I can remember back when my family first got “the internet.” I was probably around the age of 12, and we had a modem that dinged, donged, dialed and made all sorts of white noise to connect to the internet via America Online or AOL for short. It is hard to believe that was only 20 years ago, and now the internet is far more integrated into our everyday life.
Despite the internet being a household presence for 20 years, we continue to find new innovative ways to use it. The internet, for better or for worse, wreaked havoc on many traditional businesses. Take print media for example. The decline of the newspaper industry and major book retailers is directly linked to the rise of the internet. We have also seen the internet profoundly reshape the music industry, and now it is even challenging the television industry!
What about those of us in banking? I think we acknowledge that changes brought on by the internet have resulted in quieter branch offices and teller lines. Now people can monitor transactions online, wire money online, and pay bills and loans online. Also, there is even remote capture of deposits, so there is no need to bring checks to a teller to deposit. When was the last time you visited a local bank or credit union branch? There are still people there, but perhaps fewer. And now, they are more skilled generalists, who need to be skilled to handle a wide variety of problems that can’t readily be solved on the internet.
So what next? Can the internet start to replace other jobs further up the management chain? Crowdfunding has begun to show us that entrepreneurs may no longer need to go to the bank to get a loan. Crowdfunding, the phenomenon that allows an online platform to aggregate several small investments from a large group of people, is already being used to finance several small business ventures. By the end of 2013, the crowdfunding industry was only $5.1 billion, which is relatively small. But, it has seen explosive growth, since it was a $1.2 billion industry in 2011 and $2.7 billion industry in 2012.
Now, larger lending opportunities are attracting crowdfunding too. A notable example in recent news was the crowdfunding purchase of a $26.8 million office building in Washington DC, known as Georgetown Plaza. Companies like Realty Mogul and Fundrise are challenging how real estate transactions have traditionally been funded. If millions can be raised to fund traditional real estate purchases, then what can’t crowdfunding provide capital to? It would appear a new source of funding is on the horizon, and depository institutions should take notice!
It is hard to say if crowdfunding will replace commercial lending in any meaningful way, but it is likely to affect the course of business somehow. Other industries affected by the internet likely felt impervious to information technology too, but they have since faced their day of reckoning. What traditional banks and credit unions should start to do is evaluate crowdfunding to see if there isn’t a way to differentiate their products or incorporate crowdfunding into their traditional lending practices, say through a CUSO or other subsidiary, instead of waiting until it is too big of a revolution to catch up to.