Opinion Alternative Lending

The biggest emerging fintech challenge to banking

As the economy opens up, embedded finance could help SMEs recover and grow, says Christoph Rieche, iwoca's CEO and co-founder.

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I love using Citymapper. It shows me the fastest, cheapest, most accessible way to get around London - Uber, underground, electric bike, on foot; what it costs, where to hop off. Everything’s in one place - embedded within the app.

As consumers, we’re so used to these different services embedded within the apps we’re using, we barely notice them any more. But this kind of technology doesn’t just help us as shoppers – it has the potential to change the way small business owners work, too. 

Small businesses currently find themselves in the centre of a perfect storm. The Bank of England recently announced that they anticipate a growing number of small businesses to default on their loans this quarter. In light of these figures, it is vital that lenders pull out all the stops to support small businesses so that they can once again focus on growth. Technology, and more specifically embedded finance, is central to this effort.

Let’s start with one constant headache for small businesses: cash flow. Imagine you own a small business, and hire a recruitment agency who finds you a brilliant new teammate. The moment your new recruit signs their offer, the agency sends you an invoice for – let’s say – £3,000. And you have 30 days to pay. 

From the recruitment firm’s point of view, they’re out of pocket for what it’s cost them to do the job and on top they’re essentially lending you £3,000 for 30 days. From your perspective, you might prefer to spread the bill out over a longer term. Or on the other hand, if you have cash in the bank, you might want to get a discount for paying the invoice early. In essence, the 30 day payment term isn’t really cutting it for either of you. 

Enter fintech companies. Our industry can solve these problems by using technology as a payment intermediary between both parties, all neatly embedded into invoices. Buyers get to choose when they’d like to pay, and sellers get paid instantly. All fully automated, of course. The cash flow problem is solved for both sides.

Next, there’s the issue of larger investments. Often, small businesses don’t have the funds to seize an opportunity when they see one. They might go to their bank for a loan, but that tends to come with delays, uncertainty and inconvenience. Also, there's a very good chance they won’t want to help.

So instead, more and more small businesses are going through loan comparison sites, like Funding Options and Funding Exchange. This type of technology is proving very popular for business loans, just as it changed the game for car insurance. Fintechs are embedding their processes within the platforms, so customers can see what they’re approved for there and then. 

Unsurprisingly, some 20% of unsecured consumer loans come through comparison sites already; small business finance will soon follow suit. Another really encouraging trend I am seeing is from bookkeeping giants like Xero, Quickbooks, Freeagent or Sage.

Together, they serve millions of businesses, and they’re becoming a one-stop-shop for these businesses offering hundreds of add on services through a wide partner ecosystem – and soon including loans embedded within their platform. All of them have highly relevant financial data on their customers; they can pre-qualify them for loans, or help accountants point business owners to the right kind of loan for them. They will swiftly become the biggest challengers to the banks.

We’re even seeing e-commerce marketplaces, like eBay or Amazon, payments companies like Stripe or PayPal and even food delivery services increasingly offering embedded loans to the merchants who sell on their platforms. (Either directly or by joining up with techy lenders.)

Small businesses are already reaping the benefits of embedded finance; more than a third of businesses we are serving are coming through our embedded finance partners - accelerating this should be a central pillar to rebuilding our economy. Across the market, the possibilities to embed finance are endless. And for me this means helping to make running a business as easy as getting around London with Citymapper.

The views and opinions expressed are not necessarily those of AltFi.

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