Following the 2008 global financial crisis, and the subsequent withdrawal of banks from small and medium-sized enterprises (SME) loan arena, a slew of alternative lenders emerged on the scene to fill the credit gap.
Over the years, this rise in competition has given way to a more collaborative spirit between traditional financial institutions (FIs) and FinTechs as both sides strive to digitize and modernize SME finance. Although this partnership model remains popular, the volatility of the market has again created a need to connect more SMEs to capital as quickly and efficiently as possible.
This market climate may also have opened the doors to another wave of competition for SME lending between traditional and alternative players.
In Canada, one of these alternative players is Think capital. Fresh out of his acquisition of the Finance-as-a-Service technology platform Ario, Thinking Capital looks to the future of SME financing. As CEO Stephane Marceau explained to PYMNTS, to stay competitive, players need to be digital native and flexible.
“It’s a market that is going to be digital first in the future,” he said. “This is the point of view that we have had for some time, and I think that point of view has been strengthened considerably in 2020.”
The digital approach first
Traditional and alternative lenders have ramped up their efforts to digitize lending to SMEs in recent years, an initiative that has gained momentum amid the pandemic.
This is now not only a competitive advantage, but a critical requirement for lenders to operate digitally, Marceau said. This was largely behind the acquisition of Aro, whose proprietary data analysis technology can facilitate invoice and loan financing through an integrated infrastructure. The goal of the technology is to support application programming interface (API) integrations and data exchange, Marceau said, with the ability to introduce microservices in conjunction with the funding.
“Our view is that it is currently critical to have the right technical building blocks and the right level of engineering talent, to meet the use cases of the future for small businesses,” he said. note.
The digitization of the lending process has enabled a convergence between the loan itself and the software, a combination that Marceau says opens up new possibilities in how to serve SMEs. This can mean linking SMEs to actionable information and financial analysis, a function that could benefit both the SME and the lender, who can obtain richer data which can, in turn, be used to secure a future funding.
These are the kinds of added value that help SME lenders compete in an increasingly crowded marketplace and can only come about with a digitally driven approach.
“It’s about removing digital friction for the customer, simplifying the user experience, speeding up the time they can access their funds,” he said. “It’s about giving them real-time product visibility, creating engagement with the customer, and over time leveraging customer insights to bring them insights and actionable insights. “
With more FIs creating proprietary platforms or collaborating with FinTechs to integrate theirs, it is no longer enough to simply be the digital first to compete in the SME lending space. Equally important is making sure the lending technology is flexible.
“There are continually new innovations in this market, so having a platform that gives you the flexibility and modularity to quickly bring new functionality to customers is critical,” said Marceau.
Today that could mean an infrastructure that can facilitate a wide range of loans to meet the different needs of SMEs. It also means supporting flexible payment terms, with Thinking Capital allowing borrowers to choose between daily, weekly, or bi-monthly repayments.
But looking to the future of the SME landscape, Marceau said he envisions industry technology to be able to add value beyond capital itself for SMEs. Intelligence technology offers the ability to connect corporate borrowers to the right kind of contextual finance when they need it, for example, maybe before they even know they need it.
The ecosystem of SMEs is not homogeneous, Marceau advised against any generalization on the best way to approach the market. What is clear, however, is that SMEs need digital and flexible solutions not only to survive the current market volatility, but also to thrive and help support a broader economic recovery.
The SME lending space is changing rapidly. There are more options than ever before for an SME in need of capital, whether through a traditional bank, an alternative lender or, increasingly, a non-financial service provider that has built a lending capability into its own products and services. To compete, Marceau said lenders need to meet with SMEs wherever they are and use technology to add value to SMEs beyond the loan itself.
At a broader level, lenders must support SMEs by contributing to the resilience of entrepreneurs in difficult times.
“Don’t bet against small business owners. Don’t bet against entrepreneurs,” he said. “What we see everyday is that a lot of them find a way.”