Fintech companies could provide relief for small to medium-sized enterprises (SMEs) by helping to close a $2 trillion funding gap for SMEs worldwide seeking credit to grow their business, suggests a white paper released by the World Economic Forum’s Global Agenda Council on the Future of Finance and Capital.
The paper entitled 'The Future of FinTech - A Paradigm Shift in Small Business Finance', which was written by a team of MBA students from Saïd Business School at The University of Oxford, revealed that fintech companies are leading the way in disrupting innovation in the financial services sector and are offering tailored services to SMEs in the areas of equity crowd funding, lending, market place solutions and invoice and supply chain financing.
There are several issues with funding which the paper addresses such as the fact that 43 per cent of all small businesses do not have appropriate access to credit and in emerging markets, business owners perceive the lack of funding as the second biggest obstacle right after the lack of electricity.
Banks have complex guidelines for approving SME lending and many reports suggest that they are often reluctant to lend to smaller companies due to the low-scale financing deals required. However, the paper found that fintech companies are more willing to lend to, and provide new tailored products to SMEs, and statistics show that equity investment into fintech businesses increased four times the amount in 2014, from $4 billion in 2013 to $12 billion in 2014.
“Financing for SMEs is lacking although there is an ample amount of cash ready to get deployed. But in this case fintech disruptors are increasingly filling the gap banks and investors leave. SMEs can turn to them to get the credit needed to grow their business, as fintech is providing a much needed relief to small businesses around the world,” said Michael Koenitzer, Financial Inclusion Project Lead at the World Economic Forum and Council manager.
However, according to Daniel Drummer, Management Consultant at McKinsey & Company who led the The Future of FinTech study team for the paper, the reports highlights that this game-changing effect will not just happen automatically. "Having dedicated fintech entrepreneurs acting in isolation will not be enough. Instead, functioning local Fintech ecosystmes are required."
"In the creation of this report, we talked to more than 200 experts, including FinTech CEOs, bank executives, investors and policy makers. The overwhelming consensus was cautious optimism," said Drummer.
The paper was written under the guidance of members of the Global Agenda Council and the team of students also set out a number of factors they deemed necessary to encourage growth in the sector such as the availability of data, sufficient investor capital and a supportive regulatory environment.
According to the paper, the need for SME financing is a global requirement, with countries such as the UK, Italy, Spain, the Netherlands, Nigeria, Morocco, China and Canada amongst the countries which describe access to finance as a top three business concern.
“Small businesses account for more than half of the world’s GDP and two-thirds of all employment. If fintech can provide levers to help them succeed, we should create the right environment to make this happen,” said Peter Stein, Director of Finance and Markets Global Practice at the World Bank Group.