The emerging fintech sector is often portrayed in the mainstream media as disruptive, if not dangerous. And, we guess, there is a kind of swaggering reputation that makes that sound like a good description of our sector. But it’s not accurate.
Fintech companies are not disruptive forces for traditional banks. In fact, companies such as ours are providing products and services that simply aren’t offered by the big banks. Indeed, we often feel that we are complementary to their products and services.
It comes down to listening to what small-business owners are looking for, and trying to provide expedient solutions that fit their particular needs.
It also comes down to filling large lending gaps.
In 2013, Industry Canada said the Canadian small- and medium-sized enterprise (SME) loan market was valued at between $90-billion and $100-billion.
Yet, with an average loan banking sector decline rate of 15 per cent to 20 per cent, there is upward of $20-billion in unmet demand.
Canada’s isn’t the only country with such a gap.
A major new report on small business financing by the World Economic Forum showed that 44 per cent of U.S. SMEs received “none” of the bank credit for which they applied. Meanwhile, the funding gap for small businesses in Britain is estimated to be upward of $120-billion. In emerging countries, the gap for small businesses is more than $2.5-trillion – that’s trillion, with a ‘t.’
Why is this so?
As former bank executives, we can tell you that the unmet Canadian demand comes from many places.
A large part of it is the lack of efficiency and profitability that small-business loans often mean for traditional banks. High-cost branch networks and legacy information-technology systems make it difficult for banks to react quickly and efficiently to market changes broadly, and to manage the small-business loan application process effectively.
We know there’s no question that Canada’s banking sector is world class. Canada’s banks have served the country well for almost 200 years, to the extent that our banking system is annually considered the most sound in the world by the World Economic Forum.
But the reality for small businesses is that while their deposits are welcome, their credit requests are often denied. Many feel shut out of the traditional banks’ loans system.
Enter the role for fintechs in supporting small businesses.
Individual fintechs, which are inherently nimble and unburdened by expensive branch and legacy systems, are generally laser-focused on one thing – be that online lending, payments or another specific service.
In the case of online lending, sophisticated algorithms review many important factors, including demographics and an applicant’s payment capacity, among many others. In fact, data analytics generated by online lenders lead in many cases to better credit decisions than the traditional credit-review processes.
We estimate that there are about $600-million in existing loans to small businesses from the fintech community in Canada. That number will likely grow exponentially. We estimate that total small-business loans by fintechs will be more than $2-billion by 2017.
In other words, in light of traditional sources that are not willing to reach for the risk represented by small-business loans, there are clear opportunities for companies like ours to provide a variety of capital solutions to small businesses through a completely online automated process. We’re actively trying to fill that gap.
Is this disruptive? No. This isn’t revolution, but evolution.
In today’s financial-services sector, technology, capital and financing acumen are coming together to address an underserved market that itself is evolving. Small businesses are working at a pace and scale that traditional banks cannot – or choose not to – comprehensively support when it comes to entrepreneurs’ need of capital.
Online lenders do not require the bricks-and-mortar infrastructure to offer safe, affordable financial transactions in specific segments such small business. And in so doing, we’re a growing part of the financial ecosystem.
The role of fintechs within the financial services sector will continue to evolve. We will drive more innovation, generate more productivity and bring necessary products to an underserved market.
That’s solid reputation to earn.