Since the 2008, crisis Central Banks from developed economies have pumped in over €6.5 trillion into the global economy. They have left interest rates at ridiculously low levels around 0% (some times even below 0%). This has further pumped in over $10 trillion into the economy. This has pumped in over €9.5 trillion into the economy. In fact, you could now getting paid to borrow money (if you account for inflation).
Stagnant growth and housing prices
And what does the developed world have to show for all this? Stagnant growth, unaffordable housing, and hard working savers getting no return on their savings.
So we have pumped in lot of money on one hand and we have little to show for it! The reason for this is simple. All this money being pumped in goes to big banks and corporates. Big banks lend to big businesses, which are not really growing, or they lend to property buyers leading to crazy house prices. But if you are a small business or an entrepreneur who wants to borrow it's extremely hard to even get a loan, and if you do the interest rates are very high. Isn't it crazy that you can borrow €300,000 to buy a house and pay interest of around €500 a month? And yet, getting even a simple loan is difficult for a business.
There might be a trickle down effect somewhere, but I am still waiting to see it.
This is frustrating. Small businesses create more new jobs in the economy -- one of the best fixes for the economy is to help small business grow. Unfortunately, the current system only supports property inflation and big businesses.
Fintech startups have largely been targeting small- and medium-sized enterprises (SMEs), especially by lowering costs of transactions, making it easier for them to collect money from customers and automating processes. Until now, banks have made money in three ways: high payment processing fees, lending to property, and big deals. The assault on lucrative banking fees by Fintechs is going to force lending to SMEs like we have never seen before. Some of those trillions being printed will finally flow into the hands of hard-working small business.
What's going to happen?
Banks will start lending to people who actually need it!
Banks have been making easy money from fees. Download any annual report from a bank and see the income coming from basic banking fees. But times are changing. Fintechs have drastically reduced costs for free current accounts, payment processing, and currency conversion. For banks to keep making profits, they need new streams of revenues and to start taking on more risk. Banks will need to start providing new products to SMEs as the traditional places where they make money on these customers is no longer going to be possible. An obvious place is to provide more lending to small businesses. This will mean additional risk for the banks but will be great for the economy. Small businesses and banks can replace their profits from fees with actually making money on products that help their customers.
We have enough people buying houses and housing prices are high enough. Let’s start investing in businesses and entrepreneurs!
Transition from peer-to-peer lending to more risk based lending for SMEs
Peer to Peer lending has been trendy for a while, but its impact has been very limited. I was never a big believer in the model because it was always a lot cheaper to borrow from a bank. How could you disrupt an industry if you are more expensive that the incumbents? The argument that it helps a lot of people who cannot get financing from traditional players or methods addresses great cause but does not point to true disruption.
Some of the players who have realized this have shifted to solving the problem of lending to small businesses the traditional banks are ignoring without the crazy interest rates of P2P markets. Banks don't have the resources to lend to SMEs and fintechs don't have the money to lend to SMEs.
This new market is actually a cooperation between traditional banks and startups. Banks like to lend big chunks of money, so they are willing to give cheap funding in large amounts for Fintech lending marketplaces. Fintechs are creating an automated cheap platform with more modern risk intelligence tools to lend this money to small businesses. This is a perfect match -- bringing old enterprise together with latest technology to really help those who need the money.
The costs of borrowing, and hence risks, are quite high. But now we are seeing a transition from consumer-focused peer to peer marketplaces for credit to companies that target small and medium businesses.
Exciting things happening in invoice financing
Getting paid from a customer is one of the biggest issues SMEs face. Unless you are selling something directly to consumers (e-shop, restaurant, shop) it can take 30 days to 180 days to get paid on invoices.
Cash is the biggest bottlenecks business face. Four out of every five businesses fail not because they had a bad business plan, but because they ran out of cash before they could execute fully.
What we need is for these business to have cash when they are waiting to get paid. This has a direct impact on new jobs and growth.
A new wave of fintechs, such as Tallystick.io and tradeshift.com, are helping to solve this problem. This is another sector where fintech can offer the technology, banks can provide the funding (and the ECB and Federal Reserve can celebrate as more funding goes towards job-creating businesses rather than just sitting in property or with banks).