Bill Gates once stated, “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency.” Extend this rule to the finance sector and the relevance emerges. Automation has amplified efficiencies in financial services in terms of management and reach. The proliferation of internet and software in the sector has brought advanced technology that has transformed the landscape.
Though referred to as disruption, digitisation has been effective in financial inclusion. Sophisticated and premium financial offering is no longer reserved to the bastion of the institutional or high net worth clients. Interactive interfaces are easing the accessibility to variety and innovation across all customers. Attractive rates, better experience, and quality of service are driving adoption rates.
The reliance on traditional financial services’ providers is reducing; as technology-enabled finance (Fintech) companies are gaining users’ trust.
Fintech innovates Start-up and SME financing
Fintech has revolutionised the Start-up and SME’s access to finance. Their funding products and services provide significant benefits to the Start-up or SME’s solvency, debt, and asset profile. And this translates to better profitability and valuations.
The following key funding products for start up and SME have changed the finance landscape:
- Crowdfunding: Crowdfunding involves supporters funding a business for a financial return driven by a combination of intrinsic, social, goodwill and financial motivations. The method has gained a lot of traction because technology has enabled access and success. Crowdfunding platforms are based on the different types of participant interaction.
- P2P (peer to peer) lending: Generally, p2p lending (also called as crowdlending) refers to the unsecured lending to borrowers without a traditional financial intermediary such as a bank. The largest originators include RateSetter, Funding Circle and LendInvest. Alternative lenders are able to service the existing and growing Start ups and SME’s that banks can’t. Funds are disbursed within a week which matters when liquidity is a constraint. Loan application is convenient, with less paperwork and from the place of business.
- Merchant and e-commerce finance: E-commerce platforms, payment processors and telecom companies offer working capital lines and loans to their merchant users. Amazon, eBay, Alibaba, Square, iZettle, Safaricom, and Telmex are the key pioneer providers. The process is convenient and quick given the integration of payment systems and existing contractual relationship. The time between the application and payout of funds is often only one business day. Growth is expected to be driven with an uptake in etailing, epayment, and big data analysis.
- Invoice finance: Invoice financing is the online monetization (or factoring) of receivables. It is quick, easy, and flexible. The business’ accounting software is integrated with the invoice finance platform within few days. Subsequently, loan applications based on the value of individual receivables is made. Automation in processing leads to instantaneous payments. Consistent sound repayments can allow the business to borrow at a decreasingly lower discount. It counteracts the pain point of managing receivables, thus addressing the working capital shortage. It equips the Start up or SME with market data on common credit terms so the business is empowered to demand better. MarketInvoice, Fundbox, NoviCap and Finexkap are key providers. The companies don’t divulge volumes, therefore their overall market share to remains minuscule.
- Supply chain finance: The fundamental approach of fintech SCF is to extend the advantage of buyers’ low credit risk to promptly pay suppliers’ invoices. The buyer, usually a large company, relays the supplier’s invoice to the fintech lender for payment. The payment is at a discount upon the supplier’s demand, generally earlier than the due date. The buyer pays the lender the full value of the invoice later. Consequently, the Start-up or SME’s cash flow improves without compromising the buyer’s payment terms. It solidifies the supplier relationships because the SME or Start doesn’t have to work with a separate receivables factoring firm. Instead, they can use their pre-existing integrated e-invoicing and self-services platform. Fintech SCF is still a niche yet a growing market.
- Trade finance: FinTech has digitised trade finance processes and built aggregator-type platforms to connect the investors with SMEs or Start Ups. It fills the trade financing gaps from the limited options for SMEs or Start Ups. These businesses lack resources to deal with the complex process, cover the risk of large international transactions, and provide liquidity upfront. Moreover, many banks do not grant them lines of trade credit. However, fintech trade finance platforms come to the rescue and enable businesses to reach international markets.
Trends in crowdfunding and peer to peer lending are a testament to the significant gain in momentum of fintech funding solutions for Start ups and SMEs.
Global trends in crowdfunding
The UK mirrors the global trend
The advent of technology in the financing sector has benefited all the participants – entrepreneurs and investment funds. Automation of the finance sector has also helped to remove an investor’s barrier of entry. Protection funds could mitigate potential of losses from such investments encouraging more investors. If crowdfunding continues to grow at its current rate, it could supersede the venture capital investment funds, in terms of financing Start ups or SMEs