The World Economic Forum recently released The Future of FinTech: A Paradigm Shift in Small Business Finance, which details how the financial technology industry is providing alternative ways of funding for a major, yet often overlooked driver of the economy: small and medium sized enterprises.
SMEs account for more than half of the world’s GDP and employ almost two-thirds of the global network, yet they still struggle day to day when it comes to dealing with their cash flow and ensuring appropriate funding. There’s a funding gap of more than $2 trillion for small businesses in emerging markets alone.
For traditional lenders such as banks, extending credit to small businesses tends to be too costly, given the small loan size. Oftentimes, SMEs already lack the adequate skills and resources to handle finances in a sophisticated manner, so the banks’ reduced exposure to smaller businesses is just salt on the wound—a wound that isn’t even given the chance to heal.
The remedy? In comes FinTech, which in recent years, has become a powerful trend. From 2013 to 2014, equity investment into FinTech companies quadrupled from $4 billion to more than $12 billion. FinTech providers have been relentlessly trumping old and slow processes of large traditional financial institutions with their nimble, improved innovations.
Because FinTech solutions are efficient and effective at a lower scale, small businesses will be one of the main beneficiaries of its disruptive power. FinTech has an arsenal of products tailored to the specific needs of small businesses, including peer-to-peer lending, invoice finance, and supply chain finance. Taulia, for example, simply incentivizes buying organizations to pay their approved invoices early.
But in order for FinTech to continue its rapid growth, some enabling actions must be taken. The provision of cooperative regulations and sufficient investor capital is crucial. If governments set incentives and provide direct support to help their national FinTech industries, the world economy would boom.
FinTech is an industry that has actual, proven potential to be a game changer for small businesses worldwide. As long as we ensure supportive, cooperative conditions, FinTech will meet and perhaps even exceed expectations.