It may seem counterintuitive to think of businesses as underserved by the financial industry, particularly when compared to the financial inclusion issues facing minority communities worldwide. But traditional banking institutions have frequently left small and medium-sized enterprises (SMEs) out in the cold.
Fintechs have stepped into this gap in the market, driving financial inclusivity for both businesses and consumers. As a result, SMEs and their clients have access to a wider range of offerings in all traditional banking areas: payments, financing, financial planning and insurance. And the willingness of SMEs to share financial data with fintechs is accelerating expansion of the portfolio of opportunities.
While less visible than many corporate brand names, SMEs are vital players in countries across the world. On a global basis, SMEs are responsible for 70% of employment and more than 50% of most countries’ gross domestic product. The US Small Business Administration estimates that 99.7% of all private businesses are SMEs. SMEs also account for almost 99% of all business in the EU.
Despite their importance, SMEs have often found the financial world unwelcoming. Fintechs are now finding innovative ways to deliver financial services to these smaller businesses, closing the financial inclusion gap in the business world. However, access to fintech services often comes with a commitment to share data, which has its own issues.
Data privacy conundrum
While consumers and businesses continually demand newer and better services (particularly online services), they often are reluctant to share sensitive financial data. Frequent high-profile data breaches intensify concerns about data sharing among consumers and businesses.
SMEs are generally more trusting than consumers about fintechs’ data protection capabilities, but the numbers vary regionally. A recent Ernst & Young survey indicates that 89% of SME fintech adopters are willing to exchange financial data in order to get better deals, as opposed to less than half of consumers.
In the US, 60% of consumers are open to fintech solutions, despite acknowledging their data is potentially at risk. UK SME fintech adopters are almost universally (94%) willing to share data with financial companies if it means they can obtain better deals — far more than in the EU.
Finding the right balance between service functionality and data privacy is a difficult challenge. But those SMEs that are open to data sharing, and use application programming interfaces (APIs) to connect to fintech services, can have access to a new range of financial services.
Fintech now provides SMEs with new and innovative options for obtaining badly needed funding and capital investment
Fintech providers are using API-based data exchanges to build products specifically focused on the needs of SMEs. With API connectivity between SME data and fintech service providers, fintechs can offer SMEs more rapid response times on credit decisions, 24/7 advanced financial management tools, and previously unavailable or difficult to access services.
Non-traditional route
SMEs and traditional lending have always had a problematic relationship, as many SMEs lack long financial records, credit histories and collateral reserves, as well as experienced management. As a result, banks either shied away from offering credit to them or imposed onerous conditions, including high transaction costs and interest charges.
Fintech now provides SMEs with new and innovative options for obtaining badly needed funding and capital investment. A host of crowdfunding platforms worldwide deliver billions of dollars of investment to them. Other investors are placing their money in microfinance solutions for security purposes and to help get SMEs off the ground, and fintechs are now also using data sharing to develop new ways of assessing their creditworthiness.
SMEs with international client bases need fast, cost-effective ways to exchange funds with their clients. Traditional financial institutions have not been the best bet for these companies because international transfers can be time-consuming and costly. SMEs willing to share their data with fintech payment processors and international money transfer specialists can get access to rapid, reliable and secure exchange pathways at rates that fit their budgets.
Functionality appeal
Above all, SMEs want options. Price is rarely the sole, or even the primary, consideration when they choose financial services. Instead, they place functionality, feature set, 24/7 access and ease of use higher among their priorities than lending rates.
Fintechs have responded in two ways. Some have created highly specialised offerings focused on a single niche, for example, payments, or financial management services, such as accounting. Other fintechs have attempted to create an all-in-one financial platform. All of these services rely on data exchange with a SME.
SMEs and fintech are natural partners. Fintech providers are more flexible than traditional banking institutions and can be more creative in developing services tailored to SMEs. SMEs in turn provide fintech companies with data to help them refine their future offerings, in exchange for greater access to financial services. The relationship helps both sides to grow and profit.
Francois Moreau is a financial data scientist based in Paris.
