Financially Included Through Crowdsourced Financing?

> Posted by Danielle Piskadlo and Jeffrey Riecke, Senior Program Specialist and Communications Assistant, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

Thanks to social media, we are in a new era of sharing. Everything from major life events to fleeting thoughts like “I’m hungry” get posted, tweeted, and shared within social circles these days. And the provision of financial service – once a private affair – is not immune.

Sites such as Prosper and Kickstarter are among the many new crowdsourcing websites that allow people to share – in fact, advertise – their status of “I need a loan.” And these sites are revolutionizing what it means to be an entrepreneur or artist today by smashing the barriers to entry for funding a new idea, skill, or product.

In a big way, the days of trying to explain the market potential of your business plan for a trendy new app to a banker are disappearing as are the days of playing your music in the subway or selling your art on the sidewalk, hoping to get discovered. Now, almost anyone with a product or craft can simply post it on one of many sites to crowdsource the funding.

One of the beauties of crowdsourced financing is that it allows an entrepreneur or artist to assess market demand. The crowd tells you if your idea or art has potential by funding it. And distributed funding requests allow entrepreneurs or artist to tap into social networks for support in a meaningful way and without any real risk.

There are many crowdsourced financing platforms out there, and lots of different business models, so let’s take a closer look at one of the more prominent outfits: Kickstarter. Since the service began in mid-2010, more than 4.9 million people have backed a Kickstarter project, pledging over $800 million across 49,000 projects.

The guidelines to Kickstarter are relatively straightforward. You must be over the age of 18 to create a project on Kickstarter. You must declare a funding goal and deadline. Your project must have a clear ending. Kickstarter’s funding model is all or nothing: if your entire funding goal is met, you receive everything; if it isn’t, you receive nothing. You don’t repay your backers with money, but instead you reward them in some other way – often that’s by offering an advance copy of the finished product, like a to-be-released book. Sound simple enough?

Maybe so, but the finer print helps illustrate crowdsourced financing platforms aren’t one-size-fits-all. Kickstarter is only available to those in the U.S., U.K., and Canada. You must have access to the web to use the service – a limiting factor for many unbanked individuals. And projects must fall into one of a handful of categories, such as Art, Comics, Dance, Design, and Fashion. You can’t use Kickstarter to sell equity or solicit loans, or use it to fund personal expenses like tuition or bills (you can find the full guidelines here).

However other platforms do help fill in some of these service gaps, broadening the crowdsourced financing landscape. Indegogo, another popular “donation-based model” platform, lets people raise funds for almost anything, including personal needs, and its reach is global. Indegogo does attach a fee to any money that is raised. In addition to these donation-based model platforms, the “investment model” is becoming increasingly prevalent among crowdsourced financing services. These platforms, like Crowdfunder for example, take on a more traditional investment approach: businesses seek capital by selling equity stakes or debt online.

There are many other different incarnations of crowdsourced financing, as well. A platform called SoFi enables schools’ alumni networks to fund student loans. With any of these services, it’s important to remember that you’re harnessing the financial support of one particular community. There are more and more platforms being established, giving crowdsourcers more options, but each of these outfits is only as valuable, or dependable, as the community that supports it.

On the whole, it’s estimated that the crowdfunding industry raised $2.7 billion in 2012, spanning over 1 million projects, and that in 2013 the industry will grow to $5.1 billion in annual crowdfunding. This explosion of crowdfunding via the internet has the potential down the road to revolutionize how lending is done – and could eventually cut out financial intermediaries like banks altogether, or at least transform how they do business.

But for now these sites are providing the financially excluded people who have been rejected from banks in developed countries another option to fund their businesses/ideas. And it puts them more in the driver’s seat with setting lending terms because they can more easily shop around for a lender willing to accept their terms. The crowdfunding phenomenon is doing for developed countries exactly what microfinance did (or was meant to do) in developing countries. Self-help groups, with the power to set their own lending terms, were formed so unbankable women who were rejected from formal financial institutions could pool their money together and lend it all to one person needing it for a business.

Utilizing the power of online technology and networks to help individuals, businesses, and everyone in between with their fundraising needs, what a novel idea.

Image Credit: mic wernej

Have you read?

What Technology Can (and Can’t) Do for Financial Inclusion

Designing Financial Services for China’s Marginalized

Micro-Opportunity Alternative: Microfranchising