In the wake of the 2008 global financial crisis, and banks' subsequent pullback from the small- to medium-sized business (SMB) lending arena, a slew of alternative lenders emerged onto the scene to fill the credit gap.
Over the years, that surge in competition gave way to a more collaborative spirit between traditional financial institutions (FIs) and FinTechs as both sides worked to digitize and modernize SMB financing. While this partnership model remains popular, market volatility has once again created a need to connect more SMBs to capital as quickly and efficiently as possible.
This market climate may have also opened up the doors to another wave of SMB lending competition between traditional and alternative players.
In Canada, one of those alternative players is Thinking Capital. Fresh off its acquisition of Finance-as-a-Service technology platform Ario, Thinking Capital is looking toward the future of SMB financing. As CEO Stéphane Marceau explained to PYMNTS, to stay competitive, players must be digital-native and flexible.
"This is a market that's going to be digital-first in the future," he said. "That's been the view we've been holding or quite some time, and I think that view has been greatly reinforced in 2020."
The Digital-First Approach
Traditional and alternative lenders alike have accelerated their SMB loan digitization efforts in recent years, an initiative that has accelerated amid the pandemic.
It is now not only a competitive advantage, but an essential requirement for lenders to operate digitally, said Marceau. That was largely behind the acquisition of Ario, whose proprietary data analytics technology can facilitate invoice financing and loans via integrated infrastructure. The focus of the technology is to support application programming interface (API) integrations and data exchange, said Marceau, with the ability to introduce microservices in conjunction with financing.
"Our point of view is that it's a critical time right now to have the right technical building blocks, and right level of engineering talent, to deliver on the use cases of the future for small businesses," he noted.
The digitization of the lending process has allowed a convergence between the loan itself and software, a combination that Marceau said opens up new possibilities for how to serve SMBs. That can mean linking SMBs to actionable insights and financial analysis, a function that could benefit both the SMB as well as the lender, which can obtain richer data that can, in turn, be used to underwrite future financing.
These are the kinds of value-adds that help SMB lenders compete in an increasingly crowded marketplace and can only come to fruition with a digital-first approach.
"It's about removing digital friction for the customer, simplifying the user experience, accelerating the time they can access their funds," he said. "It's about giving them real-time visibility into products, creating engagement with the customer and, over time, leveraging customer information to bring them intelligence and actionable insights."
With more FIs building proprietary platforms or collaborating with FinTechs to integrate theirs, it's no longer enough to simply be digital-first to compete in the SMB lending space. What's just as important is to ensure that lending technology is flexible.
"There is new innovation continually within this market, so having a platform that gives you the flexibility and modularity to rapidly bring new capabilities for customers is key," Marceau said.
Today, that could mean infrastructure that can facilitate a wide range of loans to meet SMBs' varying needs. It also means support of flexible payment terms, with Thinking Capital allowing borrowers to choose between daily, weekly or bi-monthly repayments.
But looking out into the future of the SMB landscape, Marceau said he envisions industry technology to be able to add value beyond the capital itself for SMBs. Intelligence technology presents the opportunity to connect business borrowers to the right kind of contextual financing at the point of need, for example, perhaps before they even know they need it.
The SMB ecosystem is not homogeneous, so Marceau advised against any generalizations as to how to best approach the market. What is clear, however, is that SMBs need digital, flexible solutions in order to not only survive the current market volatility, but to thrive and help support broader economic recovery.
The SMB lending space is evolving rapidly. There are more options than ever before for an SMB in need of capital, whether it be through a traditional bank, an alternative lender, or — increasingly — a non-financial service provider that has integrated lending capacity into their own products and services. To compete, Marceau said lenders need to meet SMBs wherever they are and wield technology to add value to SMBs beyond the loan itself.
At the broader level, lenders must support SMBs by contributing to the resiliency entrepreneurs have through difficult times.
"Don't bet against the small business owners. Don't bet against the entrepreneurs," he said. "What we see every day is so many of them do find a way."