Rainmaking Event Recap: How FinTech Startups Are Changing Commercial Banking

On the 4th of July 2018, Rainmaking Innovation hosted one of its recurring FinTech Breakfast events. This time the theme was SME Banking. Rob Morris (Managing Director, Corporate Innovation), Nektarios Liolios (Co-Founder & Partner) and Helene Panzarino (Managing Director, Colab FinTech) spoke about key pain points in SME Banking and discussed the innovation landscape in this space.

Nektarios Liolios opened the session by explaining that while the focus in FinTech has long been on the retail sector it is now increasingly on commercial banking. Small and medium enterprises are historically underserved by the banking industry, and the relationship is now eroding even further. Emerging business models in digital banking and alternative lending represent a real threat and a significant opportunity concurrently. The trends observed are also supported by significant tailwinds, namely in macroeconomics and regulation. To seize the potential for growth, traditional institutions need to apply sound innovation strategy across the SME banking value chain.

Commercial banks typically perceive SMEs to be high-risk and costly customers. The sector is very dynamic, with frequent new entries, acquisitions and companies closing; it is difficult to access data for cash flow forecasting and credit history tends to be limited; these businesses seldom have assets against which loans can be secured and, lastly, low ticket credit lines that require onerous manual processing are not seen as profitable.

However, SMEs represent a major component in all Western economies. In the UK, these businesses employ 60% of private sector workers and produce 51% of combined private sector turnover. Rob outlined how dynamic customer needs, new technologies, industry growth and changing regulation all contribute to a valuable opportunity space. SMEs are now looking for flexible, tailored financial products which they say are missing from the traditional offering. They want faster decisions on their requests for credit and are increasingly switching to digital practices.

Cloud accounting platforms, like Xero, are a good example of technologies that enable access to a wealth of data which can be used to create, price and market financial products for SMEs. Artificial intelligence and machine learning power refined algorithms for credit risk assessment and allow for a higher level of process automation. Biometrics, psychometrics and other tools for digital identity verification are another example. Alternative direct lenders and marketplace lending platforms rely on a range of these technologies to build refined business models around improved value propositions.

Another tailwind for SME banking challengers is e-commerce. The European market was estimated to be worth €602 billion in 2017, with a 14% annual growth rate. The UK had the largest market of all, worth €153 billion. The increasing volume of cross-border transactions means merchants will require commensurately sophisticated credit, payments and trade collaboration facilities. PSD2 and the open banking standards that are incrementally taking shape also provide strong support for disruption in SME banking.

Rob highlighted and explored many of the winning models across verticals and offerings, among which direct lending and invoice factoring platforms like Kabbage and BlueVine, Tradeshift who now leverage their business network platform to offer credit services, and P2P players like Funding Circle and Crowdo. Helene Panzarino, an expert on the FinTech sphere, spoke about some of the success stories in SME banking collaboration.

Rainmaking Innovation helps large corporations and financial institutions with every aspect of their innovation strategy. When analysing the innovation landscape within an industry and evaluating the potential disruption, we look at a wide range of signals. The unprecedented level of uncertainty, as the business world moves faster than ever and in continuously changing directions, requires a revised approach to anticipate threats and design a strategy.

Rob illustrated our Innovation Compass approach, used for exploring how forces of change might impact an industry, a company and its specific business units; to identify where, in a seemingly chaotic world, directions for growth lie. Rob outlined how we use data to interpret even the weakest of signals, working with clients to define the scope of research, we then present a bespoke Disruption Mapping Radar, analyse capabilities to identify any gaps and formulate an Investment Thesis. Rob described how we assess whether there is sufficient time to build the capabilities required to compete, or where collaboration is a better fit. Finally the Balanced Portfolio approach was outlined, incorporating three time-horizons and diversified elements of business model innovation.

Similar events will be hosted by Rainmaking Innovation:

12th July - FinTech Founders Round Table

1st August - Corporate Venture Building

15th August - Innovation Compass

By Simone Tranchina

Analyst, Rainmaking Innovation

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