For small businesses, borrowing money is becoming as quick and seamless as ordering an Uber to the airport. Or ordering an overpriced burrito for home delivery.
This is the message from an interesting interview we came across on PYMNTS.com today. The subject was Anil Stocker, CEO of the UK-based fintech MarketFinance. Founded in 2011, MarketFinance began by making online small business loans secured by the business’s receivables. It has since evolved into a much more sophisticated online lender to SMBs.
Today, it’s an entirely new world, Stocker argued. The future of small business finance is instantaneous and increasingly decentralized. And his reasoning follows a pattern that is quite familiar to us.
That is, the notion of consumer expectations influencing business expectations.
“Businesses now are expecting a similar level of service in their business demands as they get from their consumer apps,” Stocker said in the interview. “That convenience they’ve gotten used to from ordering an Uber or a flight with one or two clicks on their phones.”
Stocker contends this kind of fast and frictionless lending experience is happening now. And it is becoming decentralized via embedded finance. This essentially involves placing lending applications (via APIs) at the point of sale. Think how Afterplay and Klarna do this for consumer purchases.
It’s a One-Click World
Still, offering small businesses a one-click borrowing experience involves a lot more complexity and risk than ordering a burrito.
“Frictionless finance lends itself more to unsecured lending,” Stocker said. This is true almost by definition since securing a loan with property, receivables, or some other collateral requires steps that can’t be completed in an instant.
But on the flip side, Stocker argues that a better customer experience also draws in the best borrowers.
“Sometimes the best companies demand a frictionless experience, ” he said. “And the more barriers you put up, you just drive away those with the best credit, and you end up with the desperate people.”
This makes sense. But it also isn’t a substitute for having state-of-the-art technology and solid risk management practices. Stocker acknowledged this. He said having more unsecured loans on the books raises the stakes for credit models. He insists, for example, that MarketFinance has been investing in its product for years. In fact, the company has raised more than $562 million since its founding. And this focus on product has positioned the company well for the moment, according to Stocker.
“We also have to be more diversified,” Stocker said, noting the company is careful not to have too many companies from any single industry in the portfolio. “We have to manage risk in a different way.”
The Decentralization of Finance
Stocker also made a case for a future of small business lending where banks seemingly pay a much smaller role. However, they may well continue to pull the strings in the background. He’s referring to embedded finance, which involves enabling non-financial players to embed banking services into their customer journey. All through the magic of APIs.
“The biggest trend right now is the decentralization of finance,” Stocker said. “Which means access to finance is moving out of ivory towers [e.g., banks] and into digital applications.”
So in an embedded finance world, banking services appear wherever payments are made. Just imagine when a small business visits an eCommerce site where it purchases inventory or materials. Let’s say it’s building materials. When the purchaser hits the buy button, they’re presented with an option to pay in 30 days. A company like MarketFinance would supply these services.
So does this mean the end of banks? Hardly. Stocker says banks have largely come to regard fintechs as their product development pipelines. Banks still bring a lot to the table. He contends have largely trusted brands [debatable, but ok]. And they are well suited to work with regulators and have the ability to attract deposits. So banks aren’t going anywhere.
However, they are not great innovators. “So they plug into fintech innovation,” Stocker said. “And they make it into a positive outcome.”
As we’ve covered pretty extensively, the buy now, pay later model that Stocker compares his business to is beginning to strain under the weight of consumer overreliance on the model and subsequent rising defaults. As small businesses begin to take on more unsecured debt, is it only a matter of time before the same problems appear on the B2B side? We’ll see how all this turns out soon enough.
