Marketplace Academy: How Fintechs are changing Small Business Lending
When start-up founders pitch their solutions to social and economic problems, they often sound far-fetched or idealistic. When everyday Australians think about start-ups, they typically think of phones apps, some new gadget at JB Hi-Fi, or a collaboration widget on their work laptop. While these ideas solve real problems and people rely on them, some problems are beyond the consumer sphere, far larger in scale, with the potential to impact entire economies. Small business lending is one of those problems, and fintechs are playing a vital role to solve it.
With the considerable credit crunch small businesses are facing from traditional lenders, many SMEs are looking to fintechs for answers because Australia’s big banks simply can’t consider the nitty-gritty when providing a loan. A few over-due payments, multiple credit enquiries, or a seasonal lull can often be explained when looking at the fundamentals of a business, but the big banks are too cumbersome to see the forest from the trees. This is because the banks are churning through thousands of applications a month, constrained by organisational policy and the behaviour of their competitors.
Every large bank now has an ‘innovation team’ and makes overtures toward Big Data as a way to increase their efficiency and outputs. Yet, the speed of their lending mechanisms is irrelevant – they’re making the same mistakes, only now they’re making them faster. The issue lies in the fact big banks rely solely on quantitative, rather than qualitative reviews of applicants, and are therefore unable to adequately service the small business community.
Fintechs can move away from that model – spending far more time talking with a small business and understanding their situation before making any credit decisions. In doing so, fintechs provide a life-line for small businesses that are facing the credit crunch and supporting many of the communities that investors, customers, and founders live in. For example, marketplace lending removes corporate interference from the credit process, allowing investors to gain higher returns while scrutinising the opportunity themselves.
This closer investor involvement leads to higher amounts of debt funding in the small business industry. Most savvy investors can recognise the difference between a company on its last legs and one that’s just had an off-season. For instance, a mechanic receiving no business because of poor customer service and a farmer who has had a bad season due to drought are two completely different prospects.
Individual investors are able to consider the bigger picture and understand the broader context of the business. In the mechanic example, a quick Google search would uncover the litany of unsatisfied customers, so while the farmer and the mechanic might have similar quantitative results, looking at them qualitatively separates them – the farmer might receive funding while the mechanic wouldn’t.
By placing investors and borrowers as close to each other as possible, as is done in marketplace lending platforms, those businesses best placed to turn their fortunes around can be identified and funding facilitated, rather than having them slip through the cracks.
It is impossible for banks to enter this level of nuance when assessing credit applications. Both the farmer and mechanic would be rejected in this example.
As bad as these shifts in the economy are, they do provide breathing room for new innovations and allow us to see the real-world benefit of new financial technologies. At Marketlend, we hope to provide where the banks have failed, and see the continued benefits for all of our lenders and borrowers.