5 crowdfunding challenges to the banking sector worldwide

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The increasing crowdfunding projects have now shown signs of consuming a considerable market share in financing the projects. From a thousand of dollars to 600+ billions, crowdfunding picked up the market at a faster pace than expected. Analysts assume the global economic breakdown of 2008 to be the major boosting factor for the growth of this financing source.  To be more precise, both the cause as well as the effect of the crisis helped the innovators to opt for crowdfunding all the more. The cause of the crisis was too much and flippant lending by banks whereas the effect was banks becoming extremely careful and analytical with the lending thereafter. So, in either case banks were reluctant to support new creditors with risky ideas. They only wanted to be foolproof with their lending or investments made.

As banks turned down the new entrepreneurial business lending offers for the lack of meeting their terms and conditions, crowdfunding seemed to be the most appropriate and accessible option for such innovators. Now, banks perceive a threat from this source of finance as more people are shifting to this convenient option. The 5 major challenges posed by crowdfunding to the banking sector involve –

  1. Type of investments

Most of the banks are interested to invest or lend for big projects. Small scale lending is restricted to specialized sectors only which are handled by dedicated subsidiaries of the banks typically. Also, banks promote certain sectors like infrastructure development, etc. and not all. This bias does not exist in crowdfunding.

2. Risk of Projects

New ideas and projects carry various risks and volatility. Banks are always interested to lend in assured markets so that they safeguard their interest and the principle. In crowdfunding, the lending is open for the backers of the idea. In fact, more risky projects are done through this option. Crowdfunding serves as a window to know the response of the target public/ customers in advance and align the project development to their requirements.

  1. Credibility Requirement

Banks rely on the historical performance of the creditor before appraising the loan proposal. This inhibits the fresh ideas and budding entrepreneurs to approach banks for financial help. On the contrary, in crowdfunding, the lenders rely on the project idea and its exclusivity and marketability.

  1. Transparency

Crowdfunding offers a transparent platform to the lenders as well as the innovators. Banks restrict this. The innovators have a clear picture about the real supporters and vice versa. Even the lenders know how the project is growing.

  1. Micro financing and innovative options

Crowdfunding not only provides micro- financing but also is coming up with sophisticated investment options like equity- based and loan- based crowdfunding. This hooks the lenders by giving them better rewards.

Nonetheless, crowdfunding still has way to go. Although it currently comprises a significant portion of lending, it still represents a very small portion as compared to the banks. Moreover, now banks are also coming up with some micro- financing options. So there are chances of turning the tables!

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Crowdfunders Editorial Team from Crowdfunders.Asia has written this article. In Asia, Crowdfunders.Asia is a leading portal on providing news related to crowdfunding, start-up, property and business. It is operated by CoAssets.com. CoAssets.com is based in South East Asia and is the first real estate crowdfunding site. You may reach us at [email protected]     if you wish to contribute your story.

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