SMEs are a central fixture of the modern business landscape, and the ever-increasing prominence of Fintech is further positioning small businesses as a main player. With the number of SMEs increasing rapidly year on year, contributing to employment and generating a combined annual turnover into the trillions of pounds, it is no secret that they represent a profitable sector. So what role does Fintech play in serving this lucrative market? We catch up with Matthew Gamser, Chief Executive Officer of the SME Finance Forum, to find out his stance on Fintech and SMEs.
Thanks for catching up with us today Matthew. As the chief executive officer of the SME Finance Forum, you know your stuff about financial technology. What do you believe is the current link between SMEs and Fintech?
I attend a lot of expos, and it strikes me that despite this being a very exciting and interesting sector, it is unfortunate that most Fintech exists far away from SMEs, and there is often little that bridges that gap. Fintech seems to have no interest in SMEs, or for that matter, in any markets beyond North America, Europe and – more recently – a few of the richer areas of East Asia. This is unfortunate because there is significant market opportunity in the SME space, but in this same space, there are huge gaps between supply and demand for SME financing, and there is a role that SMEs must play across the board, including in job creation and sourcing innovation.
Why do you think this gap between SMEs and Fintech currently exists?
There is a lot of potential for Fintech, which is why it’s a shame that it doesn’t focus on this space. As cheerleader and chief marriage broker for the SME finance industry, one of my main jobs is to convince Fintechs that I see them doing interesting things, but focus on the one percent and give them access to more financial services. I express to them that while they could seek assistance with that remaining 99%, and they may see more money in less time for their efforts, they will have to go beyond the advice of venture capitalists.
What are the risks for Fintech companies looking to target this sector?
SMEs are difficult to serve, especially for financiers, and it is because your typical SME has traditionally been a cash business. Records can be sketchy and in the past, the only way to figure out what’s going on has been for financiers to go in, kick the tyres, rinse and repeat. Once decisions have been made, investments have to be consistently managed, and the cost of this is considerable, which is why fewer institutions than ever are comfortable with doing things this way. Of course, this has led to a huge financing gap.
Do you see potential for an environment in which this financing gap can be overcome?
Now there is tremendous potential for moving from a cash society to an electronic society. Whether you’re handling cash transactions or other social and market interactions, such as eCommerce and social media platforms, it is a brilliant space for Fintech. But again, a lot of Fintech doesn’t take the SME dimension seriously. While in China, there is a true ecosystem where every transaction, regardless of size, is handled over the phone, the same is not seen with services such as M-Pesa, which deals majorly with cash. Merchants are unable to accept tenders other than cash, which causes the business to inflate without existing costs being covered. This prevents merchants from expanding their businesses and from them becoming more transparent.
What are the next steps for those in the Fintech field? Should they focus their efforts on creating systems that specifically target SMEs?
Serious potential lies with developing proper ecosystems like those in China. It is a huge opportunity – not a social one but a commercial one – because it has to be funded. Governments can lend help to get these changes moving, but essentially it is a huge business opportunity. When considering how to build and finance SMEs, the thought process has to be changed. How can cash transactions be converted into electronic transactions? We can really build upon that, and the second class of Fintech that can build upon this electronic base is one that helps SMEs to run better. They are almost exclusively white labelled through banks but are turning to electronics to help businesses manage their finances better.
Does this mean moving away from more traditional and arguably outdated ways of working?
The whole banker/businessman world where entrepreneurs approach them with a business plan is not the dominant way of doing things anymore. There is no longer the need for a one-off plan, but for a consistently flexible outlook. Financial institutions can take information about their consumers and start offering ways to manage customer relationships. Now SMEs can have the same level of customer focus, such as customer loyalty programmes, which can be done through the cloud.
What are the key reasons for making this move in technology? And how can SMEs benefit from this?
The businesses that grow the fastest and create the most jobs are those that can connect to markets and cross borders, but there are two technologies that underpin cross-border business and transfer of value. The first is Swift, and the second is Trade Finance System. Swift dates back to the 1970s, and uses slow and expensive telex technology, whereas Trade Finance Systems have remain unchanged forever. The copious paperwork involved maximises potential for error, and there are trillions of dollars tied up in this void. If that money could be moved faster, things could get better. Blockchain is the best application for SME space in taking processes and making them more point-to-point, more accurate and less tamperable. Taking money and movable assets that are a part of this trade relationship and making them part of the equation makes it easier to see what is owed and to whom.
Of course, the cases I cited here are just a drop in the ocean on the SME/Fintech landscape, but there are a lot of things that should be considered at this point, because I believe that Fintech’s most significant potential at this point is in assisting SMEs.