Crowd Source Lending
In GDS’s first quarter newsletter this year, the company discussed the growth in the crowd-funding market. Crowd funding allows anyone with a business plan or other initiative to create an online account to ask for funds from the general public for a specific amount within a set time period. Only if the fundraising goal is reached does the group receive the money.
For small companies, crowd-funding sites like Kickstarter mean that instead of asking for a traditional loan from a financial institution, funds can be gained from those interested in the potential business as donations, not from shareholders or typical investors. For banks, sites like Kickstarter could change the lending industry, an article in American Banker said. Crowd-funding and peer-to-peer lending sites have allowed lenders and borrowers to go around the traditional bank when credit was unavailable after the financial crisis.
But even as banks provide more loans, these sites have still been growing. Eventually, government regulation and compliance may be required, the news source said.
“There is nothing stopping a direct funding, or a direct payment relationship where you completely break the bank out of the equation,” Jim Marous, the senior vice president of marketing agency New Control, said to American Banker. “No one is doing anything about the compliance question. Does the government, at some point, get involved, and where are the controls on funding?”
At the same time, while there may soon be more regulation, Marous added that banks can look to these sites to adapt similar services, and non-traditional lenders can invest in credit and risk management tools to make stronger lending decisions. As the range of financial services expands, having risk assessment software can help any lender stay profitable.