Money, banking & insurance

Crowd funding – putting the fun back into funding

Middlemen have been kicked out of a few industries lately and some observers say small business finance could be next. Evidence for such claims largely comes from crowd funding websites, especially Kickstarter. Kickstarter is a platform for people to raise money, usually for artistic or creative ventures and the business takes a cut from the ventures it helps to fund.

To date, around 83,000 money-raising campaigns have been initiated on Kickstarter, with slightly less than 50% receiving money. Worldwide crowd funding sites raised $US1.5 billion in 2011 according to Massolution, a crowd sourcing research firm. Competitors to Kickstarter include Indiegogo, Peoplefundit and Crowd-funder, although the idea is old and can be linked to various subscription models used as far back as 1755. (Samuel Johnson used such a model to raise funds for his dictionary of the English language, for example.)

There have been more recent novel funding ideas. Radiohead offered their album Rainbows directly to fans over the internet (and asked fans to pay whatever they could afford) and the musician, Amanda Palmer, used $US1.19 million of funding to regain creative control of her music.

Kickstarter is still not true equity finance or early stage venture capital. It is a way for fans of a particular idea to make a donation or to support an individual or group. It is less about investment and more about donation or patronage with the funder receiving recognition or various perks. Small business finance, it is not.

Detractors argue that crowd sourcing is a magnet for fraud, but much the same argument was made against eBay in its early days. The crowd, it seems, is quick to spot and publicise fraudulent practice. However, the idea that crowd sourcing will replace banks or allow masses of people to invent their own jobs is not especially convincing.

No doubt someone will try online equity finance soon, but equity in a private company is practically impossible to sell (an illiquid asset) unless the company itself is sold or goes public. It also relies on trust, which could be difficult online, although various peer-to-peer loan sites are trying to prove otherwise.

Bitcoin for rogues

Is Bitcoin the future of money or just another financial bubble fuelled by social media? The answer is probably the bubble, but whatever happens to Bitcoin it and other cryptocurrencies like it, will leave a lasting legacy. The best way to describe Bitcoin is: like a central bank created by a rogue state.

It doubtless proves there is widespread demand for digital currencies, in general and alternatives to state-issued and controlled currencies, in particular, especially when protected against inflation and forgery.

Part of the appeal of Bitcoin – apart from the fact it sticks two fingers up at politicians and central bankers – is its anonymity. Bitcoin payments are easy to use and virtually impossible to trace; this makes them very appealing to anyone seeking to avoid the tax authorities or the police. According to some commentators, Bitcoin is already the international reserve currency of criminals.

As expected, competitors to Bitcoin are starting to appear, notably Litecoin, also P2P technology, and Ripple, also for money exchange in any currency. But Bitcoin will probably make the most impact, especially because of the infrastructure that surrounds the currency.

Links between money worries and health

Since the financial crash of 2008, suicides in Europe have soared, with 1,000 more deaths in England alone. Links between money worries and suicide are well known, but incidences of stress and mental health disorders are harder to quantify. How do you measure the effects of job insecurity or declining real wages on health, for instance?

A study published in March 2013 by the University of California, Los Angeles, says psychological stress brought on by financial insecurity can lead to chronic inflammation, which increases the risk of heart attacks, depression and cancer.
The study suggests genes may be partly responsible for links between economic wellbeing and physical health.

It supports results from a UK study, which uses data from 1979 connecting deaths from heart disease to periods of high unemployment. A Dutch study looking at the period 1815 to 2000 showed generations born during recessions had unusually high early death rates. So what’s going on here?

When individuals are extremely anxious, stress hormones flood their bodies and activate cell surface receptors, which in turn instruct cells to switch on genes that create inflammation. This process creates a surge of chemicals that combats infections and heals wounds. This is usually a good thing. However, when such anxiety persists (such as stress about the future) continual inflammation can be damaging. Moreover, animal studies suggest, the lower the animal’s social status or rank, the more active the inflammatory genes become.

Translated into human terms, if certain classes are affected more than others by economic events (declining job security or real wages, for instance), they will experience more ill-health and ultimately, leave a toxic genetic legacy for future generations. Unfortunately, economic downturns seem to hit poorer people disproportionately, so they get hit twice – once in the pocket and once in the genes.

Transforming how people pay

In 2013, a mind-blowing $US6.7 trillion was processed via credit cards globally. If you add debit cards and prepay cards, it could hit $US15 trillion, even though an incredible 85% of all commerce worldwide still involves cash or cheques. Not surprisingly, an array of technology start-ups would love to get their hands on even a small slice of this particular pie, especially mobile payments.

Firms such as PayPal (117 million active users) and Square (partly owned by Visa) are now firmly established. Traditional card companies, such as Visa (now headquartered in Silicon Valley) have responded with some disruptive ideas of their own including, in November 2013, the launch of v.me. This is a ‘digital wallet’ containing a number of cards, which can be used to pay for goods and services after entering a simple username and password.

Amex is also investing in digital payments, including the purchase of a rival to Square called iZet in Sweden. Meanwhile, Mastercard has teamed up with Telefonica to create a mobile payments system called Wanda. Many of these new services are aimed at the unbanked (especially in emerging markets), which is undoubtedly where much of the future growth will come from.

Over the shorter term, new technologies should expand the market in advanced economies too, boosting, rather than reducing, the use of plastic. Whether plastic payment cards will eventually go the same way as vinyl records is still unclear. But established payment players like Visa, Mastercard and Amex are bound to not only survive, but prosper because payments still depend upon trust, which benefits established brands. They are also buying up promising technology firms.

For start-ups that wish to process payments or act like banks, the legislative environment is tough. Regulators need to be dealt with and anti-fraud systems need to be rigorously set up. This might put off many technology firms, although two giants that are well worth watching, in the context of payments, are Facebook and Google.

The end of the penny

Since 2006, the US cent costs more than one US cent to produce and fails to do the one thing it’s supposed to do: oil the wheels of commerce. Like the UK penny (and the Australian cent), the majority of vending machines no longer accept cents. It’s the same story with parking meters, phone boxes, road tolls.

Technically cent coins, along with pennies, should be abolished. The half-cent coin was removed from circulation back in 1857, while the halfpenny piece went out of circulation in 1983. However, while cents make no sense, there is significant symbolism in small coins. So expect them to hang around in jars and tin boxes marked “Stupid Little Coins” longer than they logically should.

People still like to say they’re going to “spend a penny” when they go to the bathroom. Or they say “penny for your thoughts” when there is silence. So the penny has found its way into daily parlance and will probably stick around longer, if only in that way.