in new technologies and innovation.

crowdfunding1

Scoring

It is therefore important to note that, along with the rise of crowdfunding a number of new scoring tools are being used that go beyond traditional methods based on the customer's credit performance history. For instance, some platforms extract additional information from the entrepreneur or startup seeking funding to complete the standard credit profile, in particular with respect to his or her reputation online.

This type of information may be obtained using data analysis, specifically with semantics analysis based on responses to particular questions, the way one interacts with the platform, response times, etc. The objective is to gain knowledge of the customer from his or her behavior on the platform, just like information is gleaned from the interviews in person that are conducted in the branch offices of credit entities.

The tools to get to know the customer/user are also being implemented in traditional banking to improve the customer experience. To increase the knowledge of one's customer is one of the challenges of the new banking era.

New products

In fact, with the rise of crowdfunding new products are being generated for the retail investor that the P2P platforms are trying to recruit. These are financial instruments of a similar nature to fixed or variable return instruments already on the market but for much smaller investments in projects that are closer to the investor.

Nowadays, through its digital channels, traditional banking is offering these products.

The customer

One of the advantages of the crowdfunding platforms are their flexibility in offering a service to the customer. This is, in part, thanks to new technologies. In fact, the transformation of traditional banking toward a more digital banking system is following the same path: approaching potential customers through online and mobile banking.

A possible collaboration between banks and crowdfunding platforms crowdfunding

Collaboration does not have to be a far-fetched idea. Banks can send to the P2P platforms those customers whose risk profile is not within their limits, while the platforms can promote other banking services that don't compete with its service (an account or treasury services, for instance).

Other collaboration opportunities could exist in the area of sharing risks between the bank and the platform, with the first covering a portion of the funding through collective investments, for instance for projects in corporate social responsibility, or of a marked social nature.

In sum, crowdfunding investment is boosting innovation in the sector, as well as the creation of new tools that are more digital, more flexible, and always focused on the customer.