Reinventing small business banking through new FinTech trends
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New FinTech trends hold potential to change the face of small business banking
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With FinTech industry being on a cusp of technological revolution disrupting every facet of banking, small business banking being no exception, there is reason to believe a big metamorphosis on how small business banking will reshape in an era filled with innovations, speed and agility. While the supportive environment in terms of financial infrastructure is maturing fast, the regulatory eco-system is adept in accommodating the dexterity and swiftness of the FinTechs for enabling newer partnerships with banks or enable FinTechs act as non-bank entities on their own. According to ADB survey in 2017, with only 20% of firms using digital finance platforms, small businesses are looking for game-changing solutions in payments, capital and equity spaces.
If the new FinTech trends are seen to be believed, it has potential to transform the face of the predominantly term loan-based small business banking to cash flow-sensitive financial architecture, by addressing the information asymmetries both at demand and supply sides.
Address information asymmetry
Small businesses are embattling a weak self-capacity unable to profile themselves better through formal registry, systematic accounting with audited balance sheets, well-designing their business plans with a long term visioning and perspective plan, proper representation to bankers in loan applications including to present confidently movable collateral to lenders (banks and non-banks included). Digitisation will help small businesses to leap-frog to next level of formalisation by which they can become attractive to banks and connect on-line with payment flows of their supply chain. Credit information framework will get new impetus with data at small business level digitised.
Diversify and consolidate provider market
As FinTechs mature and banks increasingly adopt technology, there is consolidation and expansion of small business banking portfolio in both banks and non-banks through mutual role-reversals. A situation of more banks adopting altFin methodologies and more non-banks venturing into mainstream banking models will increase choices to small businesses, with the market benefiting in size, scale and efficiency. Overall, the market size of small business banking will grow prodigiously, with particularly altFin sector expanding exponentially. This will eventually result in cost of capital coming down and quality of portfolio improving which will benefit the small businesses profusely due to intense competition forcing them to focus further on risk, securitisation and standardisation. With line between banks and e-techies disappearing, there is influence of e-tailers’ pricing strategies in banks with JP Morgan Chase picking up from Amazon on discounts. Across many economies there is an increasing trend of banks unveiling digital disruptor strategy including morphing into AltFin avatar by adding tech-muscles by nurturing and fostering new partnerships with FinTechs, including grooming the start-ups to integrate solutions through open API partnerships and prepare for PSD 2 in a big way. Incidents of banks unveiling FinTech department, start-up accelerators and open API platforms have increased in many economies. Faced with increased and intense competition, banks have started creating FinTech environment through additional investments, readying to loose extra-flab to become lean to balance cost and give more tools and choices to customers. It is not out of place to say that in some economies like Poland for example, banks are almost transforming into neo-techies.
Move the wheel towards women-led enterprises
Rwanda’s emergence as a country for women entrepreneurs need close introspection in terms of promising practices; that the country could catalyse financial inclusion more through mobile money and SOCCOs (Savings and Credit Co-operatives) with a mere 26% banked population talks of importance of non-bank led model especially in inclusivity and there is more to meet the eyes on regulatory enablement both on financial inclusion and creating space for more women business owners, a resounding model to be studied for global knowledge and lessons. Yet, overcoming the challenge of creating product knowledge and reducing misuse continue to daunt the mobile money market. Given that 70% of women-owned small businesses in emerging economies are unserved or underserved by banks as per IFC estimates, this holds huge promise for women-led businesses globally.
Movable finance regime will get a leg-up
Modern secured transaction framework brought in as silver bullet to govern secured transactions for overcoming the enforcement of securities, especially for non-land based collateral like movable assets holding new promise to the unbanked small businesses unable to demonstrate collateral. On-line, automated and functioning registry besides avoiding overlaps can reassure valuations and enforcement shoring-up the confidence of banks, besides increasing availability of credit and reducing cost of small business loans.
Assuage pain-points in financial value chain
Small business banking’s pain-points on speed and ease of loan approvals will get fresh lease of life with financial value chain enjoying efficiency in all nodes be it in application, processing or approval stage of loan cycle. Small businesses in many economies are gazing admiringly on real time approvals and same or next day funding by banks by collaborating with FinTechs. While there is celebration on growth in FinTechs across domains, it looks still a payments market with global value of contactless transactions made via payment cards, mobile and wearables poised to reach $ 1.3 trillion by 2019, as per Juniper Research and it becomes all the more imperative to understand size distribution across functions, value proposition and outcome realised. One other point of interest could be to understand FinTech investments segment-wise across financial value chain for example the manufacturing node of financial value chain may require more resources and energy to bring in much-needed efficiency and pain-relievers to benefit the customers in a big way through agility and innovation.
Increased competitiveness of small businesses
With most global value chains having distinct regional character by leveraging business linkages through unlocking opportunities especially in manufacturing and services sectors of small businesses, distributed ledger-based trade finance consortium holds potential to address the pain-points in trade finance by unfurling innovative trade finance instruments in both domestic and cross-border commerce.
A shift from term lending to cash flow based approach
Small business banking suffers from undeservedly tilting towards collateral backed lending, the mainstay of banking globally, when their very nature of financial needs being predominantly cash flow based with working capital eating over two thirds of their financial needs with purchase of raw materials, sale of finished goods, staff salaries, other operational expenses and inventory management. Small business by nature sails with major account receivables on its balance sheet. With 80–90% small business failures caused by poor cash flow with a study by Ormsby Street corroborating that four in ten small businesses failing to survive beyond 5 years, the importance of cash flow is crystal clear. Increased number of partnerships of FinTechs with banks to offer receivable purchase and supply chain finance to large corporates through e-invoicing platforms enabling alternative working capital solutions as evidenced in the recent deal between BNP Paribas and Tungsten Network. The future of commerce ecosystem for small businesses, where all parties win, is what an integrated payment system can guarantee through a payment-embedded platform. This can potentially cut down costs, time and more importantly recoup the much needed cash flow for small businesses.
Evolution of new generation credit products
Evolving FinTech trends are evidently pointers to birth of product factories of non-conventional origin. The sober mode in invoice financing, leasing and factoring services with high street banks will get renewed business interest from providers to address cash flow concerns. Block chain-enabled trade finance consortium like Ireland-based ‘we.trade’ has potential to address the key challenges of trade finance by unfurling innovative trade finance instruments in both domestic and cross-border commerce, overcome information asymmetry amongst market players, enable comparative cost-benefit analysis between (banking) partners for choosing the right fit of partnerships with financing banks, effectively hedge exchange rate fluctuations and ensure guaranteed and on time payment of creditors of small businesses.
Overcoming challenges
Banks continue to sail with complaints of legacy procurements coming in the way with old school boys (and girls!) still caught in conventional thinking with bank boards inadequately drenched in tech-savvy profile, in order to better appreciate the importance of marrying FinTechs. Partnerships continuing to be bogged-down with strings attached, riddled with communication blocks, bewildered by delayed payments and lack of clarity on intellectual property from banks. The impact of FinTechs being felt more in start-up firms that too in developed economies, and leaving out the matured businesses and emerging economies are all questions which FinTechs must address for bringing industry-level changes. FinTechs can come out of playing fantasy only if they are treated as equal business partners purely on commercial terms with conditions binding on both parties by placing small business clients in the centre of long-term relationship. Overcoming security and privacy concerns of data of small businesses and their proprietors continue to cause dent in advancing small business banking through big time partnerships while embedding tech in financial services.
