Rob Straathof, CEO at Liberis
To say 2022 has been a rollercoaster would be an understatement. Any hope of a post-pandemic economic boom evaporated earlier in the year, with political crisis, inflation and vanishing market and consumer confidence hitting every industry hard and throwing markets into chaos.
Economic crisis means opportunity for fintech innovation
But where there is chaos, this is also innovation. We only need to look at previous crises to see how new approaches, business models and verticals can emerge – fintech itself accelerated post-2008.
Of course, that won’t be much consolation for people losing jobs and companies that are disappearing. This is why we need to ensure that any innovation that appears today has an impact now, not tomorrow.
And nowhere is this more necessary than when the target audience is small and medium-sized enterprises (SMEs). Businesses of all sizes suffer in downturns, but while the numbers of employees, falls in revenue and profit decreases will be larger relatively for global enterprises, the hits can be more challenging for SMEs to recover from. They don’t have the scale or resources to absorb, for example, a 10% fall in revenue in the same way that a multinational might be able to.
This lack of scale can also mean that traditional ways out of danger – enhanced overdraft and credit facilities, access to funding – are shut off from them or that the pace of these processes is too slow for an SME’s needs.
We saw this in the last financial crisis. Fortunately, this time around, there should be more avenues available to SMEs to access the finance and support they need, from cash flow management and bridge financing to start-up tools and growth support. This is all thanks to the great leaps and bounds fintech and alternative finance providers have made in the last decade. Plus, there is now greater acceptance of firms that established banks don’t back.
Embedded finance is one such service that is being propelled by this combination of factors. Put simply, it’s where companies that aren’t banks offer banking-like services, embedding the offerings in their websites and apps. From an SME perspective, being able to offer embedded finance via a fintech would allow them to combine their core service with a way for the customer to pay for it, without needing to engage a bank directly. It’s all about delivering a higher level of experience.
It’s thanks to these sorts of innovations that mean that SMEs choosing to work with fintech and alternative finance providers could be in a much stronger position to weather the storm. And this isn’t just the hearsay of a company that stands to gain if we see a shift in SMEs choosing new and alternative providers; a Capgemini study found that banks risk losing 89% of SMEs to fintech challengers. With fewer legacy systems and processes, fintechs are often in a strong position to identify SME needs, build products and acquire customers faster than traditional firms.
Collaboration between traditional banks and fintechs good for SMEs
But that’s not to say it is a choice of one or the other. Banks have increasingly recognised the need to harness what fintechs offer and marry it with their evident scale and resources. That doesn’t mean acquiring them, but partnering.
Partnering between established players and innovators even has tacit regulatory approval – the US Treasury Department believes partnerships between banks and fintechs benefit consumers. And if they’re suitable for consumers, there’s a good chance that SMEs can benefit as well.
Plus, partnering can help raise awareness among SMEs. A recent Liberis survey found that just six percent of UK SMEs are aware of open banking and that their organisation currently uses it, while 85% have never heard of revenue-based finance. This highlights a huge knowledge gap among SMEs at a time when being aware of new approaches to funding and other support could be the difference between success and failure. Established finance providers can use their scale to make more business owners aware of the variety of options available to them.
Ultimately, partnering makes sense for both sides. Banks get access to the innovation central to fintech, while fintechs can harness the support of a more established provider. And with this support, they have even more scope to innovate, try new approaches and products and reach customers in new ways.
From cutting-edge to mainstream fintech innovations
And that means the deployment of resource-intensive technologies such as artificial intelligence, machine learning and blockchain can move from pilots and proof of concepts to every part of the SME finance ecosystem.
In turn, SMEs benefit from powerful new solutions that have been tested and backed by reputable firms with experience operating in heavily regulated environments. So even the most risk-averse businesses can access cutting-edge innovation without exposing themselves unnecessarily.
This is perhaps the greatest role innovation in fintech can play – as the new becomes normal, SMEs can get what they need from fintechs without feeling like they are taking a shot in the dark. So at times of economic turmoil, they will be able to make choices knowing that they have the support that suits their business, whether it’s coming from a bank, fintech or alternative finance provider.