Crowdfunding Will Grow To Benefit Consumers and SMEs

by | Feb 2, 2016 | Investment Tips, Small Business Tips & Advice

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Crowdfunding and alternative finance are making the financial sector better for consumers, investors and SMEs.

The benefits of crowdfunding for the financial sector are manifold

At CODE Investing, we consider crowdfunding to be the first real financial innovation enabled by technology since the advent of the ATM. It improves capital raise experiences for the customers, investors, lenders and SMEs.

Don’t get me wrong. Banks and financial institutions spend billions on technology every year. However, for the most part, they have done so to increase their profit margin, sometimes at the cost of the customer. Crowdfunding is the first time technology has been harnessed to innovate finance for the benefit of the consumer.

Despite this accomplishment, online platforms still only account for 2 per cent (£3.2billion as per the Nesta Report) of the debt and equity markets (£171billion). I think that in the next 10 years every capital raise in the private market will have an alternative finance platform running the transaction. They will become part of the mainstream, raising global totals over £125billion annually, according to World Bank.

The alternative finance market addresses a gap for businesses and consumers, both of whom are being under-serviced by the incumbent solutions. Similarly, it serves investors who are looking to make higher yields than those offered through traditional institutions.

Given their very nature, these transactions carry an inevitable amount of risk. And as you would expect, the risk associated with each proposition is reflected in the yield. When it comes to crowdfunding, it is down to investors to make the right decisions, whilst being prepared for a loss.

In truth, there is hardly ever a perfect market where supply and demand sets the price. Information asymmetry exists, even in the public markets. Consumers expect the standards in the public markets to be higher, but often forget that professionals structure and price the risk before distribution.

It is impossible for a professional crowdfunding investor to form measured opinions about risk and price from the limited information and time available, especially when the information is not standardised. They usually base their decisions on some other signal. The danger comes when this signal is pure momentum.

Investors become subject to gaming tactics, as have been referred to in some articles recently. That is why at CODE, we employ a team of professionals who drive the structure and price of every deal on our platform. We provide investors with something other than momentum by aligning ourselves with them and investing in deals ourselves. We think we can improve this further by standardising on due diligence and structuring across the industry.

It’s important that investors are subject to rational education and guidance in place of scaremongering and scapegoating. Crowdfunding and alternative funding platforms will change how people relate to money, how they make choices and how they understand the financial market. They offer access, transparency and choice, alongside control and better costs for SMEs.

Like most great journeys, the crowdfunding movement will suffer its share of inevitable failures. However, with those failures come stories of success, ensuring that crowdfunding makes the financial sector a better place. 

This article was written for March 2016’s edition of Business Reporter. 

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