B2B Payments

SMB Lending Tries On Asset Tokenization For Size

So far, one of the largest use cases for tokenization has emerged as the Initial Coin Offering (ICO) — a lucrative, if not controversial, fundraising strategy that has already led to billions of dollars in investments. Yet, ICOs have been marred by fraud, regulatory scrutiny and, perhaps as a result, a decline in ICO fundraising: TokenData research found that the value of ICOs in the first quarter of 2019 hit $118 million, a far cry from the $6.9 billion raised in the first quarter of 2018, reports last month noted.

However, the ICO isn’t the only opportunity for asset tokenization to support investments in organizations. Financial technology (FinTech) firm BANKEX is developing a range of tokenization solutions for this industry, with its next target being the small business (SMB) lending space.

In an interview with PYMNTS, BANKEX CEO and Founder Igor Khmel, and Head of Sales Max Smetannikov, both discussed some of the biggest challenges in the U.S. SMB lending space today, cited by many alternative players in the industry: Traditional banks are pulling back from small business borrowers as a result of regulatory burdens and evolving risk management strategies.

As Smetannikov explained, there are key challenges for traditional and alternative lenders that choose to lend against small business revenue projections (namely, tracking revenue and authenticating it), which, he said, blockchain can address. It’s one of the biggest market challenges that led BANKEX to partner with open source, decentralized, financial infrastructure nonprofit Fusion Foundation. While BANKEX manages loans and matches funding sources for investment opportunities, Fusion recognizes and authenticates revenue from small business borrowers.

At the heart of the solution is asset tokenization. In essence, this is a way to turn physical assets — like a small business’ property, leases or perhaps even shares — into digital assets that can be securitized and packaged for investors. Khmel explained that this process is among the biggest benefits of blockchain in the financial services sector today. In the SMB lending space, it enables the securitization and investment of SMB assets that are too small to meet the threshold of other loan products that originators provide. This process also enables more participants to join in on investing in a small business, facilitates secondary trading and provides a cheaper lending process, the executives said.

In the case of small businesses, many can struggle to absorb the costs of obtaining a traditional loan or issuing shares. The process of converting assets to tokens can standardize contracts, while complying with U.S. regulations, as the result of their status as securities, said Smetannikov.

In the area of asset tokenization, industry experts often turn to the example of real estate. The owner of a mall may struggle to obtain financing if a loan is made against the entire asset of the mall property. Yet, if each individual storefront — through which that mall owner receives revenue from lease agreements — is tokenized, technology can essentially break up that large asset into more manageable and easily investable parts.

While BANKEX is not the first to propose asset tokenization’s application in the small business lending space, the company is among the first to apply the use case in the market. Both Khmel and Smetannikov noted that this business model can be applied to a range of other financing areas in which assets are “intangible” — for example, in the market of raising funds to produce Hollywood movies (indeed, BANKEX is collaborating with MovieCoin for this use case).

In the case of its small business lending platform, the executives said the company is open to white-labeling the solution for third-party financial players, or for direct use of the portal by investors and small business borrowers. Regardless, adoption may not occur right away: While the traditional financial services landscape has begun to familiarize itself with blockchain, tokens and cryptocurrency, it’s a market that continues to raise uncertainty with many — and that often includes the Main Street borrower.

Smetannikov noted that it was a representative of the small business community who first approached BANKEX with the request to build such a solution.

“The people who run their own businesses are not given enough credit,” he said of the SMB community’s ability to understand and trust this kind of technology. “We’re talking Main Street, not Wall Street. This is a product that [Americans need], and [have] asked for.”

However, on the investor side, Khmel acknowledged that the financial services sector is in the midst of a long-standing process of embracing blockchain and tokenization technology. The banking sector is among the most conservative and traditional in the country, he noted, though recent digital token initiatives like JPMorgan‘s JPM Coin and Mitsubishi UFJ‘s coin are proof that the industry is on the path to adoption — at least, in some use cases, like corporate and cross-border payments.

Will the sector embrace small business finance with this technology, too?

“Basically, it’s coming,” Khmel said. “It will take some time — probably another three to five years to change their minds completely. But every six months to a year, we see significant steps forward.”


Featured PYMNTS Study: 

With eyes on lowering costs to improving cash flow, 85 percent of U.S. firms plan to make real-time payments integral to their operations within three years. However, some firms still feel technical barriers stand in the way. In the January 2020 Making Real-Time Payments A Reality Study, PYMNTS surveyed more than 500 financial executives to examine what it will take to channel RTP interest into real-world adoption. Here’s what we learned.