Crowdfunding is, in my opinion, one of the most exciting fields in fintech, and even though the field has had a slow start in Norway compared to other countries, the segment is now blooming. What are the problems that the solutions aim to solve, where is the market heading, and is a threat or a supplement to traditional financial services?
In order to answer these questions, it is useful to take some steps back and first refresh the various kinds of crowdfunding, as they aim to solve different problems and have different characteristics.
Donation-based based crowdfunding is the simplest form of crowdfunding. Individuals are encouraged to support a cause through a crowdfunding platform. This could be a charitable cause or a community project. The contributor receives nothing in return for the donation.
Reward-based crowdfunding allows individuals to contribute to a product or projects while being rewarded with the said product when it is realized. This kind of crowdfunding is widely used by creative projects such as music and literature and is widely known through the popularity of the global platform, Kickstarter. Notable Norwegian companies in the donation- and reward-based categories are Spleis by SpareBank 1, Sponsor.me, bidra.no and Startskudd by DNB.
Crowdlending makes things more interesting. Where the first two forms of crowdfunding are based on at least a portion of idealism, crowdlending is all about return on equity. Crowdlending platforms allow private investors to invest directly in loans, either as unsecured loans to other private individuals or as small business loans to companies in need of capital. Crowdlending platforms offer several benefits to the various stakeholders on both sides of the platform. For potential investors, investments through a crowdlending platform offer an asset class that differs from those traditionally available for retail investors. The possibility of investing directly in loans may be seen as a democratization of the debt-investment market as similar assets historically have only been available for institutional investors, family offices, and similar. Notable Norwegian crowdlending companies are Monner, Kredd, FundingPartner, Kameo, and Perx.
Equity-based crowdfunding allows individuals to invest in companies as equity investors and receive shares in the company seeking capital. Notable Norwegian companies (limited to those with a license or a pending license from the Norwegian FSA) are Dealflow and Monner.
Investors are also placing their bets on crowdfunding. SpareBank 1 SR-Bank has a 34 percent stake in Monner. DNB, as well as Schibsted, has invested in FundingPartner. SpareBank 1 SMN has invested in Folkeinvest and ABG Sundal Collier has invested in Kameo just to name a few.
According to the Norwegian crowdfunding Association crowdfunding as a whole had a significant boost in capital raised in 2018 with a total of 205 MNOK raised throughout the various categories of crowdfunding. Compared to 2017, where crowdfunding amounted for 94 MNOK in capital raised, this shows a growth of 118%.
Crowdlending experienced the highest growth rate with 324% growth with 71,5 MNOK in 2018 compared to 17 MNOK 2017. This is followed by equity-based crowdfunding which grew by 306% from 13,7 MNOK in 2017 to 55,5 MNOK in 2018. Donation-based crowdfunding may look moderate compared to the two previous categories, but a growth of 48% from 42,3 MNOK in 2017 to 62,6 MNOK in 2018 also shows promise. The only category that saw diminishing numbers is donation-based crowdfunding, which saw a reduction of 26% from 21 MNOK in 2017 to 16 MNOK in 2018. This continues a decline for donation-based crowdfunding which peaked in 2016 at 37,6 MNOK.
With rapid growth, Norway is still behind some of the more mature markets for crowdfunding, but the future looks bright for the sector to grow further. The implementation of debt registry in Norway will give both banks and crowdlending companies aimed at consumer loans better insight on borrower’s financial status. Regulations have for a long time been the biggest obstacle for crowdfunding in Norway, and while Norway still imposes some of the strictest requirements on crowdfunding in the EU, with an investment limit on 1 MNOK for private investors, the regulatory landscape is at least becoming more predictable.
With PSD2 coming into effect just around the corner, potential changing user behavior in the wake of the directive could benefit crowdfunding companies as it becomes easier for consumers to “shop around” for financial services. For crowdfunding companies with a license, the ability to act as a PISP under PSD2 will also reduce friction when transferring money to the platform as well as enable access to transaction data for credit scoring.
There are still several unknown factors in plays, and one wildcard in the regulatory equation is whether the regulatory sandbox will benefit crowdfunding companies.
Crowdfunding is without a doubt here to stay, and what makes crowdfunding appealing for me is that it represent a business model innovation. This fact provides both opportunities and threats to the banking sector.
Donation– and reward-based crowdfunding may live alongside traditional financial products, as it represents something on the side of traditional banking products.
Equity-based crowdfunding in its current state solves an inefficiency in the market by catering to a previously underserved segment. However, it has all the characteristics of disruptive innovation, and will most likely move up the value chain towards bigger deals and challenge the corporate finance sector.
Crowdlending is a double-edged blade for incumbents. While crowdlending for small business loans acts as a supplement to traditional credit products, crowdlending for consumer loans is a head-on attack on one of the most profitable products in banking. With little- to no legacy, crowdlending platforms may provide cost-efficient loan origination where both investors receive premium returns as well as providing loans at a lower interest rate to borrowers. How this plays out remains to see and at the end of the day, it all comes down to user attraction and the ability to keep user acquisition costs low.
In the case of both equity-based crowdfunding and crowdlending, these paltforms provide an alternative asset class that may challenge both deposits as well as funds under management for incumbent banks and asset managers. Looking no further than across the border to Sweden, crowdfunding company Lendify announced that they have received 1 billion SEK of institutional capital to fund loans on the platform.
Whether you as a bank are actively involved or remain on the fence, this area is moving at a pace where it is wise to pay attention. Jeff Bezos is reported to have said, your margin is my opportunity, and this is from my perspective what parts of the crowdfunding sector are aiming for.