Fintech consultant Javier Guevara examines the changes to the financial services world, and how this will dramatically change the offerings open to the once-overlooked small business market.
Despite being a large and integral part of the UK’s economy, small businesses have been overlooked and unserved by traditional banks, which focused on serving larger, more profitable companies. Very rarely did the big banks offer products and services that are truly tailored to the needs of SMEs: products were mostly overpriced and a simple extended version of corporate or consumer segments.
Bank lending is one of the top barriers to growth. According to the FCA, the rejection rate in the UK for first-time SME borrowers is around 50% when they apply to big banks, and 37% of businesses appear to give up on their spending plans after the first rejection. A recent RSA report found that 55% of businesses do not survive their first five years, with 90% of failures attributed to cash flow problems.
When I first started researching the fintech space in 2011 as an initiative to bring innovation to banking, the alternative lending market had just broken the $100m investment mark in the UK. However, thinking about collaboration or partnering with these start-ups was seen as too much of a risk for traditional institutions and it is interesting to see a few years later how much of that has actually changed.
The total market size of alternative lending in the UK is now about $4.5bn, and loans to small businesses have now overtaken consumer loans. British Banking Association data implies that peer-to-peer business lending platforms now account for 15% of all new loans lent to small businesses by all UK banks. Similarly, equity-based crowdfunding accounts for 17% of all seed and venture stage equity investment in the UK.
Banks are increasing their innovation efforts and challenging back. RBS, Santander, BBVA, Goldman Sachs and HSBC are just a few big names that have responded to the challengers, building, partnering or investing in fintech with the aim of capitalising on the technology shift, staying relevant, increasing efficiencies and attracting a new, younger customer base.
The UK financial services industry as a whole has revenues of £200bn, which provides a significant market for fintech firms looking to use technology and innovative propositions to expand the reach of the industry. But what does this all means for small and medium-sized businesses?
Benefits to businesses from the fintech revolution
Improving financing options and access to capital: Fintech firms offer solutions to SMEs that are more efficient and effective at lower scale and provide them with increased access to more diverse funding options. Fintech products can be better tailored to the needs of businesses and provide options for those with weak credit profiles by broadening scope and utilising data and analytics. These firms are then able to build alternative credit profiles for businesses and enable them to access credit.
One of the new fintech entrants into the B2B digital banking space, for example, is US-based Brex. The company is leveraging an in-house KYC and underwriting process to extend credit to start-ups. Features include instant online application, no founder liability, no credit scores or security deposits and limits that are typically 10-20 times higher than those from competitors. UK alternative lender Capital On Tap offers funding to businesses with at least £2,000 turnover per month. The company claims to have provided funding of more than £500m to 50,000 businesses across the UK.
Better cash flow and improved working capital management: Fintech solutions like peer-to-peer lending, merchant and e-commerce finance, invoice finance, online supply chain and online trade finance can provide significantly better cash flow, improve working capital management and more stable or secure funding.
An example of this is the procure-to-pay supply chain management platform for SMEs Tradeshift. The platform helps companies run more efficiently, using cloud-based technology to improve processes like invoicing, workflow and supplier financing. Over 1.5m companies across 190 countries have already benefited from Tradeshift, which has processed over half a trillion USD in transaction value.
Anna Money has announced plans to launch a business current account in the UK to support SMEs in the creative industries. Features will include tools to analyse expenses, chase payments and cash flow predictions. It will also send and pay invoices by combining artificial intelligence with human insights and offers 24/7 assistance.
Easing pain-points in financial value chain and lowering cost: Consulting firm BI Intelligence stressed that “the speed at which an SMB can get a loan to hold it over may be the difference between the business folding and survival”. Therefore financial efficiency, innovation and agility can provide a tangible benefit to SMEs, reducing admin burdens, improving liquidity and enabling new opportunities and scale-up.
According to the UK Competition and Markets Authority, 81% of business bank accounts take over a week to open. Even when opened in branch, only the 20 % can be accessed immediately. A number of fintechs such as Tide and Penta have taken advantage of this opportunity, offering SMEs more attractive accounts which can be opened in a matter of minutes, with lower fees.
In the lending market, Kabbage offers quick access to working capital, with an online and automated lending process, where businesses can apply, receive an answer in minutes and same day funds on credit lines up to $250,000. The company claims to have provided over $5.6bn in funding to more than 150,000 businesses.
High fees are one of the reasons preventing SMEs from getting the product or service they need, and fintech firms have played their part in significantly reducing the costs of financial services.
For example, TransferWise, the online money transfer service provider, cuts out high bank fees by matching its users’ currency demand and supply. This has particularly benefited a large number of businesses who use cross-border payments. The service is up to seven times cheaper than the major high street banks and is moving over £2bn every month globally, saving customers £50m in hidden charges (according to the TransferWise website).
Enhancing productivity: Fintech firms are empowering SMEs to be more productive, providing real-time data and changing how business is done, how products and services are conceived and resolving critical issues for business owners.
Bread and Divido are among the alternative lenders focused on point-of-sale (POS) services allowing merchants to offer their customers the ability to instantly spread the cost of products or services, increasing checkout conversions and boosting sales. IZICAP in France is optimising POS data information to build card-linked marketing solutions for small businesses.
Toast, a restaurant management platform offers POS all-in-one sales and CRM. Functionalities include tableside ordering, menu modifications, real-time reporting, online ordering and labour management.
Improving security: SME customers are particularly vulnerable to fraud, cyber-attack and other risks online. According to the Federation of Small Businesses, SMEs face seven million cybercrime attacks per year which cost around £5.3bn to the UK economy. Card security and online payments fraud remain the biggest issue today.
With the use of technology and data analytics, fintech firms are helping businesses improve security, prevent risks and streamline compliance processes. Ravelin is a smart fraud detection and prevention platform that uses AI to stop online payment fraud by examining customer behaviour data and spotting fraudsters.
Overall, we are no longer just talking about loans, but about being a partner for businesses and providing them with the digital tools that are critical for their activity.
SMEs are benefiting from a more competitive financial service market, and going forwards we will see increasing integration of data, invoicing, reconciliation, cash management and financial accounting into banking.
Combine this with technological innovations such as artificial intelligence, robotic process automation (RPA) and the Internet of Things with API-based platforms, the landscape is likely to change dramatically for SMEs.
In the coming years, we can expect powerful financial propositions that will bring further value to businesses that will better support their activity and make prosper the segment that once was overlooked by traditional players.
About Javier Guevara Torres
Throughout my career I have had the fantastic opportunity to experience a range of strategic roles within leading global banking players across diverse segments and geographies. From Retail, Corporate & Commercial to Wealth Management and Private Banking.
As a consultant I equip financial institutions, across Europe, with the ability to identify opportunities for disruption. I help both established banks and FinTechs to solve key strategy questions.