Merchant finance – Fintech pushing the frontier of SME Financing

In the fourth part of our series on “How Fintech is disrupting SME and Start up Financing”, we present to you the innovative role of non-banking financial services providers in SME financing.

The foray of e-commerce platforms, payment processors, and telecom companies has changed the SME working capital financing sector. It is an ingenious practice of blending the concept of trade credit in SME lending. Merchants on ecommerce and online payment platforms are being provided working capital lines and loans by the host non-banking platform. Taking a cue, telecom companies have jumped on the bandwagon too.

How does it work?

Payment processors and e-commerce platforms have visibility on a merchant’s daily transactions. This gives them the first-hand insight to evaluate risk of default when they lend to small merchants. Credit is disbursed and repayment collected using the existing network systems integrated with the merchant’s. Repayment can be directly out of the merchant’s revenue.

How does it benefit the SME borrower?

The processing is quick and efficient on back of the existing contractual relationship between the merchant and the platform. It can be as speedy as a business day – the time between the application and release of funds.

Who are the key players?

  • Amazon Lending

Type: Ecommerce platforms
Founded 2012
Country US
Partners Amazon
Target group SME selling on Amazon’s platform
Evolution Phase I: US and Japan
Next phase: a business loan programme for sellers in the UK, China and six other countries
Business model Merchants chosen using an internal algorithms | Data points – frequency of stock exhaustion, product popularity, and inventory cycles.
A Loan maturity of 3—6 months
Loan amount $1,000—600,000
Loan purpose Purchase inventory

  • Alipay Financial

Type: E-commerce platforms
Founded 2010
Country China
Partners Alibaba, China Construction Bank, and Industrial and Commercial Bank of China
Target group existing SME clients
Evolution Phase I: sales of goods on its Taobao marketplace
Next phase: expanded geographically and began offering a wider range of loan products.
A Loan maturity of 30 days
Loan amount <$80,000
Loan purpose Working capital

visit Alipay

  • Rakuten Card

Founded: 2013
Country: Japan
Partners: Rakuten
Target group: existing merchantsEvolution: The offering is called “Rakuten Super Business Loans”
Business model: Merchants invited to submit loan applications
Loan amount: $8,000—80,000
Loan purpose: Business expansion and flexible working capital finance

Visit Rakuten

  • PayPal

Type: Payment processors
Target group: eBay merchants using PayPal
Business model: Merchants needed to have a good track record to qualify for a loan
Loan amount: $1,000—85,000
Funds lent: $500M (May’15)

Visit Paypal

  • Square

Type: Payment processors
Target group SME
Funds lent $225 million (Apr’15)

Visit Square

  • iZettle

Type: Payment processors
Target group SME
Business model Repayments are charged as a flat fee. | Repayment is conducted in daily instalments in proportion to card sales. |Borrowers are able to borrow up to 2x their monthly sales

Visit iZettle

  • Telmex

Type: Telecom company
Target group SMEs not financed by traditional banks due to lack of credit bureau information.
Business model Credit risk assessment is based on big data analysis. | Data points – customers’ hone records.
Loan amount <$40,000
Purpose investments in tangible assets
As e-tailing gains scale, merchant financing will gain momentum. Both, the policy and consumer preference for cashless transactions and big data will be the key drivers for growth in fintech for SME  financing. New players will increase competition and bring efficiencies in the marketplace and systems. Fintech, thus, brings a compelling value in the space of SME financing.

Visit Telmex