It’s hard to dismiss the crowdfunding phenomena, in light of some estimates that these platforms raised more than USD$5 billion in 2013 for entrepreneurs by channeling relatively small amounts of money from large numbers of online lenders, investors or donors.
By Jeff Poole, Management Consulting, Financial Services, KPMG in the UK.
At the same time, the crowdfunding sector must address many issues that could either spark vast future growth or crimp their low-cost, low-margin business models. Such uncertainty makes it hard for the traditional financial sector to decide whether crowdfunders are a friend, foe, family, or just a flash-in-the-pan.
First off, the crowdfunding industry needs to educate the public, investors and politicians about this often-misunderstood industry, including clarifying the various crowdfunding models, as highlighted in the chart below.
To achieve broad public and political support, they need to build credibility as solid, reliable and successful sources of non-bank financing, in part through formal regulation, codes of conduct, industry standards and good governance etc.
Regulation is catching up with crowdfunding providers in the UK, with the introduction of the Financial Conduct Authority’s Policy Statement PS14/4 in April 2014. European, US and other regulators are taking similar steps to supervise the sector.
While clear regulations can improve crowdfunding’s public stature and trust, industry leaders must negotiate with law-makers to adapt old rules or tailor new ones to the ‘virtual realities’ of their business. For example, how can crowdfunders comply with new sales advice requirements or provide adequate product and risk disclosure when one of their main customer communications are 140-character social media tweets? A guidance consultation GC14/6 has just been issued by the UK regulator.
The industry must face inevitable tax issues but there are also opportunities. For instance, tax decisions could be a boom for crowdfunders in the UK who are lobbying for their debt and equity-based vehicles to qualify as tax-exempt Individual Savings Accounts, potentially increasing their appeal among retail investors.
Also, when does a crowdfunding contribution equate to a gift or taxable income and what processes or documentation (ideally automated for such a digitized industry sector) must be completed?
Crowdfunders must determine their stance among competitors. Will they participate in established banking and payments associations or position themselves as renegades that operate outside industry norms? It may be pragmatic to partner with banks, in order to access corporate banking services or to form cross-marketing alliances with bankers.
Meanwhile, the banks are keeping a close watch on crowdfunding providers’ growth and their ability to navigate the above challenges. Some banks are cautious observers while others are piloting joint ventures or acquiring crowdfunding subsidiaries. Among them, Santander UK recently reached an agreement with Funding Circle, to refer customers to this fin-tech company known as the world’s largest P2P lender for small business. Other banks are pursuing co-creation with fintech start-ups in the crowdfunding space.
For anyone thinking of ignoring the crowdfunding trend, remember how PayPal shook up the way consumers pay online for goods and services. Before crowdfunders iron out their growing pains, banks will want to decide whether these disruptive players will be friend, foe or family.