FinTech is changing the rules for Small to medium sized enterprises.
Whilst the definition of a small to medium enterprise varies depending on where you are in the world, general consensus underlines the great importance they play to the overall state of the global economy. They are the life blood of cities, creating new jobs, wealth and innovating products and services that add to the general quality and well-being of many people across the world.
Small to medium sized enterprises make up close to 9 out of 10 businesses, contributing to 60%+ of global employment and around half of global gross value add. A recent survey conducted by JP Morgan Chase which analysed the businesses it directly banks, stated that ‘the foundation for economic growth and dynamism includes all small business and cash flow management is as important as liquidity for small business growth’. What is clear from this report is that SME’s are vital to economic growth for one and that secondly, most have been facing cash flow issues that are impinging on their vitality.
One of the major problems facing many SME’s is being able to balance cash flow in a world that had seen a sudden decline in finance options and flexibility. There are a number of reasons why this decline took such rapid shape. Firstly, there has been too much historic reliance on banks, co-ops and community lenders. Often these banks can cater for startups and individual concerns, but for a going concern, they are just not equipped to deal with the type of lending SME’s require on a more regular interval. This has been compounded by the credit crunch and the pressure regulators have placed on banks in relation to their capital adequacy. On one hand, you have central banks creating money to try and stimulate the lending market whilst on the other, larger hurdles have been imposed before banks are able to pass these funds on. Added to this is the increased cost and burden of processing new loans with lenders having to show that they are undertaking enhanced due diligence when lending. The cost of process the facilities are of course exactly the same no matter if the loan size is $1m or $10,000; but the risk reward parameters subsequently become skewed. This has created a void or opportunity that FinTechs have expertly squeezed into.
In an effort to reduce costs and enhance the speed of processing transactions, new financial technology companies are taking advantage of legislation to build integrated service business that will be able to comfortably slip into existing models. For example, imagine your accounting software being directly fed by data from your bank accounts. The time and effort that is saved, that was once used to duplicate readily available information, can now be used to instead enhance business revenues. Fintech firms are able to take a ‘closed looped’ in the provision of product and services and instead ‘open’ it up through the integration of their own third-party apps. This technical ability is now being backed up with legislative measures such as PSD2, to ensure a fairer, more consumer friendly and competitive market place. This in turn will directly empower SME’s in a way never seen before, simply through creating efficiencies.
Open Banking Apps and New Solutions
New software and solutions are continually coming to the market, helping in areas such as invoicing, payroll, accounting and tax collection. What were lengthy and difficult processes are now becoming far easier with the overhaul and implementation of open banking regulations. Customers are now in control of their relationship with institutions, and are able to provide 3rd party service providers access to their transactional history.
Balance Sheet Lenders
If you are a small business owner and have ever applied for credit, you will know how painstaking and time consuming this process is. Gathering everything from the KYC documents, printing and collating the banks statements, business plan, cash flow, make the process generally extremely time consuming and prohibitive. However, FinTech has started to allow seamless integration of all aspects of this into one or a few simple steps.
A good example of this is the balance sheet creditor Growth Street. They are now able to access, monitor and view previous banking transactions and subsequently offer lines of credit by pairing data with finance solutions. SME’s are now more able to easily record and access online records of payments and supply chains which they can pass to the request third parties, like Growth Street, without actually having to collate all the documentation themselves. There are now a whole host of companies offering balance sheet lending and specifically targeting small merchants. Companies such as WishFinance, Sofi and Kabbage are able to quickly analyse turnover and lend accordingly.
Another area that has seen huge advancements, is payments. These can now be taken on a global basis through companies such as Paypal or Stripe and often only require small and easy to manage card readers. Retailers are even able to scan consumers’ payments directly from their phones or watches and log and send receipts and warranties at the click of a button. All these go some way to drive down costs, increase the speed of transactions and increases the consumer experience. This means that’s businesses are able to market and attract local and even overseas customers without costly set up fees and high banking charges.
P2P lending, Crowd funding and ICO’s.
The P2P or peer-to-peer lending sector is another benefactor. Also referred to as Crowdfunding, new lending platforms are connecting small and medium sized business to potential investors. If you consider that less than a decade ago this pool of money was originally restricted to an entrepreneur’s immediate friends and family, the empowerment that has been created is vast. Whilst banks traditionally provided finance, funding has declined over the last decade and instead, aided by advancements in technology, the SME and the investor have directly been brought together. Many loans are funded by individual investors or even small groups and the growth of the industry has benefitted from a long period of low interest rates meaning that investors are seeking other alternative sources of income or yield. SME’s are now able to apply for loans online with lending platforms harnessing FinTech to assess risk, assign a credit rating and then match that to an agreed loan facility and investor. Companies such as the Lending Club, Proper, Funding Circle and Upstart are all examples of Fintech companies that are helping small and medium business get access to what had become so unobtainable.
This advancement in funding technology has taken hold more recently through the introduction of ICO’s or Initial Token Offerings. Although in its infancy and surrounded by controversy due to its natural links with the crypto currency market, these ICO’s can effectively be seen in many cases as liquid, listed Venture Capital investments in either seed or series round funding. I think that is an interesting space that needs to be watched carefully and certainly requires a degree of regulation.
In summary, FinTech has in no uncertain terms, changed the rules for SME’s and empowered small business to be able to take on the many challenges they face. SME’s are the life blood of most economies, creating new wealth, jobs and so many more tangible and intangible benefits to our communities, and FinTech in turn is proving to be a key and a vital part of this process.