September 26th, 2018
Bank economists warn of disruptive threat from mobile and crowdfunding
FinExtra | Posted on July 4, 2013
Banks that fail to invest in mobile technology and crowdfunding platforms risk being swept away by a wave of disruptive innovation warn economists at US bank BBVA Compass.
In its just-released second quarter economic outlook, the bank's economists argue that the financial industry faces its most dramatic transformation in modern history because of increased online and mobile device usage, which will make banks more productive but also boost competition from nonbanks.
"To succeed in this new hyperconnected and competitive environment, banks will have to follow a customer-centric approach and offer simple, user-friendly and effective products, with a high level of transparency and security," chief economist Nathaniel Karp writes.
Banks are ahead of the curve in mobile technologies, the bank's economists say, after examining a 2012 Federal Reserve Board survey about mobile banking.
"Mobile banking will increase the productivity of the industry as banks will have more information and ways to efficiently target users; however, these technologies are also bringing more competitors: highly sophisticated platforms with innovative business models and very low operating costs," according to the economists.
An even bigger threat to the traditional banking industry may yet come from the advent of new crowdfunding platforms, which the BBVA economists describe as "a disruptive innovation that commercial banks cannot ignore".
They recommend that banks pay close attention to this trend, strengthening their core business and investing resources in developing their own crowdfunding models.
"For banks, crowdfunding poses a challenge," states the report. "From here on, they will face a new competitor with lower operating costs, a different approach to risk management and a simpler product offering. To what extent crowdfunding platforms will displace commercial banks in the retail and small business segments remains to be seen. However, banks should be prepared for this trend and make it work to their advantage."
Crowdfunding: A Disruptive Technology for Commercial Banks?
BBVA RESEARCH -- Introduction:
In May 2013, Google announced an investment of $125 million in the peer-to-peer crowdfunding firm
Lending Club. In the same month, Google Ventures (the venture capital arm of Google), together
with Union Square Ventures and other VCs, invested $7.5 million in Series A funding for CircleUp, a
crowdfunding platform that allows small businesses to sell equity to accredited investors. Does Google’s
investments in crowdfunding mark the beginning of an era in which tech giants provide financial
services? Is crowdfunding a serious threat to commercial banks? Does it have the capacity to displace
banks in filling the financial needs of business and individuals? These are some of the questions that
motivate this essay.
In the first part, we provide a definition of crowdfunding as well as examples of some of the most popular
platforms. This is followed by a description of current trends in crowdfunding including the analysis of
the JOBS Act of 2012- a legislation that encourage small business financing through crowdfunding sites.
In the second part, we argue that lending- and equity-based crowdfunding are disruptive innovations for
commercial banks using the definition of disruptive innovation developed by Clayton Christensen back
in the nineties. In the third section, we explore a series of alternatives to cope with disruptive innovation
and finish with a list of topics for further discussion.
Download the entire PDF --> here