P2P Lending: Predictions for the Future of SME Lending and Fintech
Happy New Year to all
Banks lending out loans have historically been critical and unfair towards SMEs in order for them to flourish. But transaction costs for a conventional bank loan for small businesses are viably the same at £1 million as for £100,000. So which type of loan will a bank favour? The one that is more beneficial for them, of course, so the small borrower unavoidably gets pushed aside. No surprise as one may expect, but there are far more small-businesses that are typically searching for loans under £100,000.
Access to credit turned into an issue for SMEs during the subsidence and ensuing recuperation of the sector. Furthermore, as we all know, small and medium-sized enterprises are the machines of economic development and occupation creation. The problem is that banks were being requested to shore up their accounting reports, re-capiatlise to meet new regulation requirements and shoulder less risk, a policy push that inexorably made the recovery more challenging as this restricted access to SMEs.
Yet these difficulties for SMEs to acquire credit made created an open door for alternative lenders to fill the funding gap. Trend-setters stepped into the world of unintended consequences to give access to credit when the banks turned their backs. Hopefully, policy makers have a better understanding of what they should, or should not do, to support a financial restructuring period.
Online lending is said to have the potential to lessen the cost of borrowing at each stage while providing a better experience for the borrowers. But will online lending remain the realm of unruly FinTech?
Karen Mills, author of “The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game,” shared a few forecasts about online lending while clarifying the phases of Fintech disruption. At present, Karen believes we are somewhere between Phase 2 and Phase 3. These
Phases are depicted as follows:
Phase 1: The Wild West and the Emergence of the Innovators
FinTechs burst on the scene with marketplace p2p lending (peer-to-peer lending). These early platforms become niche players.
Phase 2: The Banks Wake Up
Banks invite the trend-setters in but instead of partnerships, substantially more noteworthy fabricate their own platforms. Customer service is where the development happens. Sitting tight for 3 months just to hear what does not work well — this procedure can be much simpler and faster when done online. They can form a better front end to give an exceptional lending experience.
Phase 3: The platforms emerge: Alibaba, Amazon, Square,and others
Big tech firms like Facebook, Google, Apple, PayPal, and Amazon will become noteworthy players in the following 12 to 18 months. They have adequate information available to them to give a productive lending process.
Phase 4: Small Business Lending Utopia
All enterprises have access to the credit they need to develop and flourish.
Clearly, we are not yet in the place of Lending Utopia but the good news for business is we are getting nearer.
Karen isn’t just a Fintech team promoter but more of a pragmatist. She trusts that the ability of Fintechs to bring new sources into the credit choice has not yet been brought. In any case, when you look at big tech like Amazon, you see a platform that knows everything about merchants. That is actionable information. And it’s not just Amazon; Facebook, Apple, Google and several others are included too. Big tech has intelligence that can be used to support a business’ progress. Extrapolate that idea across the marketplace and you may have something very influential.
She said: “If you know everything a customer has purchased… how much they exercised… where they were before (IE location), you understand your customer better. That is like gold.”
“They know everything about you and they can turn that into something that is helpful for the small business.”
Karen also believes big tech may dominate lending. The question, however, is what form and with what products. This is where regulation takes place. There could be an intercessionand, obviously, traditional finance will attempt and fight back.
“Congress is stuck,” she explained. “So, it is very hard to tee up a bill on Financial Services regulatory reform. They need to get some other things done first. There is still some uncertainty as to what they are lobbying for and whose is going to get ignored. Banks still wonder if financial innovation is good. If they are going to compete, they don’t want Fintech to have a lower cost of regulation.”
At the moment, there is a lot of discussion with respect to steep regulation in general and the likelihood that Fintechs may have a favourable position. The present administration has ceased much new regulation, but change can take some time. The OCC Fintech Charter, a vehicle that could provide a way for Fintechsto work nationally, has been criticised by old finance and several members of Congress. Karen trusts the Fintech Charter could be something valuable for the country. At present, there is a lot of administrative perplexity and overlapping federal agencies, but she also believes you need disclosure laws that apply to business loaning that upholds transparency and a level playing field.
“This situation will intensify. The future will bring new and powerful competitors into the game,” stated Mills. “Incumbents are resisting. They are fully regulated now. They are not happy about that burden. They do not want to see new competitors that have an advantage.”
“If we believe that SMEs are important to the economy, we want to be certain we have many options to provide credit. The Fintechs woke up the banks. That was good for competition and good for the small business customer,” Karen further stated.
She does not believe small community banks should be penalised all the while and a Fintech Charter that does not detriment banks is possible. The question is: Will the political climate allow for a national charter for Fintechs, or perhaps Big tech, to grow? A tough question indeed yet Karen believes it is not a question of it, but when. It’s inescapable.
Lastly, what does she think when you have innovative finance on one side and conventional on the other?
“Anything that gets us closer to small business lending Utopia is a good thing. We need to work to that end,” she expressed.