Of SMEs and Fintech

SMEs are often considered as the major driver of economies and a force in job creation. According to World Bank statistics from the formal and informal sectors, SMEs contributed to over 60% of the GDP and 67% of the total permanent, full time employment (from low to high income countries).

Despite these key roles, SMEs have been struggling to ensure sufficient funding, liquidity and capability to manage their finances in general. Their businesses are considered low scale and high complexity and for traditional lenders such as banks, extending credit has become too costly and risky. The 2007-2008 global financial crisis combined with stricter regulations (Basel III) has led to a sharp decrease in banks’ risk appetite, higher costs of borrowing, no loan overdraft (although 50% of SMEs worldwide would need one). Despite efforts to support and enhance SME financing, a significant funding gap remains.

The Fintech boom has therefore been welcomed as a major game changer, especially here in the Start Up nation. With all the tools technological innovation can now offer, SMEs are now in favorable position to benefit instantaneously from this new set of customized products such as  cryptocurrency, marketplace lending, merchant and e-commerce finance, invoice finance, online supply chain and trade finance. Disruption is now at the service of those who need it the most!

Yet the strength of FinTech also exposes the underlying risks of the industry. Limited protection for retail investors, potential extension of funding to unworthy borrowers and systemic risk arising from an insufficiently regulated and transparent sector could hurt economies at both individual and business levels. Caution is needed for all stakeholders in the ecosystem.

Talking to many CEOs of SMEs in Israel and abroad, I found out that they fully acknowledge these inherent risks. What really keeps them awake at night is that their struggle doesn’t end once they get the financing. What is crucial for them is to expand their business activities both locally and internationally. They need to make money to keep operating and growing. They need to make deals. However, the means for that are quite archaic. Most of them don’t have the time nor the willingness to allocate hefty budgets for travelling across the globe to fairs and conferences where they have no guarantee to meet the right counterpart. Internet searches can be useful but their randomness brings out the constant lurking threat. How can I make sure the person I am connecting with is trustworthy?

Fintech promises disruption, revolution. But SMEs, family businesses yearn to stand the test of time, they aspire to stability. They want symbiosis rather than disruption, evolution rather than revolution. They still need their banks. Their challenge is to renew the conversation with their relationship managers – who will have to stop thinking like bankers and more like CEOs, to find solutions that capture all the benefits of Fintech innovation under the shield of trust and reliability that banks still offer: augmenting banking by serving the underserved.

Should SMEs have to choose siding with banks or Fintech?  If they truly are the drivers of growth and employment, they shouldn’t have to.