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Crowdfunding: The Banking Maverick?

Crowdfunding: The Banking Maverick?
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​Increased access to technology and the prevalence of social networks are combining to enable crowdfunding as a way to fund small businesses. 

A WSBI-ESBG News & Views​ article by Michelle Schonenberger​ explores equity-based crowdfunding and peer-to-peer lending – the crowdfunding forms that allow investors to purchase debt, equity, or other security – as opposed to donation and reward-based crowdfunding forms.

>> See the latest News & Views 


​Published: BRUSSELS, 21 January 2016


​​​​​​Market conditions such as the financial crisis and low returns on savings are propelling the growth of crowdfunding, as are social factors such as crowdfunding’s intrinsic aim to develop and benefit communities. 


Lack of safeguards and regulation 

The lack of necessary safeguards for investors is holding back this funding model. Current relevant regulation is fragmented and confers excessive risks on the investor, due to a lack of protections, the potential for equity holdings to be diluted, and uncertainty around repayments and liquidity. This is diminishing the much-needed trust of potential users and hindering the competitiveness of crowdfunding as an alternative funding model.

The European Commission and the European Securities and Markets Authority (ESMA) are discussing the ongoing regulatory challenges affecting investment-based crowdfunding. They aim to find common ground within national regulations and to determine the applicability of existing European legislation, such as the Markets in Financial Instruments Directive (MiFID II) and the Capital Markets Union package. 

As yet, the crowdfunding industry has seen little consolidation, and much can be achieved. This calls for all-encompassing regulation of the sector and a legal framework that clearly defines crowdfunding, provides protection for investors and consumers, ensures financial authority licensing and supervision of platforms, offers pre-contractual information, introduces quality labels and codes of conduct, and enables crowdfunding to be carried out across borders. This regulation must promote cross-border investments – instead of the creation of national barriers – to ensure a level playing field in Europe.
Where do savings and retail banks fit in?

Banks are well placed to provide crowdfunding safeguards. For instance, they are well equipped to set up a platform to bring potential fundraisers and investors together to promote and finance local projects. This would encourage "mixed financing" opportunities, in which banks finance a percentage of projects with the remaining funding coming from local investors. This would enable the project to benefit from the "collective intelligence" of the crowd as a measurement of a project's potential, and for the financial risk to be shared. 

Banks could also use their expertise to help investors to "know their customer," by forming local partnerships with crowdfunding platforms and assessing the individuals and projects seeking crowdsourced investment. This would significantly reduce fraud risks. As a positive side-effect, banks would also remain the primary point of contact for start-ups, even if they do not provide them with funding. Moreover, banks are certain to contribute secure and reliable payments systems to crowdsourcing platforms, and may find roles as trustees and depositary banks for securities.

Crowdfunding has developed into a maverick of the banking industry, by-passing banks in financing the economy. Whether it can play a role in the funding landscape of the future will depend on the regulations and the safeguarding frameworks that are built today. Banks will be ready as always to provide their lending expertise.
Capital Markets Union; Digitalisation; Innovation; Microfinance; SME finance; Investments; Capital Markets