Aaron Hughes, Managing Director of Equiniti Riskfactor,looks at some of the emerging Fintech themes that will shape the SME lending landscape
A wiser man than me once said that anyone attempting to make predictions will end up either wrong or lucky. In 2019, against a backdrop of uncertainty about the UK’s future relationship with its biggest trading partner that proverb holds true now, more than ever.
This political uncertainty has led to reports of ebbing business confidence, subdued growth and reduced investment. All these metrics will recover in time, starting from when there is some certainty about the UK’s future direction of travel.
Against this background, there are numerous Fintech developments that will shape how SMEs source their funding and how the lenders do business.
AI and Open Banking
One of the most exciting areas is around machine learning and process automation. Already personal account opening, “Know Your Customer” and money laundering checks can be automated. I expect further developments to speed up corporate business onboarding as well as increased use of artificial intelligence and machine learning in underwriting and risk management.
“Open Banking” driven by the EU Payment Services Directive2 and open access to huge data sets presents challenges and opportunities for Banks and the Fintech industry in equal measure.
Increased competition in the market is welcome, and innovative products of all sorts will appear. This will be driven by the Fintech sector, but the Banks who can move fast and have their own Fintech teams will benefit the most. Managing the potential conflict between data sharing driven by PSD2 and GDPR customer privacy regulations may keep Operational Risk Managers busy for a while too.
Blockchain and SaaS
Blockchain technology and smart contracts will become increasingly mainstream during 2019. Divorced from the volatile and broadly useless cryptocurrencies, smart contracts and blockchain systems will find utility in multiple real-world solutions – conveyancing, currency exchange, shipping documentation and trade finance, supply chain management and receivables funding in addition to many others yet to emerge.
In tandem with this,there will be a continued shift towards financial services companies outsourcing to cloud based “Software as a Service” systems, rather than hosting the systems themselves. This is already increasingly the case with CRM and HR systems,and I expect to see SaaS used for KYC/AML processing, as well as security analysis, risk management and credit scoring.
In the Banking sector, we will see the continued importance of data-driven innovation. Digital-only banks are on the march in the personal banking world, with customers expecting multi-channel digital access via phone, app, web and voice – increasingly SMEs will expect the same. “Predictive” banking – offering an interface tailored to the customer’s needs and products specific to them – will be the buzzword of 2019.
The SME community
While the Fintech sector is providing a stream of innovative solutions for lenders, the ultimate beneficiaries of these – SMEs – face a very uncertain year. Growth expectations are low, margins are being squeezed and there are potential threats to supply chain continuity and future sales markets.
Wage stagnation, inflation and lack of job security are impacting discretionary spending and to make matters worse, several sectors – particularly healthcare and food production–may face severe difficulties in retaining staff or attracting seasonal workers.
What success will look like for an SME in 2019 will vary greatly – for some it will simply be survival. But success in whatever guise will come from risk assessing Brexit’s impact under various scenarios, achieving staff retention, securing the supply chain and maintaining market share.
With SMEs representing c99% of UK private sector business, their health is vital. Bank funding provides the lifeblood to the sector and while we may see credit tightening in some areas, I also expect Fintech developments in risk management to support lending in core products.
Cash flow funding based on data extracted in real time from the customers’ own accounts systems for example, or blockchain-based trade finance and invoice finance facilities. More than ever, best quality risk management processes, and full use of data to make informed lending decisions is needed.
Time will tell if these predictions prove lucky or wrong. But there is one prediction I can make with some confidence. That, at some point, the UK’s future trading arrangement with the rest of the world will be settled, confidence will return, investment will rise and previous levels of growth will return to the economy.
The SMEs, Fintech companies, and lenders who are already doing the hard yards will reap the rewards.