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MAGAZINE SMALL BUSINESS BANKING MAGAZINE

ISSUE 1 MARCH 2016

INNOVATION TECNOLOGY

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FINANCE TECHNOLOGY CAN FIRE UP SMALL BUSINESSES

IN BUSINESS BANKING

THE NASTY TRUTH OF SMALL BUSINESS BANKING

P2P TRUSTS: TIME TO BE WARY OR SNAP UP OPPOR足TUNITIES?

MARCH ‘16

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SMALL BUSINESS BANKING MAGAZINE

CONTENT

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RETHINKING SME FINANCE POLICY – HARNESSING TECHNOLOGY AND INNOVATION

WHAT FINANCIAL INSTITUTIONS CAN LEARN FROM ALTERNATIVE LENDERS

P2P TRUSTS: TIME TO BE WARY OR SNAP UP OPPOR­TUNITIES?

Innovative approaches do not replace the need for policy responses, but do mean that SME finance policies and initiatives need to be rethought

Raddon’s most recent survey of 1,200 small businesses reveals an intersection of lending attitudes and needs, which alternative lenders are taking advantage of

The flurry of peer-topeer lending investment trusts unveiled over the past year and a half has attracted a significant level of interest from investors, with £1.7bn raised in 2015 alone

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OUR TEAM

CONTENT

JANUARY ‘16

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FINANCE TECHNOLOGY CAN FIRE UP SMALL BUSINESSES

Editor

Andrey Gidulyan

The IFC is using its new financial innovation division to invest in trade finance “disrupters” as a means of bridging the gap between the technology and banking sectors

Art director

Ekaterina Mitroshina

Designer

Ekaterina Mitroshina

Sales executive Alexey Sayapin Andrey Gidulyan

Contact

LENDIX TAKES THE LEAD IN FRANCE’S SME CROWDLENDING

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MICROCREDIT: NEITHER MIRACLE NOR MIRAGE

You can find it online: www.smebanking.club If you have any questions about one of our publications, please e-mail us at ceo@smebanking.club

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Recent research across seven countries shows that giving poor people access to microcredit does not typically lead to a substantial increase in household income

Fintech herbivores want to work with banks, while the carnivores want to eat them

3 REASONS BANKS ARE MISSING THE MASSIVE OPPORTUNITY TO SERVICE SMES

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Composite lending bridges marketplace and balance sheet lending and brings the benefits of marketplace lending to balance sheet loan originators

Lendix, one of the 60 companies who joined the fray of crowdlending platforms in 2015 has quickly taken the leadership position

WHY FINTECH’S HERBIVORES ARE EATING WITH BANKS

BEST OF BOTH WORLDS: THE COMPOSITE LENDING BUSINESS MODEL

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MOBILE PAYMENT PLATFORMS FOR SMALL BUSINESS

The SBB Magazine (Small Business Banking Magazine) – your essential global briefing on business banking, small business and SME finance.

It is a free edition. We collect publications that can be interesting for you.

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CEE SME BANKING

CONFERENCE 23-24 OCTOBER 2016 WARSAW, POLAND Mercure Warszawa Centrum

visit our site

http://events.smebanking.club

What’s new

YELP

SURVEYED 900 SMALL BUSINESSES TO UNDERSTAND THEIR OUTLOOK FOR THE YEAR

Small businesses are confident about 2016

Address challenges with a clear focus

The Yelp Small Business Pulse found that small businesses in the restaurant industry are most confident about 2016, with 92% expecting an overall revenue increase. Young businesses also appeared positive about their prospects this year, hoping for a 48% growth on an average over the year.

Despite the overall optimism, small businesses face several challenges. The biggest one is developing competitive growth strategies. 60% of small businesses say attracting and retaining customer is the most critical issue. Other challenges include limited marketing budgets (32%) and time spent on non-core business elements (18%).

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american small busi­ % of nesses active on Yelp

expect their revenues to grow in 2016

Some tips to succeed this year Think Big, Stay Nimble 30% of businesses said competition from larger businesses is the biggest challenge they face this year. While larger companies have an obvious financial advantage, small businesses are better positioned to receive feedback from customers and adapt quickly to changing consumer trends.

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This group of businesses is clearly optimistic, which is consistent with relatively strong consumer sentiment and a recent uptick in retail sales MICHAEL LUCA, Harvard University Professor of Business Administration and Yelp’s Economist in Residence

Stay in Touch With the Community

Channel the Startup Mentality

79% of businesses believe digital tools help add a more personal touch in the communities and allow them to cater to the individual demands of their customers. By using the right digital tools, small businesses can reach more customers without spending much.

According to the Yelp Small Business Pulse, startups are by far most positive about their revenue growth in 2016. Many small businesses are following in the footsteps of startups to adopt disruptive technologies that can turn out to be the real game changers

To achieve success in 2016, businesses need to stay focused and adapt themselves from time to time

WHAT’S NEW

Partnership brings new loan options to SMEs

Cloud banking innovator, Mambu has been selected by Reparo Finance, a SME business financing company, to provide a new line of business loans for small to medium companies in the United Kingdom.

Andrew Ward, Managing Director of Reparo Finance, pointed to the ability to provide financing to “neglected yet viable UK-based businesses.” He said, “Partnering with Mambu has allowed our company to quickly bring more sophisticated loan offerings to market while offering the necessary expertise and scalability to meet growing customer demand.”

Eugene Danilkis, Mambu CEO, added that his company’s technology would help make it easier for Reparo to develop “new and more accessible loan offerings” to market to the historically underserved small businesses.

Mambu has had a busy 2015. The company announced earlier this month that Ferratum Group selected its technology to power SME lending, and in June added a variety of new features such as multi-account credit arrangements, balloon payments for real estate and auto lending, asset-backed lending, and more. Mambu began the year being named to FinTechCity’s FinTech 50.

Reparo Finance provides SME financing options such as asset-secured loans, that range from 50,000 pounds to 1 million. Terms range from one to 24 months and a lending decision takes only two business days. The company plans to use Mambu to provide greater flexibility when it comes to payment schedules.

Reparo was founded in 2014 and is headquartered in Manchester, UK. Founded in December 2011 and headquartered in Berlin, Germany, Mambu made its Finovate debut at FinovateAsia 2013 in Singapore.

LEASEUROPE PUTS FOCUS ON SME LEASING WITH ROUNDTABLE INITIATIVE Leaseurope is launching a series of roundtable meetings across European countries to discuss leasing as a key source of finance for SMEs. The aim is to explore the national SME financing landscape and improve the understanding of leasing as a valuable form of investment finance, as well as identifying any potential obstacles hindering its use by

local SMEs and how these could be tackled at national and ultimately European levels.

The roundtable series builds on Leaseurope’s research initiative on leasing to European SMEs, which has seen Oxford Economics undertake two studies on behalf of Leaseurope in order to better understand and quantify the importance of leasing to this key segment.

Leasing to SMEs remains a core focus area of Leaseurope’s research programme, which has been instrumental in building a comprehensive dataset and gathering market intelligence on this key client segment for our industry. I believe leveraging the findings at European level and acting locally through our Member Associations are equally important. By initiating these national roundtables, Leaseurope again contributes to the debate on SME access to finance and provides various SME stakeholders and policy makers with valuable evidence showing that leasing is a crucial form of finance for SMEs. LEON DHAENE, Director General of Leaseurope

The future of commercial cards In the slow economic growth period that followed the recent financial crisis, organizations have been focused on rationalizing their costs to improve profitability, and suppliers and merchants have been engaged in finding new ways to increase revenues.

Financial institutions, due to the prevailing low interest rate environment in many regions across the globe, have been focusing on increasing their revenues through feebased income.

These economic factors coupled with changes in the operating models of all stakeholders financial institutions, suppliers/merchants, and organizations are driving the increasing adoption of commercial cards.

Over the last decade organizations have been adopting commercial cards

for different reasons. However, after the financial crisis there has been a significant pressure on their profit margins and in their efforts to deal with this there has been an acceleration in the trend towards migrating from traditional payment modes to commercial cards.

The global commercial cards purchase volume is expected to have increased from $1.4 trillion in 2013, to $1.8 trillion in 2015, at a compound annual growth rate (CAGR) of 13.0%. The growth is expected to be fuelled by increasing demand from both small and large businesses across the globe. From a regional perspective, Asia- Pacific is expected to lead the way with the growth of UnionPay, which became the largest credit and debit card network in 2013.

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WHAT’S NEW

Fibabanka launches innovative mobile app The mobile app features a ’smart search’ option – something that has already proved popular on the bank’s online banking site.

Customers using Android or iOS mobile devices will be able to search the bank’s products and services by typing a single word type into the search bar. Aknowledging the increasing pressure facing SMEs across Turkey, Finabanka has also created a special mobile banking app specifically to meet the needs of these customers. With a special sign

Local bank forms new small business lending team, hires half dozen Univest Bank and Trust Co. has increased its emphasis on small business lending with the creation of a dedicated team focusing on serving businesses with credit needs of less than $1 million and revenues of less than $3 million.

The Souderton-based bank said the new team will lend through the U.S. Small Bu­siness Administration and independent of government-assisted lending. Univest said it has always focused on small business lending – but what’s different now is that it has identified this as its own line of business and is investing in hiring new team members solely focused on small business banking.

“We believe there is a need for banks to do more to help small businesses and as big banks take the place of many long-time com­munity banks in our local market, small businesses are likely to face funding challenges,” spokeswoman Kim Detwiler said.

Univest said it has six lenders on the team who will report to Hugh Connelly, president of Univest Small Business Lending. Two of those team members transitioned from roles within its Valley Green Bank division in Philadelphia and the other four are new hires Univest Bank is a subsidiary of Univest Corp. of Pa., which at $2.9 billion in total assets, is one of the region’s largest indigenous banks 8

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in screen and unique services such as cheque processing, the solution has been designed to make life easier for SMEs. The bank’s deputy general manager Emre Ergun, commented on the launch of the app: “We at Fibabanka love to find solutions that facilitate our clients’ lives and apply these solutions to the mobile banking experience. We will continue to provide our customers with new services and new experiences by investing in technological innovation.’

MUFG UNION BANK LAUNCHES NEW COMMERCIAL CARD PROGRAM The Commercial Card platform offers benefits that include advanced technology, dedicated client support, security, convenience, and improved visibility and control over the payables process. In addition, the bank’s Commercial Cards can help clients identify opportunities for cost savings, control expenses, streamline reporting, and improve cash flow. The entire Commercial Card portfolio uses chip and PIN technology, which is the latest technology and provides the highest level of fraud protection to clients.

Our team employed a buyer-initiated payments approach in developing these products that distinguishes us in the market­place. We are committed to providing innovative product solutions that enable CFOs and treasury managers to optimize their business processes Managing Director Ray Fattell, Head of Product and Innovation at MUFG

The Commercial Card products include: Purchasing Cards: Designed to help organizations manage their business expenses while streamlining the procurement of products and services.

Corporate Travel Cards: Developed for or-ganizations’ challenges around managing costs and improving the visibility of their business-related travel and entertainment expenses.

Executive Card: Designed as a travel card for senior executives, with the added benefit of higher travel accident and lost/ damaged luggage insurance.

MultiCard: Combines all the features of a Purchasing Card and Corporate Travel Card into a single card with optional Fleet management capabilities. ePayables Virtual Cards: Enables companies to generate card transactions through a file from their ERP or Accounts Payable system. There are two types of ePayables cards: Buyer-Initiated Payment (BIP), which allow the buyer to deposit the card payment directly into the suppliers’ merchant account (like an ACH payment); and Supplier-Initiated Payment (SIP) technology, which sends an email with a card number to the supplier, who then processes the transaction to deposit the payment into their merchant account.

WHAT’S NEW

UK CHALLENGER OAKNORTH BANK SIGNS FOR MAMBU CORE PLATFORM One of a host of new entrants to the UK banking market, OakNorth bills itself as a bank for entrepreneurs, providing loans to small firms, although it also has regulatory approval to accept deposits and offer saving products. In a bid to get to market quickly and ensure flexibility, the startup has picked Mambu’s SaaS banking platform. The IT vendor says that its infrastructure and API will help OakNorth challenge and outmatch traditional banks, P2P lenders and other alternative lending options on service and loan distribution. Rishi Khosla, CEO and founder, OakNorth, says: “Mambu’s banking technology is the core of our digital architecture, enabling us to rapidly bring new products to market and focus our innovation around giving our customers great service with a level of agility we couldn’t get from a traditional core banking system. “Changes to our systems can be made much more quickly than other banks, often in days rather than weeks, meaning we’re able to adapt to the needs of our customers, offering solutions where others can’t and moving away from the ‘compu­ter says no’ mentality that plagues the industry.”

NAB focuses on making things simpler for timepoor business owners National Australia Bank’s small business chief says the lender will push harder to simplify banking as it seeks a larger slice of the market for home-based start-ups.

NAB executive general manager of micro and small business Leigh O’Neill says ­despite the volatile start to the year in financial markets, the fundamentals around small businesses are strong. And she says they are increasingly becoming the nation’s innovators in their efforts to differentiate themselves.

“Micro and small businesses drive innovation because they want to increase growth in ­revenue, but also because they are passionate and willing to fail,” O’Neill said. “When I’m out with our customers I really genuinely get a sense of optimism. People don’t realise what a bellwether small business is.”

O’Neill also said the “shared economy” should not be “pigeon-holed” based on the dominance of companies such as

Bank lending plummets for London SMEs The capital’s small businesses are aban­doning traditional bank funding and em­bracing alternative finance, according to new figures from the British Bankers’ Association.

Whilst bank lending London’s SMEs has plummeted 40% in the last year, the ca­pital’s companies raised an estimated £350m through peer-to-peer lending in 2015. Statistics from the British Bankers’ Association show that the value of all newly approved loans and overdrafts to London SMEs in Q3 of 2015 was down 40% on 2014 totals, from £1.7bn to just over £1bn. The average London SME has now less than £20,000 borrowed from their bank – a record low. In 2011 the average London business had £28,000 borrowed from their bank.

Roz O’Brien is the Company Director of Pixel Projects, a technology business born and based in London. The company provides cutting edge audio visual installations to the world’s largest internet companies.

“Working with banks can be a slower, cumbersome process; and that doesn’t always suit our business model”, said O’Brien. “The tech sector works quickly and efficiently, it’s a fastpaced environment; and our funding setup needs to reflect that. We can’t wait on a banks’ response to a funding application.“ Pixel Projects have raised over £9 million worth of project funding through peer-to-peer lender MarketInvoice. “It’s helped our business grow faster than we otherwise could have

ride-sharing service Uber and holiday accommodation broker Airbnb. It would potentially represent “something much bigger” to the economy, she said.

NAB defines small business as those with turnovers of $5 million or less per year, or up to $1 million for micro businesses.

Ms O’Neill took the reins of the NAB business six months ago after previously serving as general manager of its private wealth business in Victoria.

She said banks were learning how changes in the economy, driven by evolving technology, were creating ­opportunities for individuals to run businesses while working other jobs.

But for banks to better tap this emerging customer base, they had to make things simpler for time-poor business owners, she said.

– we get funds quickly, as they’re needed”, said O’Brien. “It feels only natural for us to embrace new technologies in how we finance our business. It’s clear that the world of finance is changing, and tech companies like us should be the first to embrace this change”, O’Brien added.

Anil Stocker, CEO & Co-founder of Mar­ ketInvoice commented: “Banks have grown increasingly reluctant to lend to SMEs, who see business lending as high risk, low return practise. Approvals for loans and overdrafts have been hard to come by – despite direct government incentives such as the Funding for Lending Scheme. At the same time the city’s businesses have recognised peer-to-peer lending as a better, more efficient way of financing their growth. We’re supporting a lot of the fastest growing companies in the capital – dependable cashflow is rocket fuel for these businesses.”

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WHAT’S NEW

Indian FinTech company launches in the UK India’s leading online investment bank for SMEs is launching in the UK. SMERGERS offers a regulated online marketplace for SMEs looking to finance or sell their business.

In India, the platform is extensively used

by SME business owners to connect with business buyers, banks, multi-national companies, strategic investors, investment banks/business brokers. The platform also simplifies the process of finding a reliable solution provider to support the deal process.

The FinTech company’s expansion will also see it launching in the US, Canada, Australia and the UAE.

Bank offers mobile deposit service for businesses Brewster – Tompkins Mahopac Bank has announced it is now offering Mobile Check Deposit service for all business Internet Banking customers. Consumers have been enjoying this convenience service from the bank, and now business customers can take advantage as well.

All customers enrolled in the bank’s free Internet Banking service, and who have downloaded and enrolled in the mobile app, will now be able to deposit checks from the convenience of their smart phone or tablet. Your money will be securely in your account without a trip to the bank or the ATM. “We are pleased to offer our business customers another convenient service,” said Jerry Klein, president & CEO. “As your community bank, we continue to provide exceptional service in conjunction with the growing need for mobile banking.” To learn more about how Tompkins Mahopac Bank can help you with your business banking needs, contact your local branch.

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YOUNG BANK GOES GLOBAL FOR SMES READY TO SELL It was only established in 2013, but small business bank SMERGERS, based in India, already has its sights set on the world. February 17 that vision came closer to reality as the bank announced that it is launching operations in the US, UK, Canada, Australia and the UAE. In its announcement, SMERGERS said it hopes to expand its business model of small business banking disruption into new jurisdictions. The bank specializes in providing an online plat­form for SMEs interested in selling their businesses and a portal through which business owners can connect to potential investors, acquirers and advisors.

“With our impact in the Indian market, we are excited to bring our platform to the international SME and investor community,” said SMERGERS CEO Vishal Devanath in a statement. “When it comes to financing, investment management, buying a business or selling a business, SME business owners are left on their own.”

He added that SMERGERS and its team provide the support these

entrepreneurs need when seeking investment or takeovers and that the bank’s team was built to have the expertise about the new markets into which SMERGERS is entering.

SMERGERS is used by small and medium-sized businesses in India to connect with buyers, ventu­re capitalists, other banks, other companies, investors and other players. According to reports, the platform streamlines the process of finding the right resources to support and fulfill a deal.

“Many businesses we spoke to stay away from other online business-for-sale classified marketplaces, due to the risk of fraudulent users and information leaks,” the CEO continued. “To combat this problem, we regulate the marketplace to ensure interactions between genuine businesses and investors.”

Devanath added that SMERGERS has already had early success with SMEs not based in India using the platform and that the platform has built a network of strategic partners in its newest markets to fuel the global expansion.

INNOVITI AND ORPAK DRIVE INDIA’S LARGEST PAYMENT AUTOMATION PROJECT AT BPCL Innoviti and Orpak will be driving India’s largest payment automation project at BPCL, сovering 50% of BPCL’s outlets for acceptance of cashless payments.

Under this program 6500 outlets of BPCL (almost 50% of their retail base) will be auto­mated for payment acceptance, the single largest payment automation project in the country.

Innoviti had raised Rs. 30 Cr. in series B funding earlier this year from Catamaran Ventures

and New India Investment Corporation, Canada.

Innoviti Payment Solutions and Orpak, announced a partnership to drive India’s largest payment automation project at BPCL. Under this project, 6500 outlets of BPCL (almost 50% of BPCL’s retail base) will be automated using Innoviti’s payments platform uniPAY, closely integrated with Orpak’s fuel automation system.

The technology will be running off over 20,000 payment terminals spread across the country.

WHAT’S NEW

BARCLAYS RETOOLS BUSINESS BANKING FOR THE DIGITAL AGE

Corporate banking solutions that bridge existing products produce disparate, complex and outdated systems that require multiple logins on a variety of platforms, making banking a time-consuming and disjointed process.

With iPortal, we are changing all that.

Michael Mueller, head of cash management at Barclays

ACBA-CREDIT AGRICOLE BANK CONDUCTS REGULAR BUSINESS TRAININGS TO PROMOTE SMES

Defaults fall but SMEs face higher interest payments

A brand new product, built from the ground up using agile delivery methodology rather than retooling or overlaying existing ones, Barclays iPortal provides an immediate snapshot of bank accounts and products and enables users to authorise payments, manage cash, trade services and loan facilities from a single log-in. The roll-out of the new dashboard-style ser­ vice is complemented by the shipment of a biometric reader which uses Hitachi’s Finger Vein Authentication Technology, eliminating the need to remember PINs and passwords.

The portal provides users with consolidated ‘to do’ lists, and real time alerts and notifications where actions are required as well as an overview of group balances, across different business divisions and activities in multiple countries. Available on tablet and mobile devices as well as corporate desktops, iPortal will also act as a market intelligence tool, providing users with the latest market research and insights specific to their business and industry. Says Mueller.

“The development of iPortal is another major step towards our vision of the future of corporate banking; simplifying and personalising the experience to enable decision makers to spend more time focusing on the business of doing business.”

Irish SMEs are paying higher interest rates on their loans than many of their European counterparts while recent EU-wide decreases haven’t materialised in the domestic market either.

The Central Bank’s latest SME Market Report shows Irish firms are paying more for credit than their contemporaries while the research also finds rates did not decline in line with the euro area from 2014.

Data compiled for the six months to September of last year show an average interest rate of 5.7% for loans of €250,000 or less.This is 1.8% higher than the average rate charged on loans above this threshold and 3.4% higher than loans of over €1m Despite Irish firms having to contend with more expensive bank financing, SME default rates are in decline.

The rate of default has fallen over the past two years, from 26% in 2013 to 19% in 2015.

New lending to non-financial and non-real estate SMEs has picked up strongly since the beginning of 2014.The overall stock of lending has declined as firms continue to repay loans at a faster rate than they take on new debt.

Since the last report, the stock of SME loans has declined a further 8%, while the share of SMEs with no outstanding debt is increasing.

ACBA-Credit Agricole Bank is the first bank in Armenia that has started conducting regular business trainings for its customers with a view to promote small and medium-sized businesses throughout all the phases of their work.

According to a Bank’s press release, the participants of business training are offered five different topics, designed to provide them with theoretical and practical

knowledge for the best management of their businesses and application of a number of marketing tools. The trainings are designed not only for the heads of companies, which are the customers of the bank, but also for the heads of all SMEs who are not the bank’s customers if they would like to take part in them. Those wishing to participate may register by calling the bank’s call-centre.

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RETHINKING SME FINANCE POLICY – HARNESSING TECHNOLOGY AND INNOVATION

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onventional SME finance policies are designed to address conventional constraints to SMEs accessing the financial services which they need to manage risks, meet supply orders, and invest in new technologies and market opportunities. Yet technology 12

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and innovative approaches are transforming the business of SME finance, mitigating conventional challenges and risks and in some cases presenting new risks.

Continuing with only conventional policy responses may be duplicative and waste resources, and may also fail to address

COVER STORY

emerging risks. This has important implications for the World Bank Group’s approach to SME Finance.

Information asymmetry raises the costs and risks of providing financial services, and therefore reduces access and leads to higher pricing of financial services for many SMEs. Yet data availability is rapidly expanding, and data brokers are increasingly able to address information asymmetry.

Fast moving developments in the availability, timeliness, and use of data in supply chains, related to the electronification of transactions (payments, invoices, contracts), are opening up viable access to financial services for SMEs, including to factoring. So providing electronic platforms to facilitate on-line factoring and contract financing can be an alternative or complement to refinancing credit lines or support to state banks.

Public sector procurement can be shifted to such platforms to efficiently open up access for SMEs, as is the case with Chile Compra for example. Electronic security and signature laws, and market facilitation platforms, can facilitate supply chain and factoring transactions with SMEs. Crowd funding platforms can also ease access to finance constraints for SMEs, by providing more direct and efficient ways of accessing funding. They can offer borrowers cheaper loans and investors access to a new asset class. Examples of peer to peer lending platforms include Cumplo (Chile), which is web-based, and Funding Circle (UK), which has lent over $391 million to businesses from over 72,000 individual lenders. Alibababacked PPDai was the first online platform (social lending site) for peer to peer small unsecured loans in China.

Improving SME financial skills and capability is traditionally seen as a matter of training and financial education, as well as the provision of clear and transparent information on financial products. As a complement to this, innovations in the provision of cheap (or free) and easy to access automated online financial advice can also be harnessed. A growing number of firms, such as Money On Toast (US), Vaamo (Germany), Your Wealth (UK), Yseop (France, UK, US) are using software to automate the production of financial advice. As online access improves in emerging markets, including through smartphones, this is an increasingly relevant tool globally.

Implications for SME Finance Policy Frameworks: Innovative approaches do not replace the need for policy responses, but do mean that SME finance policies and initiatives need to be rethought. The concepts of additionality and leverage will be critical, based on a regularly updated diagnosis of gaps and priority needs.

Information asymmetry “Big Data” Analytics - the analysis of alternative data sets such as cell phone histories and transactional data, represent new ways for assessing the creditworthiness of enterprises currently without access to finance. For example, Experian MicroAnalytics (global) and Cignifi (Brazil, Ghana, Mexico, US) deliver credit scoring based on airtime usage. This type of approach could open up access to credit for mobile payments customers in the developing world.

ZestFinance (US) combines data from thousands of potential credit variables, gleaned from alternative credit databases and web crawling to offer a ‘big data underwriting model’.

With increasing technology and internet access, the expansion of “digital footprints” allow for alternative ways to assess borrower creditworthiness and spot and prevent identity fraud. For example DemystData (Hong Kong, US) and Lenddo (Colombia, Mexico, Philippines) use online reputation and social media analytics.

The lack of financing sources available to many SMEs, linked to constraints in the use of collateral and the availability of information, is cited as a major concern in the World Bank’s Enterprise Surveys. Typical policy responses include secured transactions frameworks (collateral laws, movable assets registries), credit lines, state banks, partial credit guarantee schemes, and encouraging competition and diversification.

Emerging risks related to innovative approaches need to be addressed through SME finance policy frameworks.

Regulatory frameworks may need to be updated to fit new providers and products, while supervisory capacity may need to be strengthened to effectively understand and monitor them. Credit reporting frameworks may need to be rethought, in terms of data accuracy and availability, new data brokers and providers to monitor, consumer protection, and how to apply or update data security and privacy standards.

The World Bank Group works with many governments and regulators to improve SME finance-related policies, regulations, initiatives, including through the Financial Inclusion Support Framework.

The WBG is therefore well placed to assist regulators and policymakers in harnessing technology and innovative approaches, and managing risks. But to ensure our relevance and effectiveness, we need to also update our knowledge and advice, and how we apply WBG financing instruments, accordingly.

A G20 SME Conference will take place on 11-12 March 2014 in Riyadh, Saudi Arabia, organized by the Australian G20 Presidency and the Government of Saudi Arabia, at which I will present on this topic of harnessing technology and innovation in SME Finance Policy Frameworks. We will post the resulting recommendations for G20 actions following this event.

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FINANCE TECHNOLOGY CAN FIRE UP SMALL BUSINESSES The IFC is using its new financial innovation division to invest in trade finance “disrupters” as a means of bridging the gap between the technology and banking sectors 14

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n the last 15 years or so the internet has led to the disruption of a number of traditional businesses, especially the way in which products are bought and sold. For example, the world’s largest accommodation provider, Airbnb, owns no property; the leading taxi service, Uber, owns no taxis; the top media company, Facebook, owns no content; and the biggest retailer, Alibaba, has no inventory.

This is just a shortlist of a longer list of disrupters who have made their presence felt around the globe.

COVER STORY

Almost all sectors will be impacted, positively or negatively, by the internet. If one does not embrace change and remain dynamic, one is destined for obsolescence. In this scenario, it should be noted there is no such thing as good or bad luck. The key is to constantly prepare oneself to take advantage of an opportunity.

These disrupters bring about massive and swift change that not only alters the way we think about that area of business but also the way service is delivered.

As recently noted by market commentator Bruce Whitfield and Craig Bond, CEO of retail and business banking at Barclays Africa and Absa, the financial sector is on the precipice of disruption. I would argue that this disruption has already started. The banking system is already changing, with a wide variety of technologies entering the market globally and altering the way users transact.

The world is seeing the rise of finance technology (fintech) startups that are shaking up the way financial services are provided. To be clear, this does not refer to the IT spend of a bank in making its back-end functions more efficient. This technology is about innovating financial services aimed at, among others, raising finance for a business or paying someone who does not have a bank account without exchanging hard cash.

The interesting observation is that fintech provides financial services at a faster turnaround than that of established banks. Those providing invoice discounting, for example, can provide prospective clients with support facilities within 24 to 48 hours, which is not necessarily possible for banks even if you are an existing client. There are a few reasons for this, including that many of these startups operate in a grey regulatory area. In addition, these fintechs can provide their services cheaper than established banks due to their lean cost structure. They do not need offices to interact with clients and their smaller size and product offering is an important contributor to their nimbleness.

Fintechs operate in a grey regulatory area because while their services continue to grow in popularity, it is hard to put a handle on who is providing what service and to whom.

Further­more, their services do not conform to a mould that regulations such as the National Credit Act cover. It is important to note, however, that being in this grey regulatory area is neither a good thing nor a bad thing.

With regard to regulation, one of the reasons countries such as the US and UK have warmed to fintechs is that they do not use depositors’ money for risky but necessary investments such as small-and medium-sized enterprises (SME) loans. Fintech companies are generally capitalised by investors who have a higher risk appetite, which allows these entities to operate in risky areas. Unlike banks, they also do not have to deal with a great deal of prudential regulation, especially those focusing on how much a bank should hold as reserves or lend to its clients.

The potential role fintech companies could play in the SMEs space warrants a closer look at what they have to offer and understanding their role before moving with haste to regulate

businesses. They can, for example, assist SMEs with liquidity; these funds may be necessary to pay, among others, bank loans, suppliers and salaries. Banks and development finance institutions are not suitably geared to provide this kind of support rapidly.

The reason I note that fintechs should not be seen as a threat by banking institutions is that they have a comparative advantage and not necessarily a competitive advantage. Yes, they could provide specific services more efficiently than the more established banks but I would advocate that banks see this an opportunity to collaborate.

Of course, there will be rogue fintech entities that will seek to make a quick buck at the expense of the consumer as opposed to those

THERE IS NO SUCH THING AS GOOD OR BAD LUCK. THE KEY IS TO CONSTANTLY PREPARE ONESELF TO TAKE ADVANTAGE OF AN OPPORTUNITY them. Of course, front of mind should be that there should always be responsible borrowing and lending practices in place. This also means the public needs to be educated. I am not convinced that public-sector regulation of these entities, in the short term, will necessarily yield a positive result, as one may inadvertently do more damage than good.

SA requires a great deal of financial assistance to support the development of SMEs. Neither the banks nor state-owned development finance institutions can meet the funding gap for SME finance. These entities, therefore, have an important — and I would argue more complementary than competitive — role to play with banks and development finance institutions, especially in assisting SMEs with operating capital, at very competitive rates, required in the day-to-day operations of their

who are in it for the long term and seek to add value. This is where education comes in and, above all, if the system is going to thrive with the addition of these players, it requires a great deal of transparency, which may come about through encouraging self-regulation.

This already exists to some extent. We should, however, cautiously approach state intervention on how these entities operate in the short term or risk losing a potentially important and innovative partner to SMEs starting out, those looking to sustain their business, or those seeking to expand operations. In all three instances finance is required — banks and development finance institutions cannot go it alone.

THE WORLD IS SEEING THE RISE OF FINANCE TECHNOLOGY (FINTECH) STARTUPS THAT ARE SHAKING UP THE WAY FINANCIAL SERVICES ARE PROVIDED SBB

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WHAT FINANCIAL INSTITUTIONS CAN LEARN FROM ALTERNATIVE LENDERS Raddon’s survey of 1,200 small businesses reveals an intersection of lending attitudes and needs, which alternative lenders are taking advantage of.

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ne out of 10 small business owners feel credit has dried up and financial institutions have stopped lending to small businesses. At the same time, the borrowing needs of small businesses remain elevated, with 39 percent of owners anticipating taking out a new loan or adding balances to an existing line of credit in the next 12 months.

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Alternative lenders For the small business owner, the increasingly wide array of options to raise capital can be seen as a benefit. But should traditional financial institutions be concerned about losing business to alternative lenders such as Ondeck, Kabbage, and Lending Club, among others?

Overall, 15 percent of small business owners have applied for a business loan from an online lender that is not a traditional financial institution. While the current threat to financial institutions may be minimal, it is increasing. A quarter of small business owners indicate they are extremely or very likely to use

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an alternative lender for their small business loan needs in the future.

What is the appeal of alternative lenders to small businesses? What do they offer that traditional lenders do not? For many small businesses, the answer is simple: A loan. Seventy-two percent of those that have used alternative lenders in the past have done so because they were unable to obtain their needed financing from a traditional financial institution. This may be somewhat of a relief to business bankers concerned with the competitive threat online lenders may pose, as many of the loans in the alternative market may not be ones they could – or want to – originate. In these cases, the real threat is the uncertainty as to what happens next with the business and any future banking relationships. Assuming the small business would eventually qualify for a loan from a traditional financial institution, will they return to their local financial institution, or was their initial experience with the online lender good enough to also win future business?

Small business alternative financial aid

For many small businesses, pricing and loan terms will certainly influence decisions when they have more options. But we also know from past research that the speed and efficiency of the loan process also plays a significant role. As shown in the chart below, the near instantaneous decisioning and quick funding process offered by many alternative lenders are clearly attractive to business owners, as both benefits rank as highly influential in their decision to utilize an online lender.

If alternative lenders prove to be a feeder market for traditional financial institutions, the expectations of the business owner may be forever altered by their experience with the online lender. Will the loan application and approval process at a traditional bank or credit union seem archaic and inefficient compared to the speed and technology offered by online lenders?

For small businesses headed by members of Gen Y – approximately 22 percent of small businesses in the U.S. – this question is even more relevant as this demographic is particularly attracted to the ease and immediacy promised by online lenders. A third of small businesses with a Gen Y owner have applied for a loan through an online lender, with half likely to do so in the future.

Small business owners’ increasingly high expectations add additional pressure for traditional institutions to continue to innovate and perhaps re-evaluate the existing loan underwriting process. This may be where alternative lenders have the greatest impact on traditional financial institutions – in many ways forcing an issue that has been ignored for too long. Is your loan process for a $20,000 business loan the same or similar to the process for a $200,000 or $2 Million business or consumer loan?

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For many in the industry, there is a significant opportunity to improve efficiency – and thereby profitability – in the business lending process. Of the 39 percent of small businesses looking for credit in the next year, half are seeking less than $20,000, which underscores the importance of being able to evaluate and underwrite smaller-dollar and smaller-risk loans in a more streamlined and automated manner.

As small businesses grow, a financial institution’s technology resources and services will only grow in importance and further influence where firms choose to bring their banking business. Already, half of small businesses indicate a financial institution’s technology resources have an impact on their decision to use an institution’s services. The importance is magnified among Gen Y business owners, with 67 percent placing significant emphasis on the role technology plays in their decision to use a bank or credit union’s business services.

While alternative lending may still be viewed as a niche product today, small businesses are being influenced by – and financial institutions can learn from – the innovation and technology offered by these newer entrants to the business credit market.

of small business owners have applied for a business loan from an online lender that is not a traditional financial institution of small business owners indicate they are extremely or very likely to use an alternative lender for their small business loan needs in the future

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Disruptive innovations help small firms get loans, connect to suppliers

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MEs generate significant employment, contribute to economic value-added, and provide innovation (the favored term these days is disruptive innovation) in the marketplace.

However, SMEs continue to face development issues such as limited access to finance, especially formal bank loans. Among others, the usual reasons cited are lack of collateral, absence of debt service track record, inadequate credit information to access bankability, size or scale, limited financial resources, and management capability. The challenge has always been to discover alternative financing modalities to fill the gap.

Most prominent solutions call for the use of information and communication technology (ICT). Maximizing the opportunities

Maximizing the opportunities offered by ICT can tremendously benefit various aspects of enterprises, open logistics opportunities, and build business networks and a payment system. Technology should be a strong enabler that makes access to finance simpler, faster, and more efficient offered by ICT can tremendously benefit various aspects of enterprises, open logistics opportunities, and build business networks and a payment system. Technology should be a strong enabler that makes access to finance simpler, faster, and more efficient.

There is real potential lending out to Philippine SMEs using ICT. SMEs could be linked to the formal economy through technology-driven models that lead to the growth of new industries. ICT can create platforms for businesses to interact with and connect to 18

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other aspects of business expansion, as well as connect to customers and other stakeholders.

Collecting relevant information on businesses will help in the design and development of new products and services, as well as open up new markets. And financial providers can use ICT to reach out to the SME universe.

Planters Bank, especially prior to its merger, pioneered SME online solutions and was one of the early innovators using an early form of credit-scoring tool for its SME clients.

The Financial Executives of the Philippines has partnered with Dun & Bradstreet and Air 21 to develop an online portal, LoanPinas, to enable banks and financial institutions to view, analyze, and respond to SME requests for financial assistance. LoanPinas serves as an online marketplace for banks and SMEs to meet and match.

Credit BPO helps business owners understand their own business profiles and get an idea of how banks will very likely rate them as potential borrowers. Credit BPO also offers its services to any bank interested in setting up its own scoring system. And the Development Bank of the Philippines is now setting up an SME credit-scoring model built with the support of Innovation for Poverty Alleviations, USA. Most of these local innovations are in their early stages and need to be ramped up.

These ongoing initiatives will not find fruition, however, if the prevailing challenges in the ICT environment are not resolved.

The Philippines registers an internet speed of only 3.5 mbps, the slowest among 19 countries in Asia. Online fraud such as hacking and unlawful access of private and confidential information disclosed online must be prevented. The logistics and transportation network are critical in the enhancement of supply chain linkages. Regulatory agencies need to be aligned with changes taking place.

Finally, technical capability upgrade through education and the upgrading of expertise in this area both for the supply and demand users are critical for innovation to move forward.

The major attempts to hurdle the problems of SME finance through Web-based solutions, telephony, and online and mobile commerce are examples of disruptive innovation.

We need to make them work in and for the Philippines.

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Big banks, startups & rethinking SMB lending

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he big banks, until very recently, seemed largely allergic to SMB lending. In the wake of the financial meltdown and increased regulations, underwriting a big loan to a big player and a small loan for a small player were equally expensive on the front end, but only one had any chance of being worth any real money on the back end. So, the big banks, more or less, abandoned the less-thanlucrative field of small business lending.

But since small business didn’t stop needing liquid capital, startups and alt-lenders appeared to fill in the vacuum, and as those digital lending models began attracting customers, funding and profits, it suddenly seemed as though there might still be money to be made from SMB loans — if managed correctly.

And so, some of those big banks are getting back in, according to reports in The Wall Street Journal.

JPMorgan Chase has recently signed on with OnDeck to create digital SMB loans for its customers. Regions Financial Corp. will partner with Fundation starting this fall, reportedly because of transparency around its lending terms (top rates max out at around 30 percent).

Not all of the bigger lenders are exactly new to this part. Wells Fargo’s credit card processing unit for merchants has worked in conjunction with CAN Capital for the last five

years to see businesses that were denied bank loans referred to online lenders.

“We are in discussions about ways to expand the program” with Wells and in talks with “several others,” said CAN Capital Chief Executive Daniel DeMeo. “There’s a lot more curiosity over the last six months than there had been previously.”

“Every major bank is working on this,” said John Barlow, president of Barlow Research. “This is really just the beginning of a reengineering of the entire small business lending process.”

Not every bank is interested in working with a lending startup. Bank of America, for example, has firmly said no to online or alt-lender partnerships because of the risk of dings to its reputation that an alt-lender brings, Chief Executive Brian Moynihan has told analysts.

JPMC will integrate OnDeck’s tech into an SMB checking account so as to speed up the process by which pre-screened borrowers can receive funds. Though OnDeck’s tech is powering the platform, only JPMC’s name is on the product.

Since small business didn’t stop needing liquid capital, startups and altlenders appeared to fill in the vacuum

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SAUDI HOLLANDI BANK PUTS SMES AT THE CORE OF CUSTOMER FOCUS A handful of customers form new relationships with banks on a regular basis, so for growth in the banking industry to remain steady, existing customers must be a continual core focus

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he financial markets of any economy are critical to its overall development, and it is well documented that robust and efficient banking systems and stock markets are key drivers of growth. In this respect, Saudi Arabia’s economy is no different from any other country. A strong, well-regulated banking sector is helping the Kingdom’s companies and individuals meet their financial goals and, as in every other service sector, the competition to provide the products and services that these consumers need is intense, but essential to its continued development.

Up to this point, the Saudi banking sector has grown quickly, taking advantage of technological developments and product innovations alongside the emergence of a true service culture. But for the sector to continue on this growth path and to do so sustainably, I believe it needs to revisit the way it views its customers.

Historically, ‘customer focus’ had been the banking industry’s mantra when talking about how services are being delivered and for many, this has been an effective way of viewing relationships. However, as technology begins to open up new direct channels, this rather narrow approach needs to be challenged, not least because new customers are becoming harder to find.

More than the basics Recent research in 27 countries found that banks formed new relationships – customers switching their primary bank and customers altogether new to banking – at an average rate of about three percent in developed markets and six percent in developing ones.

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Historically, ‘customer focus’ had been the banking industry’s mantra when talking about how services are being delivered.

So, winning new relationships cannot be the only approach to growing. This suggests that developing true loyalty is becoming ever more important in both attracting the few new customers there are but also, more importantly, in maintaining long-term relationships.

Customer centricity, or the act of putting the customer at the centre of everything Saudi Hollandi Bank does, has to be the new ethos in building deep, sustainable connections with customers, regardless of whether they are large companies, families or individuals. But what does it mean to be truly customer-centric?

Banks have to earn the right to build truly customer-centric relationships, and they must do this from a position of covering basic service expectations. Saudi market drivers are no different from those in international markets – for retail customers, these include accessibility in terms of branches and ATMs, fast turnaround-time, and a low error rate in handling transactions. In the Kingdom, providing shariacompliant products is a fundamental customer requirement. But today every customer expects these services as a minimum, just allowing a bank the license to operate. Customer centricity rests on this purely as a baseline.

The form that basic services take is fairly common for all customers. However, to begin to build on that requires a depth of knowledge and understanding of the nuances of the needs and expectations of each type of customer. Not only in segmenting them for internal organisation purposes, but going beyond this to actively create new products and services that really differ by segment.

To take an example, small and medium-sized enterprises (SMEs) are important customers to Saudi Hollandi Bank (SHB) and its experience working with them over the years shows that they have their own very specific requirements, which are different from those of both large corporates and retail customers. Getting the service offering right is critical and the bank has developed specialist skills in this area to support them, viewing this as an area of strategic importance.

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Face-to-face targeting SHB understands the unique characteristics of SMEs, and acknowledge that access to financial services for many of these businesses remains severely constrained. It therefore offers easy, straightforward and quick solutions that address this segment’s specific banking needs. acceptance framework for assessing SME credit, which helps it to better serve these customers in a prudent yet progressive way.

It knows that face-to-face dealings are im­portant for the owners of these businesses, so it has broadened its outreach by opening SME business centres right in the centre of SME ‘clusters’, like those it sees in the Balad area of Jeddah, for instance. To help SMEs deve­lop and grow, the bank provides a specialised website dedicated to SMEs called The Business Owner Toolkit. The website offers a rich source of information, market insight tools and templates to help SMEs plan, manage and develop their businesses.

Serving SMEs is now one of its key strategic pillars, and by combining a corporate banking product range with a service model deployed in retail banking, it is offering this important customer group the services they need through the channels they want, and as a result have become one of the market leaders in this crucial segment.

SHB has historically been a corporate bank, but in recent years it has grown a strong presence in the retail market by develoing a comprehensive suite of award-winning products that cater to specific segments. It has also expanded its network to 55 branches and 400 ATMs in early 2015 – an almost 20 percent increase in branches – and 50 percent in ATMs

over the year preceding it, and plans to continue investing in branch and ATM networks. This approach helped the bank grow its retail assets by over 46 percent in 2014. In recognition of its achievements, it was voted Best Home Finance and Personal Finance provider in Saudi Arabia by Banker Middle East magazine, and Best Personal Finance Programme, 2014 in World Finance.

It was able to achieve all this by making sure it fully understood what each customer in every segment is expecting, and then pulling together internal resources to create truly customer-centric products that are delivered by a strong team with industry knowledge and experience. It is this core ethos, combined with the bank’s multi-disciplinary approach, that has allowed it to grow so fast and it will broaden business in coming years.

Put resources close to cus­tomers A major area of growth in the Kingdom will be in the affluent and mass affluent segments, so it is using this approach to put its resources together to build the right products and provide the services these customers need in ways which suit them best – whether in-branch or online. Every bank needs to engage with its customers and provide a continuous interaction with them. Technology will play a vital role and investment on this front is really crucial.

Beyond the obvious visibility of social media, technology is also enabling the growth of mobile banking and customers are embracing the use of their smartphones and tablets to handle transactions. The demand for applications that are both useful and easy to navigate is growing

fast. Smart phone penetration in Saudi Arabia is already close to 75 percent and the potential to broaden the usage of this channel, placing it at the heart of customer relationships in retail banking is huge. When SHB launched a mobile banking app, over a quarter of existing internet banking users registered almost immediately without any direct marketing efforts. Digital transformations like this give banks an opportunity to provide customers with ever more convenient services, and can also play a major role in building customer loyalty.

Many new loyalty programmes in retail banking are now built around approaches that allow product managers to deeply understand customer behaviour and needs. Technology is allowing the analysis of data that in turn helps to formulate offers and rewards that strengthened bonds and enhance customer experience at the same time. SHB has realised the potential in this digital transformation, and has evolved its loyalty programme proposition to its customers accordingly.

Putting resources around the customer sounds logical but the practicalities of doing this are not simple. For it to work, every employee needs to think about his or her customer first in everything they do and, the organisation then has to be able to deliver the service in a way the customer wants while at the same time, rewarding the employee for taking this holistic approach.

This is where a strong internal culture is essential. Banks may put their financial assets to work for their customers, but they also need to ensure their human assets are lined up to sup­ port them. Creating a team that is clear about how to do that – articulating and measuring the behaviours that support this – are fundamental building blocks of a customer-centric culture.

SHB has identified the theme of helping its customers and employees to realise the opportunities that already exist, while creating new opportunities for the future. This has helped the bank to identify the types of values that its employees should aspire to and the behaviours that it knows its customers appreciate. As part of this the bank encourages each and every member of the team to challenge the way it does things, to innovate and to think outside the usual constructs of what it does.

So, getting the basics right by segmenting its approach and placing its resources close to its customers allows growth to be driven for­ward, and for the bank to become truly customer-centric. The Saudi banking sector is at an important inflection point, as the Kingdom’s economy diversifies and expands. By making sure that it puts its customers at the heart of its growth strategy, it will ensure its continued strong and sustainable expansion into the future.

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THE NASTY TRUTH OF SMALL BUSINESS BANKING Cross-border payments firm Money Mover came out with some controversial, if not intriguing, research. In a study conducted by payments consultancy firm Accourt, analysis revealed that small and medium-sized businesses in the U.K. are spending nearly $5.8 billion in hidden cross-border payment fees to their bank each year 22

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n top of that cost, Money Mover’s research said that analysts found it difficult to pinpoint exactly how much the Big Four banks — Lloyds, RBS, Barclays and HSBC — charge to SMEs for cross-border payments because their fee structures are so opaque.

At least one bank, Barclays, has come to the defense of the banks, arguing that it “wholeheartedly” disagrees with the report’s conclusions. But Money Mover CEO Hamish Anderson, who comes from a banking background himself, says that the findings reveal some troubling habits in small business banking. PYMNTS discussed the research with Anderson and its implications for SMEs across the U.K.

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Uncovering A Problem There is much discussion in the U.K. about the small business lending gap among mainstream financial institutions. In this discussion, one may believe that the biggest — and only — losers of this issue are the SMEs that need bank loans.

But banks are failing the businesses that aren’t interested in loans, too. According to Anderson, banks primarily make money off SMEs by those loans. When a small business doesn’t need financing, the banks don’t make money and, therefore, have little incentive to offer top-notch services — namely, international payments.

“These SMEs don’t generate a huge amount of revenue for banks, and they don’t qualify for the kind of terms they should be getting on things like their international payments,” Anderson said.

Money Mover first began to realize that this was an issue when onboarding its own small business customers. Through anecdotal and casual analysis, Anderson explained, Money Mover revealed that, on average, its SMEs were

There is a reliable and trustworthy alternative to using slow, outdated and expensive infrastructure — often applauded as the solution to crossborder payments friction and cost.

Major banks have begun investing in this technology, too. But according to the Money Mover CEO, this investment is far from a signal that banks are planning to get on board with the blockchain.

“Ninety percent of the international payments that are made by U.K. SMEs are made through their banks,” Anderson said. “It’s a big market; it’s a big revenue generator for the banks. There is very little incentive for them to improve and disrupt whatever they’re doing.”

Instead, he explained, banks are placing small investments in this space in an effort to explore blockchain and open ledger technology to develop their own ledger technologies internally in order to keep cost savings and efficiency gains within the institution, without channeling those savings down to the end customer.

“Where we can have any reliable and

FX is one of the few areas left where banks are not required to be as transparent paying about 2.7 percent for international payments with their banks. One small business was even paying a 2.5 percent rate to simply move funds internally and had no idea that these fees existed, the CEO said.

With Accourt conducting formal analysis, Money Mover concluded that, on average, SMEs are paying about a 2.43 percent rate to make a £50,000 payment transfer into euros.

“That could be reduced if an SME shopped around and found an alternative service provider,” Anderson said. “It could easily cut that cost in half, if not beyond that, which means another $1,000 or $2,000 back on their bottom line, rather than disappearing into the bank’s balance sheet.”

Is Blockchain The CrossBorder Savior?

Not Necessarily. This past year, financial analysts and FinTech innovators began zeroing in on new technologies — like the blockchain

trustworthy, credible structure around blockchain, which allowed us to make transactions and have them immediately verified and reconciled, it would not only remove the revenue that banks generated but also their control,” Anderson said. “It would show that there is a reliable and trustworthy alternative to using their slow, outdated and expensive infrastructure.”

Anderson admitted that this does sound a bit like a conspiracy theory. “But banks have every reason not to invest in the development of the blockchain,” he said.

Knowing Your Choices One of the key components of Money Mover’s report was that banks are not only charging excessively for cross-border fund transfers to SMEs but are not sufficiently transparent about these fees.

“My feeling, and my concern, is that foreign exchange is one of the few areas left in

banking where banks are not required to be as transparent in their pricing as they are in some of the other areas in the service they provide,” Anderson explained.

‘FX is one of the few areas left where banks are not required to be as transparent.’

This means that small business owners may not be shopping around for cheaper FX services, simply because they have no idea they should be.

“It surprised me how few businesses are aware that there are alternatives to using a bank,” Anderson said of his experience discussing the issue with Money Mover customers. “I think there’s an education issue here.”

This lack of transparency is what Anderson said Money Mover hopes to combat. “We try to give people the information they would have available to them in any other kind of financial decision,” he said. “We’re trying to present it to them and allow them to make a decision based on facts, rather than on a limited amount of information.”

The CEO emphasized that he is not out to bash the mainstream financial institutions. Anderson launched Money Mover after working at HSBC, where he served as head of prime services sales for Europe. Before that, he worked at Bank of America Merrill Lynch.

“I have no axe to grind about banks,” he assured. “We use banks and use bank infrastructure for the work we do; they’re still a vital part of the financial sector that we rely on, and people still trust the banks.”

But, he said, transparency needs to improve, and SMEs need to be open to alternatives. At the end of the day, banks are businesses, and business is all about making money.

“You have to be of a certain size and value to the bank before they start giving you access to deals and pricing that you would want to be getting,” Anderson stated. “And the difficulty is with small and medium-size enterprises. They tend to be so diverse and have such a range of requirements that banks find them very difficult to understand and to manage — and very expensive to manage as well. It’s not really worthwhile having a dedicated relationship with those companies of that size.

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CREDIT RISK & FINANCE

P2P TRUSTS: TIME TO BE WARY OR SNAP UP OPPORTUNITIES? The flurry of peerto-peer lending investment trusts unveiled over the past year and a half has attracted a significant level of interest from investors excited by the prospect of 6%-plus yields and other diversification benefits, with ÂŁ1.7bn raised in 2015 alone

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CREDIT RISK & FINANCE

LIKE MANY OTHER ALTERNATIVE INCOME PRODUCTS WHICH HAVE TRADED DOWN TO DISCOUNTS, PEER-TO-PEER FOCUSED TRUSTS HAVE MOVED IN A SIMILAR WAY SIMPLY DUE TO THE FACT MARKETS HAVE BEEN DIFFICULT

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igh profile fund managers including Neil Woodford, Invesco Perpetual’s Mark Barnett, BMO Asset Management’s Gary Potter and Rob Burdett, and AXA Framlington’s George Luckraft have all invested in P2P trusts, after new launches have opened up the sector to institutional investors for the first time.

But despite their popularity, a number of managers remain wary of the vehicles at this point in their evolution, as share price performance has been volatile and they are concerned the funds remain untested in an environment of rising interest rates.

The largest trust P2P Global Investments (P2PGI) is run by former investment banker Simon Champ. It was launched by hedge fund Marshall Wace almost two years ago and has raised more than £800m through several fundraisings.

As the first entrant to the market, P2PGI’s shares initially soared to a 19% premium in 2015.

However, following new launches in the sector, including Victory Park Capital in February 2015 and US-based Ranger Direct Lending in May 2015, both of which also had successful fundraisings of £200m and £143m respectively, sentiment towards the sector has turned, with the trusts’ shares de-rating significantly. Today, most of the vehicles in the sector trade at a discount to net asset value.

P2PGI saw its share price fall from a 9% premium above NAV in September 2015 to a discount of 7% today.

Meanwhile, GLI Alternative Finance, which launched in June 2015 and successfully raised £53m, is trading at a 1% discount, while Ranger Direct Lending is close to a 6% discount and VPC Specialty Lending Investments is trading on a discount of 8%, according to the AIC. The latest launch in the sector, Honeycomb investment trust, is the only fund not trading at a discount currently. Its board announced in December the IPO had raised the maximum gross proceeds of £100m. Invesco Perpetual was a significant investor at launch, with a 46% stake in the fund.

Like many other alternative income products which have traded down to discounts, peer-to-peer focused trusts have moved in a similar way simply due to the fact markets have been difficult.

Discount/premium volatility The de-rating of the trusts has been attributed to a number of factors, including the collapse of TrustBuddy in October, which was Europe’s only listed online platform. According to Edward Marten, CEO of QuotedData, this unnerved investors and allowed discounts in the sector to open up.

“The four funds, which made up the sector at the time, were quick to point out that the TrustBuddy platform would not have passed through their due diligence processes, but the incident no doubt gave investors pause for thought,” he explained.

Meanwhile, the number of listed vehicles dedicated to the sector has also increased, spreading demand across more funds, with a total of £1.7bn raised in P2P trusts in 2015 alone.

In addition to this, market turbulence has had an impact, with the FTSE All Share down 6.5% year to date.

George Luckraft, manager of the £216.5m AXA Framlington Monthly Income fund, said because the asset class has little operating history, investors are still adjusting to how it performs in different market conditions.

“It is a situation that is often present in many ‘new’ sectors,” he commented. “When renewable and infrastructure trusts first hit the market, they went through a similar period of discount/premium volatility before they established a track record and investors became much more comfortable with the asset class.”

Kelly Prior, investment manager on the F&C multi-manager team, agrees current share price volatility is “just the market finding a price.”

Meanwhile, Innes Urquhart, research director at Winterflood Securities, highlighted the de-rating seen for P2P trusts is not unique to the sector.

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“Like many other alternative income products which have traded down to discounts, peer-to-peer focused trusts have moved in a similar way simply due to the fact markets have been difficult over the last month or so.

“Discounts have widened a little bit across the whole trust sector, so these trusts’ performance is not that unusual,” he said.

Urquhart said this volatility is expected to dissipate in time, with the trusts more likely to perform in line with their underlying asset class, which is essentially fixed income.

“Over the long term, you would expect it to be less volatile but in the short term, the fact this is a new asset class and these are listed funds means you have to accept the discount/ premium volatility that comes with it,” he said.

invested in P2PGI at launch in 2014 but later sold when the trust reached a 12% premium.

He said: “Given a dividend income of 8%, we felt the best news was already priced in at a 12% premium. When you have got two years of returns delivered in six months, it can seem prudent to take the money and rotate it into something you can buy at a par or a discount, which is why we ended up selling out of P2PGI.” Harris believes sentiment has driven much of the peer-to-peer lending sector’s share price volatility over the past year, particularly as in the case of P2PGI the NAV has hardly corrected.

In addition, despite the de-rating, investors have continued to receive a steady stream of dividends from the trust while the NAV (which is often negatively impacted by the fact the trust has to amortise the debt when it first invests in the platform loans), has actually remained steady.

“P2PGI’s NAV has corrected by 1% perhaps, which is so inconsequential to a 20%-plus share price movement. While I do not think it should have been trading at an 18% premium, it is unwarranted for it to be at such a discount today,” he said.

Revolution

Acceptance of the sector will come with time. Each month that the trusts chug out a dividend return is another month of visibility around how the asset class behaves and performs.

Long-term view The current volatility has made it difficult for some managers to maintain a longer-term position in the sector. Mark Harris, manager of the City Financial Multi Asset Balanced fund,

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The emergence of the peer-to-peer lending sector could not have come at a better time for investors however, as the funds’ annual target yields of between 6%-10% (see table, above) stand out among the record low yields on offer from traditional asset classes.

Harris views the area as a “short-duration, high cashflow generation asset class”, which has allowed him to diversify his portfolio.

The growth of the sector has come as banks and other traditional lenders were forced to tighten their lending criteria following the financial crisis.

Peer-to-peer lending’s low operating costs, minimal regulatory constraints and data-driven models have already disrupted traditional bank-lender models by matching borrowers with lenders who transact with each other directly.

Fees are paid to a platform, which is able to offer some of the most competitive rates on loans in the market today. The majority of platforms, including the largest – Zopa – lend mainly to consumers. However some, such as Funding Circle, specialise in SME lending too.

P2P investment trusts, meanwhile, offer institutional buyers access to these platforms by buying a portion of the loans using the money generated by investors.

The trusts are highly selective about which platforms they invest in, with a key part of their investment processes involving researching a platform’s loans and likely default levels.

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THE FACT THIS IS A NEW ASSET CLASS AND THESE ARE LISTED FUNDS MEANS YOU HAVE TO ACCEPT THE DISCOUNT/ PREMIUM VOLATILITY THAT COMES WITH IT

For example, P2PGI only invests in 16 platforms from a pool of over 200 globally, while the Funding Circle SME Income trust solely focuses on SME loans in the UK. The trust structure is particularly suited to the asset class due to the fact the underlying asset is illiquid and the closed-ended structure provides the benefit of a market price.

Fund managers have so far kept their peer-to-peer lending trust holdings relatively small – P2P Global and VPC Specialty Lending together made up less than 2% of Woodford Equity Income and 3% of Luckraft’s fund, for example.

However, managers such as Luckraft and Harris are using these positions to top up their portfolios’ overall financials weighting, instead of investing in traditional banking names.

The fact this is a new asset class and these are listed funds means you have to accept the discount/premium volatility that comes with it.

Sector risks But many remain unconvinced by the sector’s potential at this stage. Former Financial Services Authority chair Lord Adair Turner warned of a future fallout from the sector, stating: “The losses which will emerge from peer-to-peer lending over the next five to ten years will make the bankers look like lending geniuses.”

Fund managers also remain cautious, including Nick Greenwood, manager of the Miton Global Opportunities trust, who is avoiding the area due to its relative immaturity.

“The industry has no history of operating in a rising interest rate environment, or indeed, a recessionary environment - both of which would impact consumers’ ability to pay back their debt,” he said. “It needs time to develop as an asset class and for investors to see how it will react to a rising rate environment.”

QuotedData’s Marten said he is also concerned some trusts have not addressed the concept of discount control mechanisms.

Meanwhile, other risks highlighted by J.P.Morgan Cazenove’s analysis of P2PGI include the relatively high gearing levels that can be employed across the portfolio (for P2PGI this is capped at 150% of NAV). The group believes if defaults outweigh the gross portfolio annual return and cost of leverage, there “would be a negative impact on the company’s capital value”.

Diversification In the face of these issues, there are processes in place to help ‘de-risk’ the asset class, argues Luckraft. The loans themselves are diversified, whether by geography, duration or default levels. For example, P2PGI tends to target lower-risk loans than some of its peers.

Harris also adds many of the loans in which the trusts invest are short-duration, of around 18 months on average, meaning there is a level of flexibility built into the funds’ structures.

Moreover, there is a rigorous level of due diligence done by the trusts’ managers and boards, to ensure the loans in which they invest meet pre-set criteria. In many cases, there is an asset backing the loan.

“Acceptance of the sector will come with time. Each month that the trusts chug out a dividend return is another month of visibility around how the asset class behaves and performs,” Luckraft said.

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LENDIX TAKES THE LEAD IN FRANCE’S SME CROWDLENDING Lendix, one of the 60 companies who joined the fray of crowdlending platforms in 2015 has quickly taken the leadership position by designing a marketplace that meets the needs of institutional investors

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arketplace lending to small and medium size enterprise (SMEs) is taking off in France. Hardly a year after the French crowdfunding regulation came into force, more than 60 companies are officially registered as crowdlending platforms (Intermédiaire en financement France Arc du Triomphe Parisparticipatif, IFP). According to the statistics compiled by crowdlending.fr, the 10 leaders who represent more than 90% of the market lent €31.5 million euros to SMEs in 2015.

This number may seem small compared to the hundreds of millions of British pounds raised by European leaders such as Funding Circle in the United Kingdom. But bearing in mind that most of its platforms started operating only in 2015, the French market’s growth is pretty impressive. The total volume of loans granted on the top 10 crowdlending platforms has quadrupled.

In 2016, a change in income taxation should boost crowdlending adoption among French retail investors. Up to now, crowdlending profits were taxed on a par with the fixed income earned from risk-free savings accounts. Pressed by the French crowdfunding association, the government recently accepted to take into account the risk incurred by crowdlenders. The change was approved by the parliament in December and comes into effect as of January 1st 2016: French crowdlenders may now offset crowdlending losses against crowdlending interest gains over a period of five years.

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In this context, crowdlending should continue to thrive in France –with Lendix in the lead.

Designed for fast growth, hence for institutional investors Created in October 2014 (but officially launched the next year), Lendix closed the financing of its first SME loan in April 2015.

It was, very auspiciously, a €300,000 loan to Alain Ducasse Enterprise, the restaurant business of a famous French chef. Since then, the platform has raised €11 million in loans to finance 57 SME projects. It became the first crowdlending platform in France to raise €1 million for a single project –the regulatory upper limit. Within six months of existence, Lendix surpassed the pioneer and incumbent leader Unilend in monthly loan volume.

Olivier Goy, Lendix’s founder and CEO proudly notes that so far his company shows an even steeper growth curve than recordbreaking Funding Circle did when it started.

At the current run rate, Lendix could well be on track to achieve its original ambitious goal of lending €25 million in its first 12 months of operation.

This success owes nothing to chance.

Indeed the platform was strategically built for fast growth. Lendix’s management has drawn lessons from the evolution of global crowdlending leaders such as Funding Circle and Lending Club which now derive respectively 60% and 70% of their funds from institutional investors. Lendix was designed from the start as a marketplace to meet the needs of institutional investors who are indispensable to fuel its rapid growth.

This approach is in line with the words of Aaron Vermut, CEO, Prosper at Lendit Europe last fall:

“Retail (lending) only – is not a possible option to build a lending business nowadays.”

Lendix Investors 2015Institutional investors are keen to invest in the unsecured SME loans traded on crowdlending platforms. It offers them an appealing new asset class with a relatively high yield and short to midterm maturity of 18 to 60 months. However, having multi-million euro portfolios to manage, these investors cannot afford to invest their funds in the small chunks typical

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process. The company claims to accept less than 1% of the loan applications.

of crowdfunding. In addition, legal entities are not (yet) allowed to directly participate in crowdfunding under the current French crowdfunding regulation.

To overcome these hurdles, Lendix set up a loan securitization fund which systematically finances the first 51% of every SME loan offered on the platform through special purpose vehicles.

Patrick de NonnevilleWith seasoned executive and non-executive directors such as Olivier Goy, who previously founded and led the private equity firm 123Venture, and Lendix’s COO Patrick de Nonneville, who was a Partner at Goldman Sachs London, Lendix had little trouble attracting institutional investors and accredited investors to its new concept.

Large family offices, private banks, corporate banks, asset managers and wealth managers such as Decaux Frères Investissements, Banque Wormser Frères, the Sycomore Group and the Oddo family office have pledged €26 million to Lendix’s securitization fund to be raised in tranches over the next 6 months.

In addition, to strengthen the trust of their investors, the management team of Lendix has put some skin in the game through an investment of €€3.5 million in the fund.

Once vetted, borrowers are guaranteed to receive their loan within 10 days Lendix model is designed to inspire trust and to make transactions as easy and quick as possible for both lenders and borrowers.

For this reason, the platform does not involve the crowd in the process of vetting loan applications. It does not either use a bidding system whereby each lender pledges an amount at his chosen interest rate and the platform retains the best offers. In Lendix’s view, these steps slow down the funding process and create too much uncertainty for both lenders and borrowers.

Thousands of Euros 500 MoneyInstead, Lendix is committed to ensuring that its team of analysts will analyze a loan request and, if accepted, propose an interest rate within a week of receiving a loan application. Rates are set at between 4% and 9% according to the company’s proprietary credit scoring criteria.

Moreover, the platform removes the reputation risk that follows when an SME borrower cannot find enough backers to fund his loan request displayed on a crowdlending platform.

Lendix guarantees that every borrower who passed the scoring tests and is presented on the platform will receive 100% of the loan requested within ten days. If the amount collected from individual lenders on the platform is not sufficient, the special purpose vehicle which already funded the first 51% of the loan will contribute the remainder.

Such strong commitments have helped Lendix attract larger A-rated SMEs as borrowers. This shows in the platform’s average loan size which is twice bigger than the market’s average. So far, the platform had zero default.

This may be the result of a drastic screening

International expansion plans With no input from retail lenders in terms of vetting and rate setting, Lendix retains from the crowdlending concept only the direct online lending aspect. However, the small lenders who chose the platform are unlikely to complain about it. More probably, they enjoy being served by professional risk managers and being able to invest their money alongside professional investors. We can expect Lendix to make their life even easier by introducing automated loan diversification for retail investors as soon as its loan volumes will permit.

In the immediate future, the competitive race for deal flow will intensify among the many too many French crowdlending platforms. Only a few will survive it. Lendix will undoubtedly be one of them.

To secure its leadership, Lendix wants to continue to outgrow its French competitors and pass the €100 million threshold as quickly as possible. When asked whether this ambition could be hampered by the sluggish French economy, Olivier Goy says it does not worry him:

“The opportunity is huge.

Crowdlending should easily capture a piece of the €80 billion of annual SME lending.

The only hurdle is communication. Most SMEs are still completely unaware of the actual opportunities presented by alternative finance.

We need to educate them.”

Lendix wants to stay in the debt financing market and does not plan to diversify into equity crowdfunding which Olivier Goy sees as “a completely different ball game”.

The company recently started Lendix Croissance, an “innovative asset financing” solution which should soon open to the public.

Last but not least, the company is expanding into other European markets, starting with Spain. Italy should soon follow.

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BEST OF BOTH WORLDS: THE COMPOSITE LENDING BUSINESS MODEL Alternative lending has become an important part of the financial landscape. Two major lending business models in this industry are marketplace and balance sheet lending, which differ mainly in the distribution of risk and the amount of return.

Composite lending bridges those models and brings the benefits of marketplace lending to balance sheet loan originators

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n the world of alternative lending, two prominent lending business models are marketplace lending and balance sheet lending.

Marketplace lending for lower risk In the marketplace lending model, lending companies sell loan portfolios to third party investors in exchange for collection of a service fee throughout the loan’s duration, and optionally an upfront origination fee. This transfers associated risk of loan default to investors, but it reduces the overall return by sacrificing inte­ rest rate spread of the portfolio. These sales bring in new capital, allowing the lending companies to originate more loans without being constrained by capital adequacy and leverage ratios.

Marketplace lending companies typically fo­cus on long-duration loans, such as near prime unse­cured consumer loans, small and medium enterprise (SME) loans, and real estate property financing. These are generally low-margin and long-duration deals, so these companies often require lengthy and substantial capital investments from VC firms to sustain operations.

Balance sheet lending for higher return In the balance sheet lending business model, loan originators retain the portfolio and so 30

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collect the interest rate spread over the lifetime of the loans. This increases return and provides cash flow, but the lenders retain the risks of possible loan defaults.

Balance sheet lenders tend to focus on specialized lending, such as subprime short term loans, cash installments, POS loans, merchant cash advances, and factoring. Loans of this type are usually short in duration with a focus on current profitability.

Retaining the interest rate spread means the single-loan expected cash flow for these companies are generally greater than for marketplace lending firms, allowing them access to profit for business growth rather than relying on VC commitments. Nevertheless, balance sheet lenders have to meet certain covenants on capital adequacy and profitability when raising new capital to boost originations, since all risk is concentrated on their balance sheet.

Which model do investors prefer?

While balance sheet lenders may achieve a higher initial return, the marketplace lending model has proven to be more attractive for investors. Marketplace lending portfolios more readily attract mainstream investors for a variety of reasons: Marketplace lending tends to be more transparent and the main risk investors must evaluate is that of the underlying, rather than the whole business as is the case for balance sheet lenders.

Direct loans to balance sheet lenders are risky for third-party investors and highly illiquid.

Investors are typically unfamiliar with the specialized assets in these portfolios, leading them to compare the lender with a bank and draw incorrect conclusions.

The short-term near-prime and subprime loans typically found in balance sheet lenders’ portfolios are difficult for investors to evaluate using a classical approach, while loans originated through the marketplace lending model are more easily evaluated using mainstream models.

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The composite lending model combines the benefits of balance sheet and marketplace lending However a bigger issue facing balance sheet lending companies is business scalability. The marketplace and balance sheet lending models both must generate capital to fund the evergrowing market demands for loans and to scale their businesses. Companies in each lending model need historical loan statistics to demonstrate proven results — a track record — to potential new institutional investors, but to create these statistics, they need initial investors.

To reach this point, marketplace lenders must spend money from early investors, while balance sheet lenders may use their own equity for this purpose. Once a company collects enough statistics and attracts institutional money it will experience hockey-stick growth in originations.

Investors favour transparency and scale over high return with unknown risk. Therefore marketplace-lending firms were literally founded to acquire new investors to scale their growth. Balance sheet lenders retain their earnings, enabling the expansion into new segments and markets; however, few balance sheet lenders have scaled their operations sufficiently to raise debt through securitizations or off-balance sheets. This is mainly due to costly set-up and the lack of specialized investors.

Introducing the composite lending model The composite lending model combines the benefits of balance sheet and marketplace lending. In this model, a portion of the portfolio is retained on the balance sheet funded by the company’s capital, while the other part is financed by outside investors on the principles of marketplace lending.

Transitioning from a balance sheet to a composite lending model is advantageous to the originator. The company enjoys the same high return on the current portfolio while collecting additional origination and servicing fees from the newly originated portfolio. Since newly originated loans are sold to the investors, the lender reduces the risk and leverage of the company as measured per origination volume.

This allows for the virtually infinite scalability inherent to marketplace lending.

Composite lending gives businesses the flexibility to add new products and enter new

markets using its own portfolio to expand the track record and subsequently open up this part of the portfolio for marketplace investors. By pointing to its existing balance sheet statistics as its track record of success, balance sheet lenders may present a solid case study for onboarding new investors for the marketplace lending part of the portfolio.

Another advantage of composite lending is the increased valuation multiples for the company. This is because marketplaces tend to have as much as 2.7x higher price to earnings ratios as compared to alternative balance sheet lenders, and 7.2x as compared with brick-andmortar lenders.

However, developing a marketplace lending business requires substantial investments in IT, legal, and marketing, since it is not the core business of a balance sheet lender. Moreover investors could be concerned by the perceived conflict of interests for the originator splitting the originations between retained and for-sale potions of portfolios as well as setting the fees.

Brick-and-mortar banks use marketplace lending to set up their consumer-lending portfolio using a process called lending as a service (LaaS). Similarly, balance sheet lenders outsource the onboarding of institutional investors through the marketplace lending model to a third party using marketplace lending as a service (MPLaas).

executed via API (application programming interface) and is designed to be easy for lenders’ own IT personnel to deploy. By using the API, the entire data exchange between the originator and the investor takes less than a second, with no effect on customer experience.

To ensure the absence of conflicts of interest, each loan is priced independently and receives origination and servicing fees according to its risk and expected cash flow. This allows for the avoidance of cherry picking on behalf of investors and selection bias on behalf of originators.

Investors are provided with independent analytics of the originators, flexible loan selection criteria, and an opportunity to diversify over different geographies and currencies. All of this ensures the pure marketplace lending approach is executed based on full transparency and informed decisions.

Summary The composite lending model brings the benefits of marketplace lending to companies operating under the balance sheet lending model. Those benefits include scalability, lower risk, and improved cash cycle while preserving high return and discretion over the retained portfolio. Balance sheet lenders are perceived as more advantageous by institutional investors, as they see not only a solid track record of originations in the portfolio, but also a transparent, skin-in-the-game approach.

Marketplace lending as a service An example of such a third party is Black­ moon Financial Group, which offers a platform used by institutional investors to invest in loans originated by balance sheet lenders.

Balance sheet lenders partner with Black­ moon to scale their businesses and sell loans at the time of origination. The integration is

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Fintech herbivores want to work with banks, while the carnivores want to eat them.

Chesbrough’s thesis is there are many more smart people outside any company than inside it, however big that company happens to be.

Therefore, advancement can’t happen by relying on internal thinking only; innovation requires tapping into external ideas and technologies.

A similar philosophy drove Westpac Banking Corp to establish its venture capital fund, Reinventure Group, in 2014 and National Australia Bank to create NAB Ventures last year. Collaboration is also central to the Sydney fintech hub Stone & Chalk, which is supported by 22 “partners” from the big end of town.

WHY FINTECH’S

HERBIVORES ARE EATING WITH BANKS

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ome of the 70 start-ups in attendance were classified as “carnivores” – disrupters wanting to kill traditional banks. But others were not seeking to attack. They were the “herbivores”. This fintech posse want to work with incumbents, who can provide real-world problems and customers to help the start-ups scale up.

Ian Pollari, KPMG’s global co-head of fintech, says some of the herbivores at Finovate had created biometric solutions to help banks manage conduct risk, compliance and fraud.

Others pitched predictive analytics and machine learning technology to help financial institutions personalise products to get closer to customers. Entrepreneurs in the wealth space showed off platforms they hoped could be “white labelled” for use by banks or investment managers.

Collaboration between incumbent banks and fintech herbivores is an example of the philosophy espoused by Henry Chesbrough, the University of California, Berkeley academic, in his 2003 book Open Innovation: The New Imperative for Creating And Profiting from Technology.

Organic mix Stone & Chalk chief executive Alex Scandurra says in most industries, “there is an organic mix of start-ups: efficiency and incremental innovators – the ‘enablers’ – and market-making innovators, commonly referred to as the ‘disrupters’. Many start believing they are truly disruptive. But they eventually realise their proposition is closer to enabling.”

Scandurra says term disrupter “is largely misused and misunderstood”. A true disrupter transforms complicated or costly products so radically that they create a new class of consumers or a new market, he says. One example is the smartphone, which put a $200 computer in the hands of billions of people throughout the world.

“In financial services the same is happening. Digital wealth management platforms – robo-advice – are heavily reducing the cost to provide wealth management solutions more closely tailored to the needs of individual clients at a significantly lower cost. In effect, this creates an entirely different market, with new entrant providers and a whole set of new customers that can’t afford the human-based model of wealth management.”

He says it would be wrong to think Stone & Chalk is merely catering for herbivores. The hub has attracted “a disproportionately high percentage of market makers from across a wide spectrum of verticals, such as data sharing, wearables, super and wealth management, alternative lending, crowdfunding and more,” Scandurra says.

Open innovation The global chair of financial services for KPMG, Jeremy Andersen, says incumbent banks have no choice but to look to engage with both carnivores and herbivores. “I don’t think any organisation is going to be able to innovate at the pace it needs to just for its own

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internal innovation of ideas,” he says, espousing Chesbrough’s philosophy of open innovation.

He says successful companies have to be open to others and predicts the future of financial services will involve an ecosystem where “fintechs are going to be important because they are the people generating ideas. Fintech is changing customers’ expectations very significantly – customer expectations of what good looks like: personalisation, convenience, service levels and, potentially most of all, price.”

The challenge for traditional banks engaging with fintech start-ups is bringing the innovation into core, mainstream operations, Anderson says. “It is one thing having a skunkworks somewhere doing really interesting things, but in the end, you have to bring it back to how you are serving your customers and how you are going to re-engineer your whole organisation to give you better customer focus, lower costs, and more agility.”

As herbivores and banks begin to partner up, arrangements will vary depending on the respective parties and their objectives. In early December, JP Morgan announced the Nasdaqlisted online business lender OnDeck will receive fees to originate and service loans for JP Morgan; OnDeck’s shares soared 30 per cent on the day.

OnDeck also announced a deal with Commonwealth Bank of Australia in December.

CBA will refer selected SME customers that miss out on its criteria (for example, they might not be willing to mortgage their house as security for the loan) to OnDeck, which began lending in Australia in late November. The quid pro quo is it will refer customers to CBA in return for a fee when it does not have the right product for their needs.

Alternative lending The global CEO of OnDeck, Noah Breslow, will be in Sydney next week for the inaugural AltFi Australasian Summit on February 29.

His topic is “the dawn of alternative lending for Australian SMEs”. Toby Triebel, the global CEO of Spotcap, which announced this month a $50 million debt and equity injection to

There are many more smart people outside any company than inside it, however big that company happens to be expand operations in Australia, Spain and The Netherlands, will also address AltFi next week.

Lachlan Heussler, Spotcap’s managing director in Australia, says the on-line lender is talking to banks about partnerships and while some fintech players have been happy to embrace the disrupter tag and ‘bash the banks’ to get some media spotlight, “most acknowledge the future of the industry is collaboration”.

“It makes sense for the incumbent financial services players to work with start-ups and vice versa – particularly in the SME lending space, where banks have difficulties profitably serving small businesses. Disruptive SME lenders with their innovative credit models and technology platforms can serve the small business segment more efficiently. That said, incumbents waited for these new disruptive players to gain significant traction before considering partnerships but discussions are now in full swing.”

Australian-based online business lenders are also doing deals with the local incumbents.

Prospa has a referral arrangement with Westpac Banking Corp and listed finance broker AFG. Listed marketplace lender DirectMoney said on Friday Macquarie Bank had purchased $5 million of its personal loans. Macquarie will take equity in DirectMoney, which now has distribution agreements with 224 loan brokers.

Last week at a lunch in Melbourne, National Australia Bank’s energetic chief executive Andrew Thorburn acknowledged the extent of the disruption of business banking. “Fintechs are looking at our customer friction and they are able to be just that little bit more nimble,” he said.

Shayne Elliott, the chief executive of ANZ Banking Group, says investing in start-ups is not particularly difficult for banks.

Fintech is changing customer expectations of what good looks like: personalisation, convenience, service levels and, most of all, price

“We have lots of money to write cheques.

The difficult thing is figuring out how we can internalise that intellectual capital,” he told the Melbourne Fintech meet-up earlier this month.

Elliott told more than 200 entrepreneurs that he had seen as a younger banker the hot money go in the tech boom of the 1990s only to blow up; as he watches tech industry valuations soar again, “part of me sits there and thinks, well, is it happening all over again?” But this scepticism has been trumped by the other side of his thinking, “which says this is real, this is coming our way, and as an industry we need to be paranoid.”

“We need to be scared, we need to be worried and it’s going to keep us on our toes.

There’s space for all of us – both big banks and fintech disrupters – in the market. Banks don’t have to be everywhere in the value chain. We need to learn to think like a small disruptive company that is prepared to cannibalise our revenue streams, because it is in digital opportunities that we are going to find growth.”

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IS GLOBAL FINANCIAL REGULATION PUTTING

A STOP TO SME GROWTH IN THE UK?

IT’S

Access to lending is a key growth factor for SMEs

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long been known that small businesses are one of the cornerstones of a healthy economy, and in the UK, SMEs account for a staggering 99.8% of incorporated companies. Without getting into a discussion on that classification (if 99.8% are small- and medium-sized, what counts as large?) it’s important to note how SMEs are defined. This figure shows that the term ‘SMEs’ refers to a much larger and more diverse pool of companies than is often realised — and they’re not just small firms and startups.

Interestingly, although these enterprises make up the overwhelming majority of the UK’s incorporated companies, they only account for 30% of the revenue. We’ve repeatedly seen that access to lending is a key growth factor for SMEs, and in turn how they’ve suffered disproportionately in the post-recession landscape.

This is normally chalked up to the recession — times are still tough, and amongst talk of a ‘double dip’ we should be glad that the state of SME lending isn’t even worse. But what we perhaps haven’t considered is that this situation could have been avoided — and good intentions aside, it could be a direct result of Basel III.

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What is Basel III?

Botta Basel SwitzerlandBasel III is the most recent set of guidelines issued by the Basel Com­mittee on Banking Supervision (BCBS) whose mandate is to “strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability”. This stated aim became increasingly important after the global recession of 2007-8, especially in light of the widely discredited Basel II. In layman’s terms, Basel III aimed to make banks more stable and less vulnerable, by requiring them to hold more capital in proportion to their risk. Theoretically, this is a perfectly logical position to take, but it came with unfortunate (and predictable) results.

Where Basel II was lax, Basel III has potentially overcorrected — particularly when it comes to liquidity and capital requirements. While appearing sensible on a macroeconomic scale, the new capital requirements disproportionately affected SMEs. Indeed, contemporary commentators pointed out this risk, with the consensus at the time saying that Basel III traded macroeconomic stability for SME prosperity.

This has held true, and years later it’s clear that SMEs are still suffering terribly because of Basel III’s collateral damage.

Unintended consequences

Basel III’s requirements for the banks to hold more capital in proportion to their risk effectively presented banks with two choices — increase held capital in absolute terms to sustain the same risk, or hold the same amount of capital and reduce risk exposure.Unfortunately, the latter has overwhelmingly been the preferred course of action for the major institutions. What’s worse, SME lending is an obvious area to decrease for banks looking to reduce their exposure, because it’s riskier, and has a lower rate of return than lending to larger, more established businesses. That’s exactly what has happened — the major banks are much less able or willing to lend to SMEs, regardless of how credible their applications are.

Another example of this phenomenon is the reduction of overdraft facilities for smaller businesses. Basel III redefined how overdrafts are categorised in terms of risk, meaning that banks have to hold capital against the full overdraft capacity even if only a small proportion is ever actually drawn.

This is a good example of Basel III’s overcorrection of the mistakes of Basel II — because even if the bank’s total value of overdrafts are only ever drawn at 20%, they have to hold

capital as if 100% were loaned. The sadly predictable result is that Funding Options research shows that business overdrafts in the UK have been reduced or removed at a rate of £5 million per day, as banks focus their limited capital requirements on more profitable types of lending. Again, while appearing superficially sensible, Basel III’s policy seems detached from reality, and indirectly encourages banks to turn their backs on SMEs. Put simply, they’ve been struggling since the credit crunch, and continue to do so even as the wider economy shows positive signs of recovery. Access to lending is a crucial growth factor for small businesses, so the reduction of bank lending — a direct result of Basel III — is starving them of the opportunity to expand, and in some cases leading to their closure.

What are the alternatives?

But all is not lost for SMEs in the UK. The alternative finance industry has — perhaps unsurprisingly — grown and diversified immensely since the credit crunch, and now lends 45% of the amount that the banks do.

This proportion is growing all the time, and we expect it to continue.

Moreover, alternative lenders aren’t restricted in the same way as the mainstream institutions. As well as having the appetite to lend to higher-risk propositions — and the freedom to do so — alternative finance providers have such a wide range of products between them that there are more and more solutions for a huge number of businesses in specific situations. For example, the retail and hospitality sectors have always been difficult to lend

to; merchant cash advances have emerged as a flexible and accessible alternative way to fund such businesses.

But what does all this mean for the SMEs who can no longer be helped by their business bank?

Invoice finance is hugely useful for firms that trade on credit; trade and supply chain finance give many SMEs the platform they need to start doing business internationally; and of course, crowdfunding has been very useful for new businesses looking to get things off the ground.

These are just a few examples — there’s a lot more alternative finance besides that can help hard- hit SMEs access the funding they neaed to survive and thrive. And while it’s clear now that Basel III has had serious consequences for SMEs, it remains to be seen whether bank lending to SMEs will recover, or whether alternative finance will continue growing to fill the funding gap, and gradually replace the banks.

With alternative finance already accounting for 45% of bank lending to SMEs, the latter future is closer than you might think.

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HOW BANKS LOST

THEIR GROOVE IN SMALL BUSINESS FINANCE Prior to the Great Recession, easy credit conditions prevailed for small businesses. Cash was free flowing, and relaxed lending practices made it relatively easy to secure financing

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fter the Lehman Brothers crash and during the ensuing “credit crunch,” volume fell roughly 19% from 2008 until 2012. This general slowdown in lending coincided with stricter requirements placed on borrowers. Financing simply became less available — even for “creditworthy” companies. For the first time in U.S. business history, small business owners frequently were unable to secure credit even from their own banks.

Many banks suffered losses when the housing bubble burst, and they became risk averse.

In order to make loans, they often sought three years worth of financial data. Naturally, revenues declined during the recession, and startups were particularly challenged because they had no financial track record to highlight.

Historical data from my company’s Biz2Credit Small Business Lending Index shows that big bank lending hit rock bottom four years ago in June 2011, when only 8.9% of small business loan applications were granted.

So what happened during this inefficient market? As bank lending fell significantly, so entrepreneurs looked for other sources.

Technology enabled platforms such as Biz2Credit, BoeFly and Lendio, as well as balance sheet lenders OnDeck Capital and Kabbage, to emerge and match entrepreneurs with willing lenders.

Had the banks not shut the spigot so tightly, borrowers might not have been so motivated to look elsewhere. Business owners went online in search of capital in the same way that shoppers adopted technology to find the best deals on consumer goods. These events led to the 36

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rise of peer-to-peer lending platforms, such as Kickstarter and Indiegogo, that collectively had provided more than $1 billion in financing for entrepreneurs by 2011.

Alternative lenders (merchant cash advance companies, factors, and others) also took advantage of the opening when banks refused to lend. In return for a percentage of future revenues, they were willing to provide quick, short-term infusions of cash. These lenders were willing to take on riskier debt, and that risk manifested itself in the form of high interest rates, sometimes 30% to 40%, that often had to be paid off in six months or less.

The latest major threat to the supremacy of banks has been the rise of marketplace lending, which evolved from peer-to-peer. Now, instead of having individuals fund your company, institutional platforms have gotten into the small business lending game. Insurance companies, family funds, VCs and others are providing billions in capital through online platforms.

They make quick decisions like other non-bank lenders, but offer longer terms and much lower interest rates. Before the recession, about 80% of small business owners went to a bank first and when rejected, they turned to the internet to find funding. Today, 80% go online first, and some 60% of them are doing so via a mobile platform. Further, almost two-thirds (65%) fill out loan applications after 6:00 p.m. and on weekends — times outside traditional banking hours. One cannot underestimate the role of financial technology in this evolution.

Even with all of this change, not one single big bank established its own digital application

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process for small business loans. The banking industry usually has been on the cutting edge of technological advancements, but in the case of small business loans, customers have moved online faster. This is a dramatic turn of events.

Big banks have steadily increased the percentages of loans that they grant to small businesses. In June of 2014, the figure eclipsed 20% for the first time since before the Great Recession. The latest research finds the level has risen to 22.1%: good, but not great since nearly four-of-five funding requests are rejected.

Meanwhile, smaller banks are approving slightly less than half of the applications they receive. At the same time, institutional lenders tend to fund more than six in ten funding requests at interest rates that rival those of the banks and at a much faster pace.

When banks were unwilling to lend, borrowers went elsewhere. Eventually, overall economic conditions improved and credit eased, but small business owners did not flock back to the banks. They learned that they could get funding elsewhere. Banks have lost an incredible amount of opportunity for two reasons. Firstly, big banks still tend to focus on small business loans of $2 million, even

BUSINESS OWNERS WENT ONLINE IN SEARCH OF CAPITAL IN THE SAME WAY THAT SHOPPERS ADOPTED TECHNOLOGY TO FIND THE BEST DEALS ON CONSUMER GOODS though many entrepreneurs don’t need such large amounts. Secondly, many banks have not invested adequately in technology that allows online small business loan applications ad still tend to favor government-backed SBA loans that take longer to process and require large amounts of paperwork.

The end result is that banks, which did the lion’s share of small business lending before the Great Recession, now are declining as lenders.

Their primary advantages — name recognition and the branch system — have eroded, thanks to technological advances. I believe that much of the market share they lost is now gone forever.

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MOBILE PAYMENT PLATFORMS FOR SMALL BUSINESS ?

What are mobile payment platforms?

Robert De Luca, Director of Sales and Marketing for Public Storage Canada explained, “Mobile payment platforms give businesses like ours the ability to use mobile devices like cell phones or tablets as a payment system for our customers. We use a vendor specific to the self-storage industry, but typically PayPal is a great option for small businesses looking to provide their customers with the ability to make mobile payments.”

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Why do you need mobile payment platforms?

Now, many businesses pay for expensive card readers or bespoke systems which integrate with a traditional checkout system.

Still more businesses have to rely on their customers paying by cash (which they don’t want to do) or by check (which they really don’t want to do), or by credit card transfers, all of which have huge fees. These are obviously complicated and cost more money.

A mobile payment system makes this a lot easier, and a lot more small business-friendly.

Most transactions are also insured and work with an infrastructure provided by the companies who develop them, so you don’t have to worry about security and the like.

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What are some options in terms of mobile payment platforms?

The good news is that there are many, many mobile payment options either available already or coming into availability in the nearfuture. The bad news is … that means a lot of choice. A lot of options. Also, it means you’ll have to do your research, as there’s no one size fits all formula.

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How to get started?

PayPal Mobile Payments: If you

have a PayPal vendor account, which you likely do if you sell online, you’ll be pleased to know that PayPal has its own mobile payment platform.

Amazon Payment Program: If you’re a vendor in the world’s biggest store, then you’re likely to want to try the Amazon Payment system. It allows you to take payments over the phone and is trusted by most of the world’s shoppers.

Your Bank: If you have a business account with your local bank, then you might find that they have a mobile payment system already in place. Barclays, HSBC and larger banks have their own mobile payments systems, so if in doubt these might be a good place to start.

Mobile payments are the next new frontier for small businesses, because the new technology means there is going to be a scramble between those who take advantage of this new technology, and those who don’t Android Pay: With Android Pay, customers simply unlock their phone and put it close to the contactless terminal. There is no app to open, and customers can even earn loyalty points for paying this way.

Clover: Clover is a replacement for your payment terminal, cash register, and everything else you need to accept payments from customers. You can accept credit cards, EMV, and Apple Pay.You can also run reports from home.

Shopify: This is currently one of the most popular online sales platforms, and now offers POS solutions for businesses. It’s easy to set up, and you can be ready to sell in only an hour.

It is user-friendly. You get a free card reader when you sign up. It also allows you to accept more than one payment option. It also allows you to create your own gift cards that can be used in the store or online.

Apple Pay: Any merchants who already accept major credit cards can use Apple Pay. You’ll need a contactless payment-capable point of sale terminal, and if you don’t already have that you’ll need to contact your payment provider. There are no additional fees associated with using Apple Pay.

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3 REASONS BANKS ARE MISSING THE MASSIVE OPPORTUNITY TO SERVICE SMALL BUSINESS Small business lending is a market window of opportunity big enough to drive a truck through.

It is also a perfect fit for “rebundling“; business finance is too complex for point solutions. Small businesses need banks and banks need small businesses as digitization disruption hits their consumer revenue line. Massive need on both sides and still nothing…

Serving small business would also be a big PR win for those “evil bankers”. If there is one thing we can all agree that bankers should be doing, it is lending to small business. Banks could get regulators off their backs and polish their faded brand.

There are three things stopping banks from seizing this huge opportunity:

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Banks don’t see themselves as being in the service business. Who can blame them?

Good service is harder than simple transactions. The trouble is, digital disrupters are taking those simple transactions down to zero price using Moore’s Law….

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The middle child organization vacuum. Banks have units and scalable business models to sell to Big Corporations (oldest child) and Consumers (youngest child). Small business is stuck in the middle and ignored. The way to overcome that is creating an Intrapreneurial venture within the corporate ownership structure but freed from the constraints of “this is how we do things around here”.

The lack of a simple executable strategy. Banks are not the first to find the small business a difficult market to crack. It used to be a big problem for the IT business as well. In the olden days, IT meant selling technology to big companies. This meant long expensive sales cycles but with a big reward at the end. Then we had the Internet driven B2C revolution – lots of tiny transactions with short/cheap sales cycles.

Small business was the problem market for IT. Sales cycles were still long. Small business owners still viewed each decision as critical and complex and so insisted on taking their time.

Yet the reward at the end of that long sales cycle was far less than in an enterprise sale.

Then along came the Cloud and Software As A Service. This dramatically changed the economics of delivery. Then Social, Analytics and Mobile changed the economics of marketing. Suddenly small business IT was viable and forecast to grow faster than overall IT spending according to Gartner.

A few weeks ago, Rick Huckstep covered Zenefits, one of the fastest growing SAAS

ventures ever (a staggering 30% month to month). Their innovation was to offer the HR software free and monetize via a 5% finders fee from Insurance companies. This is also happening in the market around e-invoicing and Accounts Payable Automation, where the monetization is coming from a slice of the short term working capital financing.

Free financial software monetized through financial transactions – that sounds like a scalable business model. It requires banks to think outside the box, but that is actually quite cheap. Banks need to stop thinking of their IT as simply enabling a banking transaction.

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MICROCREDIT:

NEITHER MIRACLE NOR MIRAGE Recent research across seven countries shows that giving poor people access to microcredit does not typically lead to a substantial increase in household income. There also appear to be no significant benefits in terms of education or female empowerment. Yet, microcredit does allow lowincome households to better cope with risk and to enjoy greater flexibility in how they earn and spend money. In short, microcredit is a useful financial tool but not a powerful anti-poverty strategy

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ecent years have seen an intense debate between microfinance proponents and detractors as to whether microcredit can lift people out of poverty.

The microfinance industry has long painted a picture – often backed by inspiring individual success stories – of households escaping poverty once they receive a microloan. Women are thought to benefit in particular as access to credit allows them to become economically and socially more independent. More recently, however, doubts have emerged about the ability of microcredit to improve living standards in a structural way.

What has been absent from this heated debate is solid evidence. To fill this gap, a number of research teams across the world started randomized evaluations (large field experiments) to rigorously measure the impact of access to microcredit on borrowers and their households. Studies were set up in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia, Morocco and the Philippines.

Research took place in both urban and rural areas and evaluated both individual-liability and joint-liability (group) loans. Some of the participating micro-finance institutions (MFIs) were for-profit organizations, whereas others were non-profits. Nominal annual interest rates varied between 12 percent (Ethiopia) and 110 percent (Mexico).

Four main lessons Together these studies have produced a rigorous body of evidence on the impact of microcredit in a wide variety of settings. Earlier this year the research results were published in a special issue of the American Economic Journal: Applied Economics (references at the end of this blog). They paint a remarkably 40

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consistent picture and contain four main lessons: Across all seven studies, microcredit did not lead to substantial increases in borrowers’ income. It did not help to lift poor households out of poverty. This holds both when measured over the short term (18 months) and over the longer run (three to six years). A possible explanation for this finding is that, while microcredit clients overwhelmingly reported using loans at least partially for business purposes, many of them also indicated they used part of their loans for consumption. Another possible explanation is that not all borrowers are natural entrepreneurs. Of those that use microcredit to open or expand a small business, some borrowers are successful, but many others are not. Indeed, though business investments and expenses increased for borrowers in several countries, researchers did not find any overall effect on borrowers’ profits in Bosnia and Herzegovina, Ethiopia, India, Mexico and Mongolia.

Access to microcredit also did not appear to have tangible impacts on borrowers’ wellbeing or the wellbeing of others in their households. For instance, three of four studies found no effect on female decision-making power and independence. In Mexico, where the MFI emphasized empowerment, women did enjoy a small but significant increase in decision-making power. In six studies, microcredit access did not increase children’s schooling.

On the upside, the data collected by the research teams show that households with access to microcredit enjoyed greater freedom in deciding how they earned and spent money.

In Bosnia and Herzegovina and in Morocco, microcredit allowed people to change their

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mix of employment activities, reducing earnings from wage labor and increasing income from self-employment activities. In the Philippines it also helped households insure themselves against income shocks and to manage risk. In Mexico, households with access to microcredit did not need to sell off assets when hit by an income shock.

Importantly, there is no evidence of systematic harmful impacts of access to microcredit.

For instance, overall stress levels among borrowers were no different from the comparison group in Bosnia and Herzegovina or the Philippines, though male borrowers experienced significantly higher levels of stress in the Philippines.

(Field et al., 2013). In addition, monthly or seasonal repayment schedules that better reflect borrowers’ income flows can help borrowers to make better use of their loans. Some MFIs have started to offer loan products where repayment schedules are matched with expected cash flows (which depend on the seasonality of agricultural products). Further research is needed to evaluate the impact of such flexible loan prod-

Implications for the microfinance industry

ucts in terms of repayment rates and poverty outcomes. In Mali, researchers found that a credit product designed around agricultural timing had positive impacts and did not lead to increased defaults (Beaman et al., 2014).

Related to the previous point, MFIs and borrowers could benefit from better segmenting the market and offering larger, more flexible products to clients most likely to perform well, and smaller, less flexible loans to less promising borrowers. Better ex ante differentiation is, however, not straightforward and would require better screening methodologies.

In addition, financial institutions can pilot better ways to help high-performing

Small changes to product design may have a big influence on how people use and benefit from microcredit. For instance, repayment begins for the typical microloan two weeks after loan disbursement and payment is usually required on an inflexible weekly basis. This can be an effective strategy to limit default, but may also constrain borrowers’ income growth. In India, granting (some) borrowers a grace period – so that they can build a business before they need to start repaying – led to increased short-run business investment and long-run profits, but also increased default rates

microentrepreneurs become eligible for SME lending. Today, successful and growing clients who need more funding may get stuck – positioned as too large for microfinance, but not yet viable clients at traditional lending institutions.

MFIs could set up arrangements with local banks to transfer such successful clients (for a fee) to a bank so that they can continue their growth trajectory. Likewise, banks with both a

SMALL CHANGES TO PRODUCT DESIGN MAY HAVE A BIG INFLUENCE ON HOW PEOPLE USE AND BENEFIT FROM MICROCREDIT microfinance and an small and medium-sized enterprise (SME) department should ensure that fast-growing micro clients can easily graduate to SME status.

Lastly, we note that the rapid expansion of lender competition can tempt some clients to borrow from various lenders (double dipping) which may result in over-borrowing and repayment problems. A potential mechanism to prevent such problems is to let lenders share borrower information via a credit registry.

These considerations are particularly urgent for countries, such as Tunisia, that are currently opening up their microfinance sector to increased competition.

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WELLS FARGO:

SMALL BUSINESSES WITH PLANS HAVE BRIGHTER FUTURE OUTLOOK Wells Fargo launches new, free business planning resources and tools to help every business create a plan for success as part of Wells Fargo Works for Small Business

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n a recent national survey, only 33 percent of business owners said they have a formal business plan, yet those with a plan also have significantly higher expectations for the year ahead than those without. These results were among survey findings pointing to the value of business plans as Wells Fargo introduces The Business Plan Center, a new Wells Fargo Works for Small BusinessSM offering that provides online tools to help business owners create and update their own business plans.

In the January Wells Fargo/Gallup Small Business Index survey, business owners who said they had a formal, written plan reported much greater optimism for 2015 – their future outlook score (+51) was 12 points higher than business owners without a plan (+39) and 8 points higher than business owners overall (+43). Further, those business owners with plans compared to those without were more likely to report that in the next 12 months they expect to:

Increase jobs at their businesses (32 percent of business owners with plans versus 19% of business owners without plans).

Grow revenues (62% versus 51%) Increase capital spending (39% versus 28%) Apply for new credit (26% versus 14%).

In an effort to provide business owners with a simple, convenient way to create or revise business plans, Wells Fargo is launching The Business Plan Center, a free, online 42

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resource now available on WellsFargoWorks. com. The Center features the Business Plan Tool, a step-by-step guide to develop a written business plan. It also offers a Competitive Intelligence Tool, which provides business owners with key insight on competitors and the market for their businesses that can be used as part of the planning process. Other interactive learning resources on the new Center include videos, articles and infographics covering essential elements of a business plan.

“Every business – big or small – needs a plan. We know from research and our direct experience working with business owners that a formal, written business plan is the foundation for long-term financial success,” said Lisa Stevens, Wells Fargo’s head of Small Business.

“Many business owners have business plans in their heads. We want to help every business owner put a plan in writing, if they don’t have one already, so they have a guide to organize their goals, improve decision-making and focus on activities that will help their business thrive.”

The new Business Plan Tool will enable business owners to develop and update written plans that include a high-level summary of the business; an overview of business history, structure and management, and its current and planned products and services; a detailed marketing plan; and market and competitive analyses. It also will allow business owners to enter financial data – such as starting balances, fixed assets and liabilities, sales forecasts and expenses. The tool will generate financial statements, such as a detailed cash flow statement, profit-and-loss statement and balance sheet.

Wells Fargo is also announcing other initiatives to expand the support it offers small

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business owners through Wells Fargo Works for Small Business. These include:

Wells Fargo Works Project National Contest. For the second year,

Wells Fargo is inviting eligible business owners to enter a nationwide contest to win $25,000 and a business mentorship opportunity. To enter, business owners must submit a 2-1/2 minute video or 600-word essay with a photo responding to questions about their business.

Twenty-five finalists will be selected to each receive $1,000 for their business. Five grand prize winners will be selected from the 25 finalists to receive $25,000 each for their business. The contest runs from May 1 through June 30, and winners will be announced in September. View webisodes from last year’s finalists to see how they’ve taken their business to the next level since participating in the contest.

New and enhanced content on WellsFargoWorks.com. The online learning resource will feature videos, articles and infographics on the importance of creating and updating business plans, as well as offer useful tips on how to approach building a plan. Later in the year, webinars will be available, focusing on the key components of a business plan, such as marketing, legal and finance. The expanded

site includes hundreds of informational articles and videos, featuring financial guidance from small business experts.

Small Business appreciation offers. Through the end of June, Wells

Fargo will conduct its annual Small Business appreciation celebration. The event celebrates the accomplishments of small businesses and provides business owners with time- and money-saving offers on several products and services, including Wells Fargo’s Business Platinum Credit Card with Rewards, and Merchant Services and Business Payroll Services products.

Introduced in 2014, Wells Fargo Works for Small Business is a broad initiative to deliver resources, guidance and services to help more small businesses achieve financial success. It provides wide-ranging support for business owners throughout the U.S. to help them build knowledge, access capital and expand their community of support. Wells Fargo Works for Small Business encompasses the company’s commitment to helping small businesses take the next step toward their goals.

WE KNOW FROM RESEARCH AND OUR DIRECT EXPERIENCE WORKING WITH BUSINESS OWNERS THAT A FORMAL, WRITTEN BUSINESS PLAN IS THE FOUNDATION FOR LONGTERM FINANCIAL SUCCESS

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