The Blog

2013: New Year, New Finance?

Government initiatives launched to much fanfare, did little to benefit small businesses. The banks ignored the cries of all around them to do what they are supposed to do, lend, preferring to stick their fingers tightly in their ears and warble "la la la" instead.

2012 was a tough year for SMEs. The Eurozone crisis rumbled on and economies stagnated or contracted. Government initiatives, such as the Funding For Lending (FLS) scheme in the UK, launched to much fanfare, did little to benefit small businesses. The banks ignored the cries of all around them to do what they are supposed to do, lend, preferring to stick their fingers tightly in their ears and warble "la la la" instead.

Banks are simply not incentivised to help SMEs. Businesses should make it their 2013 resolution to say, "enough is enough" and embrace the low cost and easy to access alternative financial services that are bursting on to scene.

Peer to Peer Lending

Getting a bank loan is like juicing a stone and the process and customer service experience are about as friendly as the people in the elevator when you squeeze out a fart. Lucky for businesses that a host of peer-to-peer financing companies have emerged that are proving to be a real and viable source of funding. Firms such as Funding Circle, Squirrl and Funding Knight operate online marketplaces that cut out the middle-man - the bank - connecting investors directly with businesses needing money. They provide (relatively) easy, friendly and low cost access to funds for businesses, with investors (rather than the bank) also earning good returns for directly accepting the risk - win-win. Funding Circle has lent over £70m in total to over 1,000 businesses.


In a similar vein to peer to peer lending are the crowdfunding businesses that are gaining considerable traction. Like Ronseal, Crowdfunding does what it says on the tin. Rather than a single investor providing funds to a business, a crowd of people commit small amounts to a project or business and the funds are aggregated to meet the total business need. The rewards to the crowd need not be monetary; for example, they may receive a gift of a unit of the product that is being funded through development. Monetary incentives for investors are usually derived from returns on the equity of the business, not debt as in P2P. Most people have now heard of the crowdfunding revelation that is Kickstarter. Other firms include Seedrs and Crowdcube in the UK, Startnext in Germany and Wiseed in France and the European Crowdfunding Network.

Financial Services are evolving

P2P and crowdfunding are not fly by night fads - they are symptomatic of the fundamental change that is occurring at the industry level of financial services. Governments are waking up to the fact that the market can solve its own problems, that policy led-solutions that apply sticky tape to the fractures in our current financial services industry are not necessarily the best way to address the issues SMEs face. Governments are increasingly recognising the importance of the "New Finance" movement, of the challenger services that will shape the future of the financial services industry. The UK government recently pledged £110m to lend to SMEs through alternative finance schemes such as P2P lenders - a significant and important step that signals the acceptance of these firms into the mainstream.

The adoption of New Finance services is likely to be a key driver of small business growth across Europe over the coming years. New Finance firms are more connected with consumer and business needs. They focus on specific niches of the financial services value chain and become masters of their environment. The structure of the legacy banking industry - an oligopoly with vertical silos across the various layers of service - will evolve. Recent history shows that no one can, nor should, try to be good at everything, that this type of industry business model is not in the customers best interest. Look at the music industry, the telecoms industry or the energy industry to see how customers have benefitted when control has been disaggregated.

Like most innovative technologies born from frustration, Finnish firm Holvi is taking on the traditional banks by offering a very simple user interface, optimised for online and mobile, that provides businesses and consumers current accounts and payment services with a twist. The added extra of integrated and comprehensive accounting tools allows users to manage their finances, run an online store and keep track of and send invoices all from one application.

Other companies are targeting the antiquated cross-border payments market. The Currency Cloud offers transparent and low cost international transfers for businesses. The Currency Cloud's international payment services can be delivered through an interface; business application providers are building apps that integrate the capability directly within services such as Sage or Salesforce. Making an international payment can now be as easy as making a domestic payment; a couple of clicks and you are done, all managed through the purchase ledger. Find a bank that makes things that easy and cheap.

Regulators have played their part in this sea of change. For example, regulators define the liquidity ratios/capital adequacy requirements for banks - the amount of money that banks need to hold in liquid assets, such as cash and bonds, to cover risks and cater for shocks to the market. Under regulations, lending to SMEs carries the highest capital requirement; this is a cost to a bank. Added to the operating overhead of commercial banks that have are only moderately more efficient then they were when the wheel was invented (seriously, I have seen green screens in some offices) the return on capital for servicing SMEs is extremely low. It thus follows that the quality of services small businesses get from their banks is correspondingly poor. Subsequently, some banks are exiting the SME market in certain services. HSBC has closed down parts of its international money business. Being fined a record of $1.9 billion for misdemeanors largely stemming from criminally bad processes for international transfers obviously helped HSBC reach their decision.

The financial services revolution is gaining momentum. New Finance is set to transform financial services for SMEs in 2013 and beyond. The support SMEs require is available; businesses just need to vote with their feet by saying 'no' to the inadequate services provided by banks and saying, "Yes, yes YES!" to the specialist firms that were born with the purpose to make things better.

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