The Next Big Thing in Crowdfunding

Next Big Think In CrowdfundingThe rapid growth in crowdfunding platforms is remarkable. As the market matures, some key trends are emerging which I think have important implications for future areas of growth.

Fragmentation.  With over 600 platforms ( today, the market has become highly fragmented. Pick any segment — equity, loans, real estate — and you’ll find multiple platforms.

Institutionalization.  Crowdfunding and P2P platforms are increasingly turning to institutional capital sources to provide liquidity and scale. This includes investor groups, “institutional” investors that have raised funds, and banks (recent articles here and here).

Electronification. As participants have become more sophisticated, so too have the platforms. Electronic access through APIs, both for data analysis and investment, have become prevalent.

When you combine Fragmentation, Institutionalization and Electronification the future looks quite interesting.

  • Investment analysis becomes much more complex. Relying on the tools of one platform are not longer sufficient. Institutional investors need to bridge marketplaces. They want an aggregated view of where the “market” is for a particular security, loan or asset. They want to dissect relative value across platforms. They want to consume and analyze large sets of data using standardized or proprietary analytics.
  • Connecting to multiple platforms, to either consume data or submit investment requests, becomes a pain point. Connections are costly to setup and maintain. By themselves they provide little competitive advantage (for now at least). Participants would much prefer to deal with a single connection point.
  • Electronic trading becomes a capability for potential differentiation. Given the small investment amounts and desire to redeploy capital, institutional investors need tools to enable them to invest in an efficient, rule-based approach that leverages APIs that are now available. As these electronic capabilities mature, I would expect more advanced algorithmic trading to increase. While some participants may prefer to build these capabilities from scratch, I expect others will prefer to license a platform and invest in developing trading strategies on top of it.

Helping accelerate these developments is the desire for crowdfunding sites to grow their marketplaces as quickly as possible. In general, they appear to have adopted an approach which is open to the broader ecosystem, and does not discriminate based on type of investor or trading style.

As a result, I see a tremendous opportunity for “second order” crowdfunding players that are focused on providing data, analytics, connectivity services and electronic trading platforms. There are already some notably companies addressing these needs (e.g. Crowdnetic, LendingRobot). I expect we’ll see many more in the future.

An open API standard for banks

The UK government has issued a call for comment on the establishment of an open API standard across UK banks. This follows a report last year, Data Sharing and Open Data for Banks, which discussed the benefits of such a policy.

The UK ambition is quite remarkable:

“..the government wants to go beyond how APIs are currently used in other countries, to deliver an open API standard in UK banking. An open API standard would entail UK banks developing a single and common API, which is publicly available and can be used by any fintech firm or app developer to design products or apps which work for all UK banks.”

— Open Consultation (01/28/15)

Assuming all the privacy, security and industry cost concerns could be addressed, this would remove a huge barrier that firms face when initially starting up — how to get access to data without bespoke integration and lengthy negotiations.

There are many personal finance, expense management and comparative banking products in existence today (see FinTech Market Map) that would stand to benefit.

Of course, common standards sound good on paper but will need to resolve several issues:

  • who sets the standards?
  • how are the standards going to evolve over time?
  • who bears the initial cost and maintenance cost?
  • who gets to monetize the data, and its derivations?

It will be interesting to see if similar initiatives gain traction in other markets, and if the momentum continues or ends up falling short.