Brave new worlds

Chaos theory:

Has the worst economic shock since World War Two, finally shown SMEs the value in digital?

Bravenewworlds

As small businesses emerge from the black hole of 2020, three observers of the crisis discuss how alternative financial services have been striving to support them

Much like the crew of the Star Ship Enterprise, fintech entrepreneurs are compelled to boldly go where (in their case) no financial services have gone before.

And that took them on an extraordinary journey last year, when Earth itself began to feel like a strange new world – and a scary one for many small businesses.

As countries locked down, tens of thousands of small and micro businesses suffered a repeat of the credit crunch: cash flows froze, some business models became obsolete overnight. But, for others, markets opened up as consumers clamoured for home deliveries and online services from behind closed doors, which created demand for new payment mechanisms and capital to help them adapt and grow.

Amid all this chaos, the meagre cash buffers held by SMEs were exposed. A report by Nucleus Commercial Finance revealed that around a quarter of UK SMEs had little or no reserves to fall back on, while the same was true of half of sole traders. Research from business lender MarketFinance painted a frightening merchant gift cards and a rescue fund for customers on the verge of collapse. Quotevine released a software-as-a-service tool for commercial brokers to support SMEs with credit from asset finance firms. And, beyond the UK, Credijusto in Mexico was just one example of fintechs going at warp speed when it secured $100million of debt funding from Credit Suisse to extend loans to its SME customers. The list of examples goes on.

Manu Saadia, American author of the 2016 book Trekonomics, which examines economics from the perspective of the Star Trek film and TV franchise, believes fintech has teleported to another level in response to the changing world order and it is now the engine room for innovation.

“Banks have almost outsourced the innovation part of their businesses – the tools provided by fintech are so convenient, consumers want them, so banks are going to buy,” he says. “The banks that survive the disruption of the next few years will be those that forge such alliances. It will be the natural way for innovation to become pedestrian.”

Analysis by Santander’s invoice and expenses tracking app, Asto, found that around 80 per cent of SME bosses it spoke to would now use digital tools, such as apps, accounting software and alternative finance (although, ironically, Asto itself will be wound up this year).

And as repayment plans on those government loans begin to fall due in

picture of a majority of small businesses who predicted that they wouldn’t survive to see 2021.

Given fintech lenders’ inherent agility, the crisis should have – and to some extent has – been a fantastic opportunity to step into the gap left by slow-moving incumbent banks to service SMEs. But, in the UK at least, emergency government loan schemes, which were initially interest-free, eclipsed anything alternative lenders could offer due to their incredibly generous terms.

Small business lenders found themselves clamouring for attention, when few were initially trusted to be among the institutions distributing those loans. Financial technology trade body Innovate Finance raised fears that fintech customers would leave and may never return, while the Federation of Small Businesses recognised competition was under threat.

And yet many did manage to maintain their profile by doing what they were built to do best – approve much-need loans in minutes, rather than the days or weeks incumbent banks had hitherto taken, and moving quickly to adapt their product offer to meet changing needs. Iwoca, for instance, launched IwocaPay, which paid suppliers up front and gave buyers 90 days to clear their balance. Paytech SumUp offered the capacity to accept mobile payments to all of its merchants, alongside an invoice service,

2021, Alex Reddish, chief commercial officer at payments processor Tribe, says fintech providers now have the perfect opportunity to support SMEs through the coming painful months and years of economic recovery.

He says: “Fintechs have managed to deliver some great use cases for SME businesses and younger businesses. There’s obviously great product opportunity and fintechs are going a long way to enable affordable credit. We have the ability to disburse money quicker, to manage credit lines quicker.

“There’s still a very big issue around underbanked businesses, and those that aren’t necessarily able to obtain those services, but you have to say that fintech has been a massive improving metric in how SMEs interact with financial services.”

SMEs have distinct needs but banks neglected those because servicing them was not profitable… open banking has opened people’s minds to what’s possible

Mai Yamaguchi, Coconut

Another consequence of the pandemic has been a surge in the number of business startups – especially sole traders, many of whom have been forced into self-employment after being laid off.

The Financial Times reported in December that new business registrations were 30 per cent higher in the four weeks to mid-December, compared to the previous year, and similar growth was witnessed in western Europe and the US.

These sole traders are potential customers for smart accounting app provider Coconut. Product manager Mai Yamaguchi says fintechs like Coconut are often a better fit for SMEs than incumbent banks and accounting platforms.

“SMEs have distinct needs, both as retail customers and corporate clients, but banks have traditionally neglected those needs because servicing them has not been profitable for them,” she says.

“When the pandemic hit, we saw a lot of the major banks stop accepting new business customers just at the time many people were starting up a business, either due to job loss or because they’d had the time to decide what they wanted to do. Opportunities coming out of the self-employed market haven’t been picked up, and fintech companies are starting to address this.

“At Coconut we’re seeing lots of self-employed people having issues with managing invoices and cashflow. We think the solution to that is to enable more insights, and empower self-employed people to take control of their finances by automating a lot of the manual processes that they face when running a business. For example, we provide automated invoice chasing, which is a pressure point for many people.”

Yamaguchi, Reddish and Saadia are all in agreement that open banking, while still yet in its infancy, holds the key for fintechs to drive innovation for SMEs. They also believe that the platform model of the Chinese super apps, such as Alipay and WePay, is an obvious blueprint for how sole traders and SMEs could manage their businesses going forward.

Fintech [in the pandemic] has been a massive improving metric on how SMEs interact with financial services

Alex Reddish, Tribe

Versatile, all-encompassing and entirely mobile-based, super apps are now part of consumers’ everyday life in Asia.

“Revolut would say that it’s trying to do something similar for business here,” says Reddish, “but I don’t think it’s really been conquered in the B2B world yet.

“Starling and Coconut, to some extent, have aggregated additional services, and are therefore providing a centralised interface for me as an SME,” he adds. “I think that will become more and more commonplace, and the innovation will happen around that in terms of the products that feed into it.”

Saadia cites accounting software package Intuit QuickBooks as a product that already offers a one-stop shop for businesses – a B2B super app in waiting.

“They have a lock on the tax filing market,” he says. “They manage payroll, they manage taxes, they manage pretty much all aspects of your financial life, if you let them. They even offer short-term loans. So it's a super app of a kind.

“It’s not very glamorous but it’s what every small business in the US uses. I'm just a writer, but even I use it to invoice, to record my expenses, to do my taxes. Everything is in one place, and it’s connected to all my other accounts, so I don’t have to download 20 different apps. Intuit offers a model for others to come into that space.”

Increasingly, these providers will be using AI to interrogate data and inform decisions, says Reddish: “Machine learning and AI will become a proper reality, not a tagline on an investor deck.”

In fact, Tribe is already signed up to a Microsoft programme that’s exploring, among other things, GPT-3, an autoregressive language model that uses deep learning to produce human-like text.

“Things like that will become much more interesting,” says Reddish. “Distributed ledger technology, blockchain… you can see a roadmap to applicability.”

Yamaguchi agrees. “I think open banking has opened people’s minds to what’s possible with the infrastructure in place. We’re still getting the traditional banks on board [with open banking] and executing it in the way that it was intended. But, like machine learning and data, it’s been talked about for a long time, until

The way technology tends to work is that it creates new needs

Manu Saadia, author

people’s mindsets kind of caught up and they were ready to utilise the real value of it. We’re still going through the learning curve and, by the end of the decade, I think that we’ll see more ways of using it than we can even imagine now.”

As one experienced in the future, Saadia is wary of making any such prediction.

“We’ve been wrong so many times in the past,” he says. “The way technology tends to work is that it creates new needs. So with new tools, new needs for services arise.”

Whatever technology wins out, the ‘little guys’ in business stand likely to benefit. As Star Trek’s venerable Vulcan Dr Spock would say, may they ‘live long and prosper’.