Fintechs see big opportunity in small business lending

Hello and welcome to this week’s issue of the Future of Money. Winter feels very much in the air in Essex (where I spent Sunday courtesy of a rail replacement service), and that has me thinking about Christmas — and what the cost of living crisis means for buy now, pay later providers.

The pandemic years saw a boom in ecommerce, allowing the sector to grow massively with options to pay in instalments or to “try before you buy”.

Back in June, Sulabh Agarwal, global payments lead at Accenture, told me that soaring energy bills and rising inflation meant that demand for credit was being driven by limited cash flows.

That situation has only worsened, with inflation in the UK hitting a 41-year high in October. As a growing number of consumers are likely to turn to BNPL for essentials instead of discretionary spending, it raises questions about the sustainability of that cash flow.

I’d be interested to hear your thoughts on BNPL — can the sector weather the cost of living crisis? You can reach me at sid.v@ft.com.

Happy reading!

PS Join us at the FT’s flagship banking event of the year and meet all the major bank CEOs in one place, online and in-person from November 29 — December 1 at the Global Banking Summit. Register here.

Latest news

• Laura Noonan and I did a deep dive into Revolut, one of Europe’s most valuable private fintechs. We spoke to over a dozen people, including former employees, who said that the cultural and operational issues may hinder its ambitions.

• Patrick Jenkins tears into one of the big questions about payments: why the card scheme powerhouses of Visa and Mastercard have yet to have a Kodak moment. What are the real threats to these “old fintechs”, he asks.

• Muddy Waters, one of the world’s best-known short sellers, revealed a bet against Uruguayan payments company dLocal last week. Shares fell as much as 30 per cent, Laurence Fletcher and Harriet Agnew report.

Can fintechs help keep SMEs afloat?

For small and medium-sized enterprises, the current economic outlook is bleak. Research from SME lender Cashplus Bank published last month suggests that rising costs are wiping out gains over the past year.

The current environment makes it difficult to secure funding too. Research released in October by Codat, which provides an API for small business data, found nearly 40 per cent of SMEs said that credit was expensive, with 55 per cent taking out personal loans for their businesses.

In markets such as the UK, high street banks heavily retrenched from SME lending after the financial crisis, leaving a funding gap estimated by the Bank of England in 2019 to be £22bn. Fintechs and neobanks are increasingly seeking to fill this space.

“You’ve seen fintechs across the board really step up,” said Tom Renwick, head of business lending at Atom Bank. “They have better decision models, better real time insight and they can move more nimbly and make quicker decisions.”

Players in the SME lending sector have carved out a growing niche. Allica Bank, another digital challenger bank targeting businesses, announced in October it had been profitable for the previous three months and had lent over £1bn since launching in 2021.

The play is not limited to the UK either. Dutch payments giant Adyen recently released new products to allow platforms and marketplaces to offer financing to SME customers.

“If you look at the traditional manual loan making process, there are all sorts of biases which is the reason that SMEs don’t want to go there,” said Hemmo Bosscher, vice-president for platforms and financial services at Adyen. “There’s a lot more appetite than is currently being addressed.”

He estimated that the current market size for SME lending was $110bn, but that this was only the start.

“You see platforms disintermediating other providers, so you have to ask why do SMEs still need a bank down the line,” he added. Traditional banks are faced with a choice between continuing to lose market share or committing to digital transformations which are not guaranteed to pay off, he said.

Data from the Federation of Small Businesses shows that confidence fell sharply in the third quarter among UK businesses, reflecting economic uncertainty and higher prices. Fintech lenders have a prime opportunity to show their worth, but they face no small challenge in ensuring that SMEs find the funding they need to prosper.

Quotable

“Fintechs are finding out that equity is more expensive and regulation more intrusive than they might have anticipated . . . for survival, I think a lot need to be in the collaboration game.” — David Duffy, chief executive at Virgin Money

It wasn’t so long ago that fintechs were on top of the world as banks languished in a low-interest world (see: Sam Bankman-Fried musing about acquiring Goldman Sachs).

With rising interest rates, falling consumer spending and surging inflation, that calculus has been turned on its head, leading to questions around the future for unprofitable, cash-guzzling fintechs — and whether banks might snap them up.

Duffy, chief executive of the UK’s sixth largest lender, points to an alternative model: collaboration. Joint ventures between fintechs and banks can mean scale for the former and new capabilities for the latter.

Others, however, see assimilation as the way to maximise benefits. Sanjiv Somani, UK chief executive of Chase, JPMorgan’s digital bank, told the FT earlier this month that he wanted to integrate the retail bank with digital wealth management arm Nutmeg, which it bought last year.

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