SMB FinTech Has Come a Long Way…But We’re Not There Yet
It wasn’t that long ago that banks were the only game in town, and if you wanted to borrow money, that was your primary option. The recession of 2008 caused banks to strain under the weight of tough lessons learned and heavy regulations. That created the perfect opportunity for financial technology, or FinTech, startups to slide in.
According to the Business Research Company, the global FinTech industry was valued at $127.66 billion in 2018. By 2022, it’s expected to be worth $309.98 billion.
But sheer growth in these numbers does not mean that the space around SMB financial services isn’t still without issues. While some new FinTech in the small business market — specifically online lenders — are addressing some of what was broken in the traditional banking industry (slow loan approval times, endless paperwork, challenging criteria to qualify for a loan), the tide hasn’t completely turned and one solution can create new challenges.
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What Small Business FinTech Has Going for It
Financial Technology is to its big bank brother what a Lamborghini is to a Ford Model T. It’s faster, sleeker, and definitely sexier. With less red tape and often fewer regulatory constraints, FinTech companies can maneuver faster. Small business owners looking for a loan get a yes or no nearly instantly, or at worse, days, rather than weeks.
Speaking of speed, it takes a lot less time to apply for a loan with an online lender than it does to schedule an in-person meeting with a banker, dig up all the required paperwork, and then sit on your hands while you wait for said banker to input your data in what is inevitably a turtle-slow system.
Decisions are highly data-driven with FinTech companies, and now that so many of the tools used to run a small business are online, the data needed can easily be transferred in seconds. No more fax machines and piles of paper.
Also, FinTech companies are moving away from looking at things like do I know you, and am I familiar with your small business, and toward assessing data points like revenue, cash flows, outstanding debt, time in business, and credit scores. As a result, demographics typically underserved in the traditional lending market (women, minorities) could start to have to worry less about bias coming into play with online lenders the way they do when they deal with human bankers making the decisions. The anonymity behind a computer screen can make financing a completely data-driven decision.
The approval rate for alternative lenders was 56.5% in September 2019. For big banks, it was 27.9%. With more open underwriting criteria, and a lot of flexibility on what their lending products are (various terms, amounts, etc.), it seems getting to a “yes” for a small business owner can now happen more often.
What Hasn’t Yet Been Solved
We’re off to a great start in FinTech, but we still have a ways to go. As the space gets more crowded, small business owners can get analysis paralysis with so many overwhelming options. There’s no easy way to compare apples to zebras.
You can’t, for example, easily determine what the APR for an online working capital loan is that uses points or a flat fee the way you can a traditional bank loan, as we’re used to with mortgages and car loans. Then there are all kinds of fees. Origination fees. Service fees. Early payoff fees. It can be hard to know what your end cost is to borrow money, and alternative lenders know this confusion typically works in their favor.
As a time-strapped, often cash-poor entrepreneur, you’ll often want to make a decision that is most convenient, not necessarily the most affordable. With so many options, it’s hard to know if you’re getting the best deal you can get. And for a small business owner, paying a little less on a loan each month can make a big difference.
What’s not that different with FinTechs from banks is if they don’t approve you, there is not always visibility into why you were denied. Especially with highly-complex algorithms for decisioning, they often can’t pinpoint exactly what it was that meant you failed to qualify. That can make it difficult to know what to do to improve your options.
Can regulation help? There are some positive things happening, but really, when has new regulation been the fastest route to solving a market problem? Progress does exist. With the passage of SB 1235 in California, and a similar one, S2262 in New Jersey, we now have the first truth in lending bills for businesses in the U.S. Clearly, better transparency on small business loans is a problem that FinTech can solve faster than legislation can.
Will FinTech eventually be able to truly serve the small business customer? I sincerely hope so, and am heartened by companies that are headed in that direction.