Crowdfunding drives unprecedented efficiency
Crowdfunding has become the center of attention in the field of financing. It is also an increasingly popular financing option for both entrepreneurs and investors. However, crowdfunding is actually not a new concept. The foundations of the United States’ iconic Statue of Liberty, for example, was built by cash collected through crowdfunding, which at that time was facilitated by a newspaper.
Nowadays, thanks to the internet, entrepreneurs with big ideas can easily connect with keen investors.
Crowdfunding is an alternative financing channel, in which a number of people contribute to financing a project, debt or donation. In return, these investors are eligible for equity shares in a scheme called equity crowdfunding: free products with reward crowdfunding; and interest, called debt crowdfunding and is popularized by peer-to-peer, or P2P lending. When investors do not get any return for their investment, the scheme is called charity crowdfunding.
The World Wide Web has been a platform for facilitating collaborations between investors and entrepreneurs, and exponentially driving the growth of crowdfunding. This is one of the stand-out-products in the evolving collaborative economy. The trend emerged in 2003, when ArtistShare launched its reward- based crowdfunding service. Since then, the industry has expanded significantly.
In 2015, the value of crowdfunding was globally estimated at US$34.4 billion - higher than the value of venture capital worldwide, which stood at $30 billion. The former is projected to hit $1 trillion by 2025, according to Switzerland- based market research firm MyPrivateBanking.
The idea of crowdfunding is actually very similar to Indonesia’s concept of gotong royong (mutual cooperation). In the country, crowdfunding began to emerge in 2011 with a platform to raise funds for creative projects.
The 2012 movie Atambua 39° and community movement #SaveMaster, which saved a school in Depok, West Java, from eviction, are some of the prominent projects supported by crowdfunding, collecting Rp 312 million ($23,421) and Rp 137 million, respectively.
The method was also applied to gather Rp 1.3 billion from 3,223 donors to help sick children.
Globally, crowdfunding is used in many sectors. there are around 21,000 active projects across various sectors that benefit from crowdfunding, suggesting that its applicant is widespread.
Crowdfunding Center research shows that around 442 crowdfunding campaigns are launched on a daily basis, collecting $60,000 per hour. In total, there are 162 countries that actively participate in funding activities, with the US getting the largest share.
Out of 20,699 active projects, 11,505 are located in the US, while 2,205 are situated in the United Kingdom and 1,137 are in Canada. With around 30 active projects currently running Indonesia still has much to grow.
Convenience seems to be driving the popularity of this funding scheme. Some argue that crowdfunding removes the intermediary role of middlemen, banks or other financial institutions who charge high lending fees.
However, if crowdfunding is successful thanks to lower fees, then it will not take long for existing players to reduce their fees and apply new technologies in their existing circumstances. In addition, banks are trusted to keep someone’s saving.
Crowdfunding has been so successful because it brings unprecedented efficiency and sophistication. It also introduces a higher degree of credit scoring efficiency that we have not seen before.
Under the current situation, banks lend to individuals through credit cards or unsecured loans which are also the target of P2P lenders. For a bank, the cash funneled to this group of individuals is just a very small part of its overall lending assets, making up between 5 percent and 10 percent, because the majority of their assets are usually dedicated to secured loans.
Banks obviously do not invest largely in credit scoring for this segment. In contrast, a P2P company is fully dependent on its credit scoring model. if the credit scoring model is not good, they have the risk of going bankrupt.
Consequently, this forces them to highly invest in data analytics and continuously improve their credit scoring models for individuals- which is not the case with conventional money lenders at present.
This crowdfunding phenomenon is a natural progression toward market efficiency and therefore, a force to be reckoned with. We will see many new types of players entering the financial sector, and many
existing players will be forced to change their business models in order to compete. Many niche sub-sectors, such as real estate crowdfunding, will also arise.
Regulations will play a key role in determining how quick countries adopt to crowdfunding. Regions like the UK will lead the way and are estimated to set the reference rules for the industry.
Indonesia also has a big potential to boost local crowdfunding services. Players are looking forward to regulations to be issued by the Financial Services Authority (OJK) in the near future.
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