This is a guest post written by Weronika Slowinska, contributor at supplier comparison company, Market Inspector.
It’s nothing new that acquiring business funding or applying for a loan at a bank can be a challenging experience. A lot of research, paperwork, and the uncertainty of whether you will be given the loan or not, are things many small business owners truly dread.
The financial crisis of 2008 left many cautious and less trusting when it comes to money management and even banks revised their policies when it comes to borrowing money. Although a dreadful experience in general, the crisis also created a vacuum in which was soon filled by Financial Technology companies (FinTechs). It should be noted that the lack of trust in the bank-consumer relationship was mutual. Meaning that people also became wary when it comes to confiding their money in banking institutions.
What are FinTechs?
The term has recently gained a lot of attention as they entered the market with a bang. FinTechs can be either startups or established tech giants who deliver innovative financial solutions. They tend to come up with completely new services, or they build upon the existing ones. What distinguishes them from incumbents is the agility, speed and innovative character that serve as a foundation for building solutions directed towards customer segments that have been overlooked by conventional banks.
Some experts consider them “disruptive” as they are an example of smaller companies with fewer resources who are able to challenge established incumbent businesses. What characterises the process of disruption is that when FinTech enters the market, incumbents – busy with chasing higher profitability in more demanding markets – do not respond actively. Thus, new entrants are able to quickly catch up by delivering solutions that the incumbents’ mainstream customers demand.
This is particularly visible in the financial sector, as the incumbent banks’ ability to respond to growing competition is extremely slow. This is caused by their inability to innovate quickly and inability to change and adapt to a dynamic playing field. There are many factors preventing them from quickly catching up with FinTechs, but that is a topic so broad that it could cover multiple articles.
The customer segment of small business owners have always had a harder time with big players in the financial sector. Commercial banks make more money by lending to individuals than businesses. Limited in their sizes and revenues, they often need that extra cash injection to achieve growth. Getting business loans for women, or in fact any small business funding, is often limited to those who have distinctive financial history and great prospects for the future.
Here is where FinTechs come in handy. FinTech companies generally fall into several key verticals:
- Personal finance
- Money transfer
- Equity crowdfunding
Most importantly for small businesses, FinTechs open up the pool of possibilities when it comes to getting quick loans to accelerate their growth. Different from incumbent banks, FinTechs leverage advanced analytics and technology to quickly assess risks, determine credit ratings and assign proper interest rates. All of these advanced technologies allow FinTechs to make loans accessible to a broader market segment. Contrary to banks, they loan money quickly and freely. Moreover, they’ve created new channels through which one can lend money, one of which is called peer-to-peer networks, and they have established platforms where lenders and borrowers connect and subsequently enter transactions.
So why is FinTech growth so important for small businesses? Because it provides opportunities and possibilities to business owners that they would not have otherwise had. It also promotes innovation and agility, causing banks to re-think their business model. In doing so, they promote innovation and agility, and have changed the metrics of competition in the financial sector.
About Weronika Slowinska
Weronika Slowinska is Copenhagen-based graduate, majoring in Business Administration and Information Systems. Passionate about digital marketing and innovation. Extremely fond of disruptive technologies and entrepreneurship. Weronika creates a high-quality content for UK-based Market-Inspector.co.uk, a small business supplier comparison website.