The pandemic has disrupted traditional lending dynamics between banks and SMEs. Banks are not as willing to take risks on them. However, this has caused an opportunity for a burgeoning relationship between SMEs and Fintech to develop.
This new relationship will play a vital role in the future of SMEs and investors in general, so it is crucial for anyone involved in these sectors to learn about this relationship.
The first thing you need to know about this topic is what SMEs and fintech are. Here’s a brief overview of each term.
SME stands for small and medium enterprises and refers to smaller organizations. According to the European Union, "small enterprises" refer to those with less than 50 employees and a balance sheet or turnover of less than €10 million.
Medium enterprises refer to businesses with less than 250 staff and a turnover of less than €50 million. SMEs can be anything from a local chain of restaurants to a collection of caw washes.
Fintech is a term that comes from a combination of financial and technology, and that improves and automates the delivery and use of financial services. It uses algorithms and software to improve companies’ financial services.
Fintech provides fast and modern financial services for companies, allowing them to manage their finances and providing them with better access to loans and financial solutions. These services can include - but are not limited to - raising money for business startups, sending electronic money transfers, and helping people manage their investments.
Fintechs provide a new method for SMEs to avoid traditional banking and financial management by creating easy-to-use technologies. Fintech can facilitate SME lending, making it easier for SMEs to receive capital investments.
More than half of SME credit applications are currently abandoned, either because they are rejected or because they are too complicated. By providing simple business lending for SMEs, fintech can help SMEs with the capital investment they need for expansion or to keep their operation afloat.
The problems related to traditional business lending for SMEs have only gotten worse during the coronavirus pandemic, but thankfully fintech has stepped up to fill the void.
In 2017, fintech companies focused on SMEs provided $6.5 billion worth of loans for small businesses, and that number has only grown since then. According to the International Finance Corporation, there is a $5.2 trillion gap between funding and funding needs for SMEs. If fintech can provide even a fraction of that SME lending, that is incredibly important.
Fintechs provide SME lending in two primary ways: facilitating loans and crowdfunding. Fintech can make it incredibly easy for SMEs to get small business loans from existing lenders. Fintech has also created a marketplace of crowdfunding resources, which allows consumers to directly invest in startups.
There are also a variety of services fintech can provide for SMEs. In recent years, apps have revolutionized mobile and in-shop payments, allowing SMEs to avoid using traditional financial services.
Fintech has also provided targeted and data-driven marketing at a much lower price than was previously possible. Fintech has made it easier to file the paperwork necessary to start a company and has created accounting software that allows SMEs to save on personnel.
The modern economy moves fast, and the dynamism of SMEs combined with the efficiency of fintech is going to make them the dynamic duo of the future.
Currently, the IMF describes fintech activities as “less developed in Europe than in other regions,” although they admit there have been challenges when it comes to data collection. Their primary issue regarding data collection comes from the fragmentation of the data they are collecting, as there is “no comprehensive source for fintech data”.
In 2017, only 3% of global fintech lending was taking place in Europe, with more than half of those loans taking place in the UK. However, fintech business lending grew by over 40% in European countries outside the United Kingdom in 2017.
Europe provides a lot of potential for fintech due to high levels of connectivity and internet access. Because so many SME owners have access to the internet, smartphones, and computers, there is a large amount of possibility for people who want to use fintech to help their businesses.
Fintechs can provide serious competition to traditional lenders because of their adaptability and lack of bureaucracy and their ability to reach more SMEs through technology.
Europe accounts for a third of global non-cash payments, meaning fintech focused on processing payments has a large potential market in Europe. Most non-cash payments are still processed through traditional banking institutions, but fintech could grow considerably in that area.
We still do not have very much data from after the beginning of the coronavirus pandemic. However, fintech payments may have seen an uptick in use after SMEs who were previously cash-only may have switched to fintech payment options.
Fintech can greatly improve the efficiency at which SMEs operate. Beyond the services listed above, it can help connect SMEs and potential clients or customers more efficiently. This ability can save companies money on advertisement and promotion and can also help consumers find goods and services they want more easily.
It can also help facilitate e-commerce, allowing companies to operate without the need for traditional brick-and-mortar stores. This change will allow more new small businesses to open up and will drastically decrease their overhead.
Going forward, fintech is going to be a great resource for SMEs. Fintech’s flexibility and dynamism match the needs of the modern economy. Small and medium enterprises loan applications are often either rejected or not completed, and fintech can help fill this gap.
Currently, fintech lending is still rare in Europe, especially outside of the UK, but due to Europe’s connectivity and internet access, fintech and SME could be the dynamic duo of the future.