Crowd finance 101: The many faces of global crowd finance

April 12, 2017 • By TAB team

Our ‘Crowd Finance 101’ series takes a look at the nuts and bolts of crowd finance. Today we take a look at the global coverage of crowd finance.

Our ‘Crowd Finance 101’ series takes a look at the nuts and bolts of crowd finance. Today we take a look at the global coverage of crowd finance.

The many faces of global crowd finance

Crowd finance is diverse, dynamic, growing and spreading throughout the world:

The global crowd finance industry is estimated to have raised $34 billion in funding. 50% of this activity was in North America, 28% in Asia, and 17% in Europe.

The United States is the world’s most mature crowd finance location, and the UK is the most developed market in Europe, with a progressive regulatory approach that has supported platform growth while protecting consumer interests.

In this Crowd Finance 101 piece, we’re focusing on two jurisdictions often overlooked by Western media: China and India.

Crowd finance in China

Crowd finance is still nascent in China but the potential for growth is huge. The World Bank estimates China will generate $50 billion in funding by 2025, or 52% of all money raised via crowd finance globally. Rewards and donation-based crowdfunding dominate.

Fundamentals look solid. As in any growing economy, there’s a wall of capital looking for investment. On the supply side, companies find it hard to raise capital via traditional lending, so crowd finance poses an attractive alternative.

Finance is politicised In China. State-controlled banks dominate lending, and they are subject to strict regulation and bureaucratic meddling from government. As a result, a huge shadow banking industry has developed to meet the needs of those seeking affordable funding,

Shadow banks exist outside the formal banking sector, offering customers flexibility and price competitiveness, but operating with less regulatory oversight. Shadow banking also undermines trust in the Chinese banking system and crowd finance risks being lumped in with shadow banking in the minds of regulators and consumers, subjected to the same suspicion and risk-avoidance.

Financial crime is also a concern. In 2015, Ezubao was exposed as swindling US$7.6 billion from investors via fake investment products. Episodes like this undermine trust amongst investors.

Trust is an issue that goes deeper than regulating shadow banking and policing financial crime. Chinese society is built upon personal relationships, with distrust towards unfamiliar people, companies and ideas. Crowd finance needs to overcome this barrier in order to enter the Chinese mainstream.

To do this, more transparency is needed. Platforms need to share data with consumers. This is a challenge we are passionate about solving at Crowdsurfer.

Crowd finance in India

In India, rewards and donation-based crowdfunding are growing. Historically, donations have built temples, cash covers are taken at marriages, religious festivals include contributions. So, donation-based crowdfunding mirrors traditional giving.

P2P lending is slowly gaining traction. Uncertainty surrounding stock market and real estate valuations and the price of gold – important asset classes in India – and the process of demonetisation begun in 2016, all make marketplace lending an attractive proposition.

Similarly, SMEs have been adversely impacted by demonetisation and bank lending had dried up. P2P has stepped in as an alternative. In 2016 the Reserve Bank of India (RBI) put out a consultation paper on P2P, aiming to clarify protection for investors whilst encouraging innovation. Regulations should come into force in 2017, providing a huge boost to market place lending.

The future of equity crowdfunding in India is less certain. It’s currently classed by the financial authorities as “unauthorized, unregulated and illegal” and there is no regulation in the pipeline.

Crowd finance in India is crying out for a more proactive approach to regulation. Once financial authorities recognise the potential of P2P and equity crowdfunding as catalysts for growth, we will see increased adoption. It’s still early days, but the growth of marketplace lending in India is a positive sign.

Our view

The heterogeneity of crowd finance is the key reason for its global success. Companies, charities, communities and individuals have a flexible set of funding tools that can cope with different regulatory frameworks, market conditions and cultural traditions.

This heterogeneity is a huge bonus but also a great challenge for regulators in places like China and India, where authorities have been slow off the mark. But policy changes suggest they are getting their act together. We expect growth in both markets as regulation improves, platforms achieve ubiquity and trust grows.

At Crowdsurfer we believe we have an important role to play in the development of global crowd finance. We’re helping regulators track and analyse the crowd finance industry. You can keep up to date with the developments on Crowdsurfer Pro.


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