It is fair to say that back on the first of January, not one SME or fintech CEO would have predicted the unprecedented situation we find ourselves in. Covid-19 has brought seismic shock to the SME sector in particular, with many forced to pivot their operations overnight to adapt to the new normal, and others unable to trade and reliant on government schemes to stay alive in lockdown. Whilst SMEs provide a disproportionate percentage of job creation and economic growth, they are especially vulnerable to volatility, as they do not typically have the strengthened balance sheets and access to ready finance lines of a corporate.
The financial crisis of 2008 brought both significant regulatory change to the global banking sector and enabled the rise of fintech. At the same time, distrust in the old system also paved the way for a rebirth of entrepreneurship, as individuals looked to build their own security. As stated by the OECD, access to financing is one of the most significant challenges for the creation, survival and growth of SMEs, especially innovative ones. During the credit crunch this access was almost impossible to find from traditional sources, and as tech fused with lending, the alternative lending sector was born.
SMEs and fintechs have a natural affinity, similarities in outlook and approach to challenges. Agile, innovative and responsive, fintechs recognise that SME customers need solutions quickly and easily, and that if something goes wrong, it has a real world direct impact on individuals. It is no coincidence that the two have developed an almost symbiotic relationship, as SMEs recognised the benefits of fintech services such as invoicing and tax tools, and in turn, fintechs saw the economic opportunity of the growing SME market.
The UK is the standard bearer for the industry, the global fintech hub, seeing rapid growth both domestically and in exporting its technologies and regulatory standards around the globe. Building on its long legacy of financial services, the fourth industrial revolution has provided the UK with a perfect opportunity to lead once more. And yet, when lockdown came, bringing rapid, enforced acceleration in digitalisation as well as a plethora of government policies and schemes to hold the fabric of society together in this time of crisis, it was to the traditional retail banks that the Government turned.
Across the world, governments rushed to introduce a variety of schemes ensuring SMEs had access to badly needed cash flow. In the US, the Government announced a plan in April to distribute billions of dollars in stimulus cheques to both individuals and small businesses, but as retail banks struggled to meet demand and were slow on distribution, the US Government made a quick u-turn towards the fintech industry. Following lobbying from Paypal, Intuit and Square, they were approved as participants in the US Small Business Administration’s (SBA) Paycheck Protection Program (PPP), which provides forgivable loans to small businesses that keep all employees on their payroll for at least eight weeks. The scheme now includes a wider number of approved fintech lenders, including Funding Circle, Lendio and Kabbage who can distribute at speed.
In Australia, which embraced Open Banking in July under the Consumer Data Right Act, the Government launched a scheme providing a guarantee of 50 per cent to small and medium enterprise (SME) lenders for new unsecured loans to be used for working capital. From the outset, neo-banks were brought into the inner circle to distribute these loans, with 44 lenders now approved. Despite this, the scheme has not seen as much take up as planned, and as a consequence, was extended in June until next year with a higher maximum loan size.
Here in Europe, Switzerland was quick to provide 100% government backed loans up to 500,000 francs, and 80% guaranteed loans up to 20m francs. The French Government announced P2P and other fintech lenders could help deliver their emergency loans alongside banks with a state guarantee of €300bn (£262bn). And in the Netherlands, non bank lenders such as Ebury and Floryn were accredited to distribute loans as part of the Government’s BMKB scheme.
Fintech participation in the distribution of loans is important for two reasons; firstly, it enables much needed cash to get into SME accounts as quickly as possible, but secondly it facilitates a relationship that existed both before Covid and one that will remain critical in the economic recovery. Here in the UK, the incumbent banks have only been distributing CBILS and BBLS loans to existing customers, which immediately provides a setback to non-bank SME customers. For those alternative lenders who have been accredited to distribute these schemes, ring-fencing the cheap Bank of England capital required to sensibly offer these emergency loans for exclusive use by the banks, has led to some high-profile difficulties for non-bank lenders.
So, for Governments around the world, the long term impact will be in the unintended consequences of these emergency loan schemes. For the UK, the distortion in the market risks a serious reduction in the level of competition in the UK SME finance sector. This in turn could leave SMEs with a reduced alternative lending market to turn to once the Government schemes end, jeopardising future growth. What is clear is that with fast distribution, data driven decision making and future-proofed technology, the fintech lending ecosystem has a vital role to play in helping SMEs to both recover and thrive. It is incumbent on Governments to ensure their policies enable fintech lenders to do so.