Trends in Finance Which Should Concern Bankers and Brokers
Despite being one of the slowest industries to adopt advancements in technology, banking and finance industries have enjoyed consistent prominence. It may be the case that the roles which professionals in this sector play may be diminished. There are technologies and practices which are capable of loosening the grip of certain institutions in their roles as financial service providers.
Here are some of them.
Direct Listing Compared to IPOs
Initial public offerings (IPOs) refer to a process which allows a privately owned company to become a publicly-traded one. Founders, shareholding employees and initial investors generally want to sell a share of their piece of the company at the highest prices.
This means they get cash in their pockets and the value of the company increases. For this process, a firm typically hires underwriters (an investment bank) which finds investors to buy all the stock on offer. This process guarantees that the company sells all of the stock available at a pre-negotiated slightly lower price.
The investors try to make a significant profit by purchasing the equity at a relatively low price then resells it to the public at a much higher price. The risk is that the public price may not be as high as expected and the investors make a loss.
But if the public investors are willing to pay a much higher price, then the company’s shareholders would have lost by selling a piece of the company cheaply. Additionally, there is a limited amount of equity on offer, the whole company cannot be sold to the public.
Spotify made a bold decision to bypass the bankers, brokers and investors and offer their shares directly to public investors. Unfortunately, the stock’s performance has been relatively disappointing but the fact that the price did not crash is important.
This strategy (direct listing) is can be risky since, in the event that the price of the stock falls, shareholders lose value. Further, there are no restrictions with regards to the amount of equity which can be sold upon direct listing. If the price of the stock is falling, those who sell early get more than those who hold on to their shares. This creates an incentive for shareholders to offload their stock quickly, causing an over-supply and a further drop in share price.
Regardless, Spotify went ahead and have now recently been joined by Slack and iHeart Radio may soon follow suit. These companies are proving that there may be no need to hire costly underwriters. As such, bankers and brokers are being replaced by, well, ordinary people.
Regulation Crowdfunding Challenging Venture Capitalists
Venture Capitalists are not all as they are depicted on shows like Shark Tank, but some of them could be worse!
Entrepreneurs who desperately need large amounts of cash used to require an investor or a loan to fund their projects. The downside of loans is their interest expense and the potential threat of a seizure of assets if instalments are not met.
Venture Capitalists are a major source of investment for start-ups which require several millions as investment. This is a market which passed the $177 billion mark in 2017 and is edging towards $200 billion. However, entrepreneurs may not entirely enjoy the influence of having a major investor on their projects.
It is understandable when venture capitalists are keen to protect a multi-million dollar investment yet undue influence may result in the creative direction of a start-up suffering or a series of rushed decisions which could deviate from the founders’ vision.
Additionally, venture capital investments can be extremely profitable – yet access to them is limited to a very minute but extremely wealthy portion of the population. Additionally, not all start-ups have access to these funds, even when an idea is brilliant.
While venture capital is clustered in certain locations, like the San Francisco Bay area, New York and London, regulation crowdfunding allows entrepreneurs access to capital from their clients, fans and other a whole range of other individuals.
Instead of one over-bearing investor, a start-up could have a pool of investors, all with limited influence but essentially a wider knowledge base and skill set which could benefit entrepreneurs and inventors. As such, mega-rich venture capitalists are being replaced by, well, ordinary people.
Bankers have had it good for a very long time. They have access to everyone’s money, they can loan it out – often at obscenely high interest rates (when compared to interest paid on deposits), and are often bailed out if they lose it in reckless investments.
Microloans, specifically payday loans have the highest rates of interest and are very prolific at trapping people into a debt cycle. However, the concept of micro-lending is not inherently an evil one although it primarily victimises the lowest income earners. Additionally, it benefits a small group of people.
Peer-to-peer lending platforms give ordinary people a way to make significantly more returns than they would in a fixed deposit account at a bank while helping those in short-term need for cash.
It is vital to note that this concept, in a market expected to reach over $800 billion in loans by 2024, is not without significant risk, as is demonstrated by the collapse of Lendy’s which had £165 million invested in it. Borrowers could benefit from low interest rates, particularly if they gain credibility on such platforms. As such, predators in the short-term loan business are replaced by, well, ordinary people.