By Richard Prime on Tuesday 3 August 2021
The pandemic has shifted the needs for businesses in all sorts of ways, but particularly for small and medium-sized firms, funding has not caught up, writes Sonovate's Richard Prime.
Plaid’s Keith Grose was right to say the pandemic has turbocharged change in people’s financial needs, expectations, and the way they access finance (What’s driving the rise of the £16bn embedded finance sector, 10 June), but the adoption of embedded finance is not quite as black and white as his article suggests.
The piece gets much right, but I do feel it’s important to flag one important point: whilst it’s all happening at 100mph on the consumer side, the reality is that such innovation continually lags when it comes to business finance.
Levelling the field
Consumers are drowning under a deluge of fintech innovations, which is fantastic news and a real boost after such a difficult 18 months. Fuelled by digital transformation and changing consumer behaviours, the dial has been shifted in the personal finance space. But now, more than ever, embedded business finance, such as lending-as-a-service and liquidity-as-a-service, needs to catch up.
For every Klarna on your Peloton that we see in the consumer finance space, how is business finance responding? Usually with yet faster, simpler, and cheaper ways to achieve the same sort of funding that already exists. Whilst this is commendable, and has over the last 10 years transformed the prospects of many SMEs looking for funding, is this where it ends?
One of the greatest pain points for SMEs is navigating the complexity of finance solutions available in what’s a highly-fragmented lending market. But consumers are now finding financial services exactly where, and when, they need them. It needs to be the same for businesses. There’s still a disconnect between the mechanics of current business finance – even the most modern types – and what businesses actually require from their funding to survive, thrive, and grow.
It was therefore encouraging to see Funding Options recently launch a real-time lending platform that powers a two-sided marketplace with data analytics, APIs and AI. Likewise, Railsbank continues its unstoppable charge to reinvent the credit market with banking-as-a-service. But let’s go further still.
On-demand finance for an on-demand workforce
Businesses with contingent workforces are crying out for on-demand finance. In the same way that workers can click a button and start working, they expect to click a button and get paid. But this doesn’t work when the businesses that hire them suffer from late or non payment of invoices - the universal, number one pain point. Finding better ways to finance this massive and growing economy is therefore vital for the health of businesses and the tens of millions of people who choose to work this way.
As contingent working booms, so too does the number of businesses that require ‘made to measure’ funding that’s available on-demand, embedded at the point of need, and forever switched on.
That’s the necessary future for lending-as-a-service and liquidity-as-a-service – providing funding that’s accessible when it’s needed, not before (which costs companies money to sit on and service) and not after (when it’s too late).
This need has been exacerbated by the rapid expansion of the global contingent workforce, a pre-pandemic trend that’s been significantly accelerated by the ongoing disruption caused by Covid.
With the pandemic restricting workers’ mobility, remote work has become increasingly attractive with more people realising the benefits of flexible freelancing compared to clocking in to an office 9 to 5. It’s estimated that freelancers now represent about 35 per cent of the global workforce; in the US alone that figure is expected to rise to over 50 per cent by 2027.
As the future of work becomes the here and now of work, contingent working will become a greater mainstay of most businesses’ make-up, requiring more prompt payment for services than your typical permanent workforce. Companies that don’t adapt the way they approach funding their businesses and paying their people will undoubtedly lose out in the fight for talent.
This means ready access to a fluid stream of capital has become more crucial than ever. In a financial ecosystem now characterised by open banking and a proliferation of data-driven tech solutions, it’s incumbent on lenders to respond by reimagining how finance works for businesses and customising the options they need.
The views and opinions expressed are not necessarily those of AltFi.