FinTech start-ups and the role of crowdfunding

The following article is a guest post and may contain affiliate links:

The FinTech industry has witnessed a huge amount of global investment and growth over the past few years. Between 2010 and 2015 alone, there has been a staggering $49.7 billion, a quarter of which was invested in the first two financial quarters of 2015. This trend of huge investment into FinTech has lead to a massive growth worldwide. This includes millions of FinTech start-ups appearing year on year offering a broad range of financial software solutions.

However, just like any other industry, finding funding in FinTech for a new start up can cause many great concepts to fall at the first hurdle. Attempting to borrow capital in the current economic climate through traditional bank lending, which are subject to stringent regulations and outdated processes can not only take a long time to process, but also it may not be guaranteed.

The latest funding alternative

But as is always the case in business, there are always people looking for alternative ways to raise capital for a new business venture, and a leading trend that is boosting the financial prospects for many new FinTech ventures is crowdfunding.

The whole concept of crowdfunding is to raise small amounts of capital across a large number of investors to generate a collective pot of money that can then be invested into the business. Managed correctly with comprehensive capital market solutions, it can be a very effective way of generating enough capital to launch a new start up and make the money go further too.

With this in mind, it is now playing a huge role in FinTech start-ups who are now appealing to the masses for investment and moving away from the larger banks. These don’t even have to be people with huge capital to burn; as the beauty of crowdfunding is that anyone with even a small amount of capital can make an investment into something they believe could be a success.

In the UK alone, crowdfunding is having a significant impact on the FinTech industry. And in some instances the amount of capital raised can far exceed the initial expectations like it did goHenry, a British FinTech start-up who designed a pre-paid debit card and app aimed at teaching children how to manage their money from a young age. They sought additional funding for their venture through crowdfunding campaign with Crowdcube, with an initial target of £2million that was raised in less than 48 hours - they then went on to secure a record £4million from more than 2000 investors.

Is this a continuing trend?

With such a buzz around crowdfunding and so many success stories within the FinTech industry, this does raise the question of whether this method of raising capital is likely to continue and whether traditional banking institutions are in danger. Certainly with many FinTech companies offering crowdfunding services themselves it would suggest it’s here to stay for the foreseeable.

Naturally, one of the attractions of crowdfunding for start-ups is the ease and quickness that capital can be raised. Although it requires a company to promote their concept to a wider audience, this can be done effectively through crowdfunding companies. Furthermore, crowdfunding campaigns allow start-ups to make a more compelling and emotional connection with investors, particularly if they have a concept that is relevant to the potential investors, designed to enhance customer experiences.

On the flip side, banks still require certain regulations and objectives to be met before they can authorise credit or loans, regardless of whether the individuals believe in the concept’s prospects or not. This could pose a problem for banks, unless they change their business models, if the prosperity of crowdfunding campaigns for FinTech start-ups continues as it is. Banking institutions that historically profited from business loans and credit could miss out on a sizeable chunk of revenue, where they made profits on interest repayments, which could have the potential to affect the bottom line.