The SME Opportunity for Fintech

~5 min read

Due to its impact on our everyday lives, consumer-focused Fintech is unsurprisingly getting most of the media attention. However, Fintech services targeting businesses could be far more lucrative for Fintech providers, due to large transaction values, extensive digitization needs and significant budgets. In this Mondato Insight, we explore how business-to-business (B2B) Fintech is moving up the value chain, identifying the different types of Fintech services available to small and medium enterprises (SMEs).

Most recent developments in financial services business models have been consumer-focused, with such Fintech players continuing to receive the bulk of investment, ex. peer-to-peer Fintech startups received 22 percent of the value in U.K. investments last year. The industry is, however, increasingly working on innovation in the B2B space, with a focus on SMEs.

SMEs in the Spotlight

Fintech that targets businesses – i.e. B2B Fintech - is clustered around the digitization of processes, such as invoicing, payments and financing. They have a steep curve in gaining traction, as SMEs rely on more manual processes and often do everything themselves. “SMEs are distracted as managers /owners are always multitasking. For them to change behavior, a service has to be of overwhelming value,” shared Max Elisco, the CEO of Viewpost, in a recent interview. Even though SMEs would benefit from digitization, they struggle to implement it.

SMEs in addition often find it difficult to gain access to equity or debt financing. They have a limited track record in raising investment and providing suitable returns to their investors. Some SMEs have non-existent or very limited internal or external controls and procedures, and often have few tangible assets to offer as a loan guarantee. In addition, SMEs usually do not use digital systems, thus making it difficult to access their credit worthiness. New Fintech solutions are trying to change this approach by digitizing the internal and external processes and procedures of SMEs, and thus allowing for alternative financing options.

On the Road to Digitization

Organizations of all sizes face high costs associated with processing and distributing paper checks and complying with government tax and employment regulations. There is a growing number of electronic payroll offerings from firms such as QuickBooks, USPayserv, and First Data, that allow employers to electronically remunerate workers, and calculate, file and pay taxes.

Companies still issue and deliver paper invoices, pay via checks and struggle to track whether or not an invoice has been received, processed or paid. E-invoicing providers such as Viewpost offer the opportunity to track invoices and payments, thus allowing for working capital optimization or increasing options for access to capital as the invoices can be used a collateral.

Electronic merchant and e-commerce platforms, such as Amazon and e-Bay, take SMEs to the next level. They allow businesses not only to sell on their platform and accept electronic payments, but also to track inventory and have real-time reporting. Businesses can also benefit from scalable built-in loyalty programs, coupons, marketing, and security and compliance functionalities. And they have recently expanded to financing, with Amazon, eBay and Square providing SME loans through their platforms.

Lucrative B2B payments

Many Fintech companies that offer digitization services also bundle in payments. But there is a plethora of companies focused only on B2B payments. Cross border B2B is a hot space, and domestic options such as direct debit and escrow as a service are gaining traction.

B2B transactions represent 75% of all cross-border transactions for banks. Most companies depend on their banks to handle their cross-border payments needs, with the bank applying its exchange rate at the time of transfer. Banks, however, do not always have the best exchange rates and often work with other banks, sometimes several, to get the money to its beneficiary. This results in slow, expensive and cumbersome cross border payments. Thus companies such as Align Commerce, Currency Cloud, Ebury, Traxpay and Payoneer offer cross border B2B payments with better user experience, rates, and speed, including risk management and compliance.

Escrow is a service (EAAS) is when a 3rd neutral party temporary holds the funds of a transaction until a service is fulfilled/product is delivered. EAAS is a fairly new concept, even if escrow is not, as PayPal has doing this for years. is the classic supplier, but there is also a trend to more encompassing solutions, such as Armor Payments that integrates into 3rd party applications such as marketplaces, to facilitate such payments.

Companies such as AccessPay, GoCardless, and Twikey offer direct debit payments, which is an arrangement made with a bank that allows a third party to transfer money from a person’s account on agreed dates, typically in order to pay bills. Direct debit offers more stable fees than cards (usually a fixed fee per transaction), as card fees are often based on value. Direct debit is a great fit for some business types, especially those that collect fees on a regular basis/subscription model such as gyms, schools, and property rentals. A direct debit brings transparency and predictability, allowing businesses to know when and how much money will be coming in in each period.

Tapping Into Diverse Financing Options

Once business’ processes and payments are digitized increasing transparency and cash flow predictability, borrowing money becomes easier. Supply chain finance allows a supplier to sell its invoices to a bank at a discount as soon as they are approved by the buyer. This permits the buyer to pay at a later date while allowing the supplier to secure its money earlier. B2B cash flow management solutions such as Apex Peak and FundBox permit businesses to overcome short-term cash flow gaps by earlier payment of invoices at a discount. Fintech providers plug into companies’ accounting and/or other software to analyze the data and estimate the risk before making a lending decision. Such loans to SMEs could be too risky and unattractive for banks.

Online marketplaces are cropping up for investing and borrowing money. Besides personal loans, Lending Club offers small business and entrepreneur financing. SMEs may find such products a great alternative when they are deemed too risky by a bank.

Trade finance is a relatively unexplored field that could help business get paid faster. When shipping and receiving goods internationally, usually there is a time delay between shipping and payment. Internet of things (IoT) shipment tracking could help by showing the buyer that a product has been shipped so it can pay upon shipping, not upon receipt.

Crystalizing Value Propositions

B2B Fintech services, their variations, and future mutations are changing SMEs’ business models. However, providers need to overcome marketing challenges before wider adoption is reached and the impact of their services is felt by the SMEs and the economy in general. SMEs, and corporates for that matter, do not necessarily understand the new options they have at their fingertips, nor how they work, what do they need to implement them or how their bottom line will be impacted. Fintech providers must crystalize their value propositions in the eyes of the customer and sharpen their marketing messaging to fully achieve the potential of this market segment.

© Mondato 2016. Mondato is a boutique management consultancy specializing in strategic, commercial and operational support for the Digital Finance and Commerce (DFC) industry. With an unparalleled team of dedicated DFC professionals and a global network of industry contacts, Mondato has the depth of experience to provide high-impact, hands-on support for clients across the DFC ecosystem, including service providers, banks, telcos, technology firms, merchants and investors. Our weekly newsletters are the go-to source of news and analysis in the DFC industry.

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Mondato is a boutique management consulting firm specializing in strategic, commercial and operational support for the Digital Finance & Commerce (DFC) industry.
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