The financial services industry is in crisis - what’s the solution?

The legacy of the 2008 credit crunch is still being felt throughout the financial services industry, nowhere more so than investment.

Lending restrictions mean privately-owned companies are finding it tougher than ever to raise capital, and record low interest rates have led to the number of individual shareholders steadily declining — with Millennials particularly disinterested in traditional stock or fund markets. How do we turn this situation around?

It’s time to make investment more accessible

One key reason for the finance market’s sluggishness is the traditional approach to raising capital. The process has not changed in decades, and businesses are faced with limited fundraising options, which are often long-winded and expensive.

Many companies choose not to go public because of the high cost and complex compliance requirements when launching an IPO. According to PwC research, the bills and fees associated with running a successful IPO can amount to 7% of the total raised, and the number of parties involved can make the process very time consuming.

For companies that want to remain privately owned, the most common option — and the only option, in the case of some businesses — is bank financing. But most banks significantly tightened their lending criteria following the 2008 recession, and typically only now lend to established companies. This makes this route inaccessible to SMEs and start-ups, who need the capital most of all.

There are also various forms of private equity fundraising methods, from venture capitalists and angel investors to friends and family support, however these tend to have a small pool of investors, and offer zero liquidity. Some businesses are even turning to newer platforms such as crowdfunding, but even the largest crowdfunding platforms tend not to offer a legal framework for equity ownership — so essentially they’re just a site for raising donations towards a start-up project.

Tokenization: the key to liberating financial services

For any companies concerned about the lack of opportunities available through traditional fundraising methods, the good news is that an alternative approach to raising capital is now emerging, which offers a much simpler process for helping businesses to grow.

This approach tokenizes financial assets and securities, so companies can reach new investors and raise capital quicker. Tokenization is a method which converts assets into digital tokens, which can be managed and traded virtually via the blockchain.

Because they are virtual, tokens can be sold in fractions — meaning investors that could never afford share prices through traditional fundraising methods can purchase a number of tokens, which amount to a percentage share. Equally, the lower cost of entry attracts investors to take a chance on companies that they may not have previously considered.

This tokenized approach is particularly attractive to younger investors, who are put-off by the high entry price of traditional investment methods. According to a Harris Poll study released this year, 80% of Millennials are not currently in the stock market, either because they don’t identify with the typical investor profile — most view him as a 60-year-old white man — or because they trust digital applications more than ‘old world’ platforms. They are looking for a technology-driven way to invest their hard-earned money

Another benefit of tokenization is that digital assets are stored and traded securely on the blockchain, which supports self-executing smart contracts — meaning the entire process can be managed directly between the issuer and the investor. This enables faster, cheaper transactions, immediate asset liquidity, and the marketing potential is limitless.

What’s interesting about this blockchain-based approach is not just its accessibility, but its flexibility for businesses of all sizes. For example, a family-run SME could use such platforms to manage a simple private sale of an equity stake, ensuring that it is secure, legal and transparent. In contrast, a larger firm could run a public equity offering, using the platform to manage regulatory compliance and reporting, KYC/AML, investor communications, and shareholder voting — building stronger investor relationships in the process.

Liberation, not complication

Regulation and compliance clearly have their place in financial services, but for companies seeking investment, setbacks such as the 2008 credit crunch have led to governance becoming more of a hindrance than help. The emergence of FinTech companies using blockchain to create alternative fundraising methods ensures that both businesses and potential shareholders remain protected, in a way that promotes investment, instead of closing the door for companies ambitious for growth.

Own is one of the companies at the heart of this revolution, and we are proud to be offering a solution to the challenges of the current financial market. By simplifying established processes through the power of blockchain technology, we are bridging the gap between the old and new economies, allowing everyone access to fundraising tools and markets.

We are using the blockchain to enable tokenisation, which in turn is innovating investment. Through our ecosystem, companies are able to:

  • Lower the entry barriers to make fundraising more accessible — particularly to younger investors
  • Fully digitise transactions so that data is stored securely, giving shareholders and companies additional peace of mind
  • Remove third parties from the fundraising process, to make it cheaper and more efficient for both the issuer and investor
  • Directly connect companies with their investor base, so they can nurture those relationships to convert shareholders into customers

By facilitating this new approach we are levelling the investment playing field, and restoring the balance of power from custodians back to companies.

Discover more about Own’s blockchain technology here.

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