This sponsored editorial comes to us from Vineet Mathur, Vice President at Bancbox. Bancbox gives non-financial institutions a simple and secure way to collect, store, and send money. Its product Bancbox Invest was designed for crowdinvesting marketplaces and helps platforms secure and manage funds for the entire transactional lifecycle.
Contribution and donation based Crowdfunding trended heavily in 2012 and grew substantially in 2013. As it continued to develop and more people became comfortable with the concept, it became obvious that the traditional methods of capital raises are going to be disrupted. Then arrived JOBS Act and brought along CrowdInvesting, the exchange of securities for an investment and it became evident that the role of angel investing and venture capital was about to change; not that it will be eliminated but might get reduced and move later in the cycle of fund raising i.e., beyond Seed round or Series A.
With the advent of JOBS Act and the bipartisan support it received, it became quite obvious that the intelligent people in Congress want innovation to happen beyond the coasts. They understand that there is enough capital available across rest of the country and there are worthy ideas that can benefit from that untapped capital. Though currently investing in those private offerings is still privileged only to accredited investors and financial institutions that can afford significant investments and risks, however, once SEC approves Title III, CrowdInvesting, in its real sense, will allow anyone to invest in equity and debt offering of private companies. That will be the true democratization of raising capital, and the vision so many shared with the passage of the JOBS Act.
For now, contribution based crowdfunding platforms such as Kickstarter, Indiegogo have it relatively easy. A lack of regulations and an easier process means a lot of the complexity is spared. The rules are simple: you pay a set amount to get a certain good, and you receive that good as long as a given amount of money is raised by the end of the campaign. If the entity raising funds doesn’t reach its goal, it costs the investor nothing. And bulk of the payments are made using credit or debit cards.
Moving from Rewards to Investments. Unique challenges require unique solutions.
Given that CrowdInvesting deals with securities, the platforms are bound by bigger challenges while collecting money. It is critical the payment mechanism on the platform is compliant and trustworthy. The second component to this payment mechanism is the reduction of user friction (ease of use), and optimizing a compliant solution and user experience is a challenge. For these reasons, a digital payment solution is the way to go.
To begin with, a programmatic payment solution that can enable real time creation and management of independent third-party escrow accounts offers scalability that manual processes cannot handle, allowing platforms to manage processing for large deal volume and investor base as envisioned in Title II and III. Think about a scenario where someone in the platform would have to call a bank every time an escrow needs to be opened for these offerings and then share that escrow information with the various investors outside the platfrom. How can such manual and archaic process scale?
CrowdInvesting platforms need a solution that facilitates creation of independent escrow accounts for each project, as well as providing the means to collect and return funds to and from investors. A third-party escrow account meets the SEC requirements for these offerings, and ensures secure holding of funds for a raise. The secure movement of funds is also critical for the return of funds to investors, in a failed deal or in the event of proceeds such as dividends, loan servicing, or revenue sharing.
Second, the user experience is significant to reduce friction after an investor has made a decision to fund a deal. A white-labeled programmatic solution allows the user to stay on a platform, and the bulk of the funding mechanism is handled by the payment solution, while ensuring that the branding of the platform stays intact. To achieve that the solution should support all the various methods of payments such as ACH debit and credit (pull and push), wires and paper checks.
Managing International Flow of Funds
A platform interested in international markets deals with an additional set of payment challenges. For starters, the intricacies surrounding regulatory frameworks in different countries, the ability to exchange and settle funds in various currencies, and different partnerships with banks in international markets to secure funds in escrow are just a few of the issues a global platform would have to consider. Reconciling these issues to secure the regulatory and compliance requirements are critical before a platform can consider offering these options.
Across Asset Classes: From Startups to Real Estate
Different platforms will also have their own different use cases for their specific type of raises and business models. For example, a real estate crowdfunding platform will require a different solution than a platform servicing startups or small businesses. Real estate developers need to easily sign up and list their projects on the platform, and be able to show if the offering is perceived to be a good investment in terms of appreciation and income potential.
Once the deal is funded by the investor pool, the money in escrow needs to move to the developer. If it were a debt deal then the loan would require repayment back to investors, preferably directly into their accounts. Thus each platform needs to optimize its user experience and regulatory framework for its specific business model and use cases.
Pulling it All Together: The Bancbox Approach to Making Payments in Crowdinvesting Marketplaces Secure & Compliant
Blending these elements into a specific CrowdInvesting payment application is a complicated challenge that we tackled when building Bancbox Invest solution. Learning the regulatory and compliance framework around the industry and identifying necessary and optimal requirements from potential partners helped us create a seamless white-label API solution to optimize the user and platform experience and that’s the core of BancBox Invest.
We strongly believe that CrowdInvesting will bring the Silicon Valley capital raise ecosystem to the rest of the world, and will provide entrepreneurs across the world the ability to realize their dreams and disrupt industries thus enabling new technology and business models. The Bancbox Invest team is excited to play its part in the future of raising capital, and bring a secure and compliant payment experience to all parties involved.
Q&A with Vineet
Jonathan here! I sat down with Vineet for a follow-up Q&A. Transcribed below.
How much transactional volume has your platform processed to-date?
How many investment crowdfunding platforms are you managing payments for today? What’s the breakout between equity and debt-based?
Vineet: We have 31 platforms across verticals such as Broker Dealers, Online VC, Real Estate, Clean Tech etc . 11 of them are doing pure equity deals, 9 are pure debt and rest are doing both debt and equity.
Are you working with any international platforms?
Vineet Not yet but we have bunch of international investors and issuers.
I see that you work with Seedinvest, SparkMarket, Filmfunder and many others here in the U.S. Can an investor carry over his/her Bancbox Invest account from platform to platform?
Vineet: We currently don’t provide such wallet structure as: 1). our clients don’t want their investors to be shared across platforms, 2). there are compliance concerns around allowing funds collected through one platform to be invested at a different platform.
Do you support cross-border capital flows? If so, from which countries, and can you provide insight into the nuance of managing international transactions?
Vineet: Yes, we do. We support all the countries that are allowed to transact in US however we need the platform to be based in US. International transactions need deep compliance oversight in terms of ensuring that the investors and issuers are legal entities and abide by the US Patriot Act. On top of that you need to ensure that the funds are clean and not coming from or going to be invested in terrorist activities.
What’s the cost structure of Bancbox Invest? Fee’s to integrating platforms? To the investors?
Vineet: We charge the platform a percentage fee based on the amount in the escrow with a floor and a ceiling. We charge this fee only if the deal was successful. We don’t charge anything to the investor.
How does Bancbox Invest differ from other payment solutions?
Vineet: We are a solution built from ground-up to handle the unique needs of the Crowdinvesting industry. This industry needs compliant and scalable payments, third-party escrow and proceeds disbursement solution that no one else currently provides. There are solutions out there that provide collection and storage of funds but either they aren’t fully compliant (in terms of money transmission laws) or they don’t support payment mechanisms such as wires, paper checks etc. Furthermore they don’t support the automated disbursement of coupon payments (which we call as proceeds disbursement) which is critical in terms of debt offerings.