Nature abhors a vacuum, as the saying goes, and we might say the same for corporate lending.
As nimble tech upstarts join forces with traditional financial firms, cross-selling becomes a strategy. There’s opportunity in serving the middle market in the U.S., where smaller firms seem stuck in a limbo of fragmented lending solutions, and where loans are pricier than might be seen elsewhere.
For the financial services (FinServ) firms that seek to serve the capital needs of the middle market (which can be defined as companies with a top line ranging from $5 million to $100 million), speed is important — and data is, too. After all, a more streamlined lending process gets capital into the hands of business owners who want to put a tailwind behind growth. Data helps lenders make the best risk-adjusted lending decisions.
To that end, late last month, HSBC U.S. Commercial Banking announced a partnership with FinTech Neptune Financial (NepFin). The focus of the partnership will be on offering a continuum of financial services: The middle-market firms that work with NepFin to tap financing will now be able to connect to the bank’s commercial banking offerings.
HSBC has said, through its own research, that the middle-market segment accounts for $7.3 trillion in turnover in the U.S., and middle-market firms employ 29.7 million workers. In an interview with Karen Webster, NepFin CEO Albert Periu delved into the timeframe, the mechanics and ambitions behind the partnership.
As evidenced above, the middle-market segment is a significant one in terms of contribution to the U.S. economy, and Periu said it spans roughly 176,000 companies. These companies represent roughly $300 billion in refinancing and borrowing every year. When it comes to tapping traditional lending conduits (aka the bigger banks) in the U.S., he said there are “massive inefficiencies” at play. That’s especially amid middle-market firms that have an earnings before interest, taxes, depreciation and amortization (EBITDA) of $10 million or below.
He offered the analogy of a barbell approach, where the biggest companies operating in the U.S. have relatively easy access to capital, and the smallest businesses have an extremely efficient lending market in place — as they can tap a range of products, from cards to home equity lines of credit, and where tapping $1 million or $2 million to grow a business can be done without too much trouble. As he noted, for the lenders themselves (alternative or traditional), “the cost to underwrite and service those loans is the same.”
Technology As Advantage
Against that backdrop, the idea that disruption and disintermediation have come to the FinServ sector has become what he called a “new industry normal.” He noted, too, that NepFin can test new products with speed to help fill that aforementioned gap.
“Ultimately,” he told Webster, “banks have a lot of data, a lot of good experience and low cost of funding. … We’ve always been building products in mind with the idea that we should be partnering with banks as well.”
For NepFin, HSBC “brings a global footprint so we can offer the customers that we know already — including new ones — a suite of products now, as opposed to just lower middle-market term loans,” such as deposit accounts and trade receivables or inventory financing.
When asked about where we are in terms of the larger economic cycle, and the sentiment of these middle-market firms, he said the general expectations are that these cycles span 7 years. “We still see a lot of optimism. We see their customers continue to show up. Revenue growth is there,” he said.
There are some generational shifts at work, too, as baby boomers are selling firms to their children or other owners.
“They are not looking to overextend themselves from a leverage perspective,” he explained.
He told Webster that “we’ve always had the view that technology should play a role [in lending]. … I want to make sure people know this isn’t about replacing humans completely. It’s about ‘how does data make our lives easier [via] sourcing through underwriting to monitoring?’”
Both HSBC and NepFin are embracing the needs of a, thus far, underserved market — and the partnership has crystalized quickly. He added, “These deals tend to take a long time. I was really excited that it was done in under a year.” The February announcement marks the beginning of the formal engagement between the two companies, where the two firms had previously been engaged in pilot programs over a period of months.