From FinTech Business. Despite the success of fintech companies the world over, many still underestimate their importance, but when it comes to peer-to-peer lending, the market potential can’t be ignored, writes FundX’s David Jackson.
History is brimming with examples of our limited ability to think beyond the current status quo.
In 1977, Ken Olsen, co-founder of Digital Equipment Corporation, famously stated, “There is no reason for any individual to have a computer in his home.”
In 2007, then-Microsoft CEO Steve Ballmer predicted, “There’s no chance that the iPhone is going to get any significant market share.”
And even Microsoft co-founder Bill Gates displayed surprising short-sightedness when he announced, “We will never make a 32-bit operating system”, taking into consideration the 32-bit Windows NT 3.1 was launched just four years later and a 64-bit system is now on offer.
It can be easy to look back with the wisdom of hindsight and wonder how these statements were ever made. However, despite evidence of fintech’s increasing pervasiveness, we still seem to be making our own version of these statements now.
Below are several reasons why fintech for SMEs may be here to stay.
1. Pent-up demand in the SME debt market is a massive opportunity for fintechs
According to Reserve Bank data, there are around 100,000 SME loan applications made in Australia each month.
Of these, approximately 25,000 loans worth around $20 billion are approved and written by the banks. Another 50,000 loans worth around $40 billion aren’t approved or written, and rightly so, because the applicants aren’t requesting realistic amounts of credit given their capacity to repay.
This leaves another 25,000 loans worth $20 billion dollars that aren’t being written, not because the applicant isn’t creditworthy, but because banks often take an overly conservative approach when it comes to business lending.
Or, to put it another way, a $240 billion yearly opportunity for Australian fintechs.
2. It isn’t profitable for banks to lend to SMEs
Findings of the recent Financial Systems Inquiry suggest that traditional lenders struggle to finance SMEs for a number of reasons.
An inability to price risk in this segment leads many lenders to waste time and resources completing manual credit assessment processes that include physical handling of paperwork.
This can be particularly challenging where an SME is in its early stages and there isn’t a long history of credit activity or financial performance of the SME or owner.
Banks and other traditional lenders can deal with this by placing a costly “uncertainty premium” on business lending. However, this is an expense SMEs are not well-placed to absorb into their expenses.
Sometimes lenders go one step further and err on the side of caution by not lending to a business at all, as demonstrated by the $20 billion worth of loans not being funded each month.
Onerous capital requirements can also drive traditional lenders to make higher provisions for loan losses to reflect the higher expected losses on SME loans.
3. It isn’t convenient for SMEs to borrow from banks
To account for the higher cost and risks born by banks lending to SMEs, traditional lenders are also more likely to require security in the form of property or another asset.
This is undesirable for an SME owner who may wish to create as large a divide between their business finances and their personal finances as possible.
The manual application process of traditional lenders can often also be overly onerous for SME owners, whose time is already likely to be stretched quite thin.
Finally, SME owners looking to shore up cash flow rapidly may struggle to find a fast solution from any traditional lenders.
The time taken from application through to funds in the bank can sometimes stretch out to weeks or months, during which time staff and suppliers will require payment for the business to continue operating.
4. The low-interest environment is driving the search for yield.
Low interest rates across the globe have spurred innovators to search for yield opportunities in niche opportunity sectors such as the SME debt market.
This is affecting two groups of players in the market. On one hand, the search for yield is driving institutional, sophisticated and everyday investors to seek out new ways to make a higher return on investment.
On the other hand, fintech innovators are meeting this demand for new asset classes by creating new avenues for investors to achieve this yield.
As an example, marketplace and peer-to-peer platforms for SMEs are providing lucrative new investment opportunities.
Because these platforms cut out the middleman, investors are thought to receive higher rates and borrowers supposedly pay less, which may explain why Morgan Stanley has gone so far as to predict that P2P fintechs have the potential to take A$27 billion from the banking industry’s revenue moving forward.
And while the low-interest rate environment may not last forever, the rapid evolution that will occur while it does last is unlikely to be unwound if rates begin to rise.
5. The big banks are joining in.
In-house incubator hubs, accelerator programs, chief innovation officers, fintech acquisitions … as much as the big four and other major financial players try to deny the threat of fintech, their actions speak louder than their words.
As major banks the world over are (grudgingly) joining the fintech revolution, the question might be asked – are you coming along for the ride too?
David Jackson is the founder and chief executive of FundX
