Bank service to smaller enterprises doesn’t reach the level of service they provide to their larger retail and industrial clients, leaving a gap that fintechs are eager to fill.
Banks are the enemy of small business,” asserts George Bevis, founder and CEO of Tide in the UK, one of a new wave of financial technology (fintech) companies that promise to revolutionize how small businesses manage their finances. “Culturally, [the banks] are incapable of moving at speed.”
Bevis may have a vested interest in that view, but still, to date, the fintech boom has largely been confined to the consumer-banking space. Corporate treasury and cash management, which is still dominated by the large global cash management banks, has yet to fully reap the benefits of fintech’s growth. However, in the small-to-midsize corporate tier, battle lines are being drawn between fintechs and incumbent banks.
Bevis, a former product director at UK peer-to-peer lending company Zopa and business strategy director at Barclaycard, set up Tide—which provides an account small businesses can sign up for in “minutes, not weeks,” according to its website—just over a year ago to channel what he calls the tide of entrepreneurship. “There are more entrepreneurs in developed countries now than there have ever been before,” he says.
But he claims that traditional banks do not serve these entrepreneurs well. “Banks should be pretty ashamed of the quality of service they’ve given smaller businesses,” says Bevis. “It takes a very long time to find out if you’re going to get credit.” According to Bevis, most banks are investing tech resources in the consumer side of their business because they fear they could become irrelevant due to increased competition from nonbanks. But this has left small and midsize enterprises (SMEs) under-resourced.
A March 2016 research brief entitled A Guide to Winning SME Banking Strategies from Bain & Company ventures that “many banks now have an ambivalent stance toward SMEs.” The firm’s partners note that “large US banks, for instance, are making fewer small-business loans than a decade ago, forcing small firms to turn to higher-priced alternatives.”
The report also highlights the fact that the UK lending market for SMEs shrank by approximately 5% per year from 2009 to 2013, and that banks have not invested as much in digital platforms for SMEs as they have for their large corporate clients. In Asia and Latin America, Bain & Company says, companies like China’s Alipay—a spin-off from ecommerce giant Alibaba—are filling the gap left by banks.
Although small and midsize companies are the core engine for economic growth and employment in most developed and emerging economies, analyst firm Deloitte says most of these companies have limited access to financing. It estimates that less than 60% of SMEs in Indonesia, Malaysia, Philippines, Singapore and Thailand, have access to bank loans, and approximately 50% are “unserved or underserved by financial institutions.”
Deloitte cites a number of key impediments—low coverage of SMEs by credit registries, inadequate distribution channels, a lack of cash-flow visibility, and regulations that assign higher risk weights to SME loans, for example—to improving what it terms “poor financial inclusion of SMEs.” These obstacles are also prevalent in advanced economies, even though SMEs have better access to credit and a myriad of financial services providers—challenger banks, incumbents and fintechs—are looking to fill the SME financing gap.
Galen Robbins, Bank of America Merrill Lynch’s head of Global Transaction Services for Global Commercial Banking, Business Banking and Small Business, disputes the notion that small businesses are not well served by traditional banks. “If you’re talking smaller companies with less than $1 million in annual sales whose business is online, that space may be underserved, yes,” says Robbins. “Fintechs will focus on these niche areas. But SMEs generally are not underserved by the banks.”
Given that the entity we call Bank of America today is made up of many former local and regional banks across the US, it’s natural that it focused on businesses with typically $2 million to $5 million in annual sales long before it became big enough to serve the largest companies. “It’s a space we’ve found incredibly attractive for a long time,” explains Robbins. “We’re taking SMEs international; our growth rate in that sector is 20% plus.” Companies with annual sales under $2 billion contribute approximately $3.7 billion to BofA’s GTS business, more than half of total GTS.
Banks are the traditional go-to place for small businesses that need a loan or other financial services, but in the UK and Europe newer nonbank entrants are using the latest technologies and forms of artificial intelligence (AI) such as machine learning to deliver a better integrated, faster and lower-cost digital banking experience for SMEs. “It’s about understanding the tedious administrative tasks (bookkeeping, paying staff) of people who run small businesses and using software to automate these tasks,” says Bevis of Tide, which is not a bank but operates under the emoney license of PrePay Solutions, a European digital banking services provider. “If you have a current account with Tide, you can more easily sync your bookkeeping data with your accounting software and have a clearer picture of your receipts and invoices.”
Tide recently announced a partnership with UK-based iwoca, whose mantra is “fast, flexible and fair small-business loans.” After trawling thousands of data points (banking history, potential sales channels, eBay and Amazon accounts) for every applicant, iwoca then analyzes this data using machine learning and other techniques to make what it calls “fair lending decisions instantly.” Since its launch, iwoca has lent more than £200 million ($260.4 million) and supported more than 10,000 small businesses across the UK, Poland, Spain and Germany. Its goal is to fund one million small businesses.
In July, iwoca announced a partnership with Italy’s Intesa Sanpaolo to provide Intesa’s SME clients with credit products. The partnership will leverage iwoca’s SME lending platform and Intesa’s expertise in building banking operations across much of Europe, the Middle East and North Africa. It coincides with an investment in iwoca by Neva Finventures, Intesa Sanpaolo’s fintech venture capital arm. “Intesa Sanpaolo have some one million small businesses that they provide banking services to, but they find them difficult to service with credit,” says Christoph Rieche, CEO and co-founder of iwoca. “The idea of the tie-up is to provide this supply line of customers with better service. For the banks, the cost of servicing and underwriting these customers is a very labor-intensive manual process.”
As more countries adopt digital finance, Reiche says, iwoca will get larger amounts of transactional data on which to base lending decisions. However, Reiche says iwoca will not replace traditional loan underwriting but simply make it faster.
Robbins says BofA is looking at how to take fintech and scale it up for its SME clients, particularly for repetitive transactions. “AI is still in its early days, but that could really be a game changer for our clients,” he says. “We could test AI with some SME clients to get some learning and understand the risks, and either partner with a fintech or do it ourselves.”
“Fintechs won’t be able to win on innovation alone,” continues Robbins. “Competition and innovation will push us to do better and better. But we know our SMEs’ businesses incredibly well and can help them sell their companies, for instance—fintechs don’t have those relationships with their customers.” Robbins says SMEs are also hesitant about working with fintech: “‘These fintechs seem interesting,’ they say to me, ‘but how are they going to make my business different? I’m not sure of the brand. Is this platform safe?’ The client acceptance is taking a little longer.”
One thing fintechs do have, however, is the ability to use data—albeit third-party data—to effectively gather useful customer insights that can be used to speed up the account-opening process or make quicker lending decisions. They also don’t have the legacy systems of banks, so they’re able to fully automate the account-opening and management processes. “The automated work we do in the background is not trivial,” says Bevis of Tide. “Most of the big banks have a complex edifice of manual processes [and are] not empowered to change the setup.”
Tide’s objective in the next decade is to serve 50 million small businesses globally, and Bevis believes what it is doing in the SME space will filter through to bigger business. “We are working on multiuser permissions so we can expand as fast as the revenues of our customers,” he explains. “So, as they grow, they won’t have to move to a more traditional corporate bank.”