Small Business Banking

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paypal, Small Business Banking, square

Could Square be the first global small business bank?

Late last week we learned Square was back for round two of its banking licence application. The company was reported to be reapplying for the license, after withdrawing its initial application earlier this year.

While the bank will be Utah based, it isn’t hard to imagine the U.S. company as having global small business banking ambitions. Today its payments and merchant ecosystem is available in Canada, Australia, Japan and the U.K. These are all jurisdictions that have struggled to produce good small business banking alternatives during the fintech boom, despite many offering ‘neobank type’ licenses.

Square has had a pretty good run over the past two quarters, after slower growth in the preceding three. In the 2018 third quarter the company saw net revenue grow 51% YoY to $882 Million, on Gross Payment Volume of $22.5 Billion. While the company is still a relative minnow alongside competitor PayPal (by way of comparison, the payments giant pulled in revenue of $3.68 billion for Q3 on $143 billion in total payment volume) Square is no doubt banking on a license to help it further encroach on PayPal’s market share. It would also position it to further solidify its objective to own the lion’s share of commerce requirements for small businesses.

Square also has a hand in the crypto jar, with $43 million of Q3 revenue attributed to bitcoin. In August of this year the company was awarded a patent for its crypto payment network, and reports suggest adding bitcoin to its Cash App back in January helped Square make a dent in PayPal’s Venmo during 2018.

PayPal started from a consumer first strategy, and then pushed through into the SME space. Square on the other hand has played a reverse strategy. And while Square could have been seen as a acquisition target for PayPal up until a year or two ago, the banking license play now feels like a solidly competitive move on the chessboard. If Square can deliver on SaaS banking for SMEs, rather than the hodge podge of services and pricing that exists today amongst the incumbents, then it may have a real killer advantage. It will need it, because PayPal has deep pockets, and can instigate a price war it can almost certainly win.

Certainly one to watch in the SME banking space in 2019.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

Small Business Banking

Gifs, memes and Money Mentors – the era of the expert is here

This week over at Daily Fintech we launched our book an expert service, allowing our readers to go one layer below the research we provide for free, in the public domain. It’s one more string to what I can confirm are many stringed bows for each of us in the team.

I like to think this initiative is a perfect microcosm representation of the emerging workplace – niche subject matter experts that can now monetise their skills via low barrier, digital service marketplaces. It’s that next evolution beyond more traditional freelance platforms like UpWork and its ilk.

Leveraging knowledge imbalances has always been at the heart of the service economy. While some types of knowledge are now readily available at our fingertips, complex decision-making processes still require a helping hand. Like navigating the US student loan system.

NextGenVest, which just this week announced it had been acquired by CommonBond, connects wannabe students with Money Mentors: current undergrad college students, sophomore and higher (but not graduate students) who have previously applied for financial aid and scholarships. Via text message, Money Mentors are ready, between classes and beer pong, to answer questions and provide guidance on how incoming students can negotiate and access the best student loan deals possible. As detailed in the job description, Money Mentors must:

Create a friendly environment for conversations with students over text using gifs and memes. Be available for shifts at least 16hrs/week (over 3-4 days) between 8am-12am (but you get to choose your shifts according to your schedule!)

Money Mentors are paid based on the amount of times they ‘deliver value to a student’, with the average mentor making upwards of US$400 every fortnight. Not bad going for a student with a few hours to kill. And we all know they have plenty of those.

3 or 4 years ago, who would have thought this would have been a job? It’s a reminder of the scope and untapped economic opportunity in the knowledge economy. While NextGenVest might be exploiting a surprisingly niche area, there are plenty of other sites you can head to for more typical advice, served up online, in micro-bites. For example, if you’re a doctor or a vet, try Just Answer, or if you want startup advice, head to Clarity. If you’re a bit of generalist, head to Maven, who’s tagline is ‘Everybody Knows Something’. Well at least they think they do, in my experience.

Portfolio careers are blossoming, and NextGenVest and co are just one of the ecosystem enablers. Financial services that support this new ‘work’ paradigm aren’t really keeping up. As the line between work and personal life gets even more blurred, this idea of business and personal banking being ‘separate’, starts to break down. It’s one of my core theses, and something I’m yet to see anyone really tackle, in a serious way. ‘Next Gen Banking’ shouldn’t be about digitising existing banking processes, or making them faster. B-o-r-i-n-g. It should be about inventing completely new ways of thinking about money and lifestyle, or reassembling the constituent parts into novel and fresh experiences. I guess we’ll just have to keep waiting a little longer…

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

Small Business Banking

There’s a new UK business banking kid on the block!

News hit the wires in the past 24 hours that the NatWest division of Royal Bank of Scotland was backing a new SME banking provider, Mettle.

The new bank will have to strengthen its resolve to crack the market, especially knowing two other providers have already launched in this space – Coconut and Tide.

Coconut’s features include a tax estimator, automatic expense management and helpful tips about what is and isn’t claimable from the taxman – always a minefield to navigate for new business owners.

Tide’s features include ‘the world’s fastest business loan’, with £15,000 in short term credit available in under 2 minutes, through a partnership with iwoca.

While Mettle’s full list of features aren’t known yet, it will follow the trend of its peers in offering in-app card control plus simple invoicing and bookkeeping features from the palm of your hand.

What’s interesting is these new banks aren’t necessarily only eating into the territory of high street retail banks – they’re also encroaching on cloud accounting software vendors like Xero, Wave and MYOB. Bringing these two worlds together is something the platforms have been a little slow to deploy, at the app level. For many freelancers and SMEs, being able to manage everything from you mobile is increasingly preferred.

The announcement of Mettle comes as RBS gets its £775 million ‘RBS Alternative Remedies Package’ in full swing. The fund was mandated part of the government’s bailout measures during the GFC.

Ironically (or maybe not so ironically!) one component of the fund is directed towards establishing an Incentivised Switching Scheme – to help RBS SME customers to switch to alternative banks or lenders. It’s not clear if Mettle would qualify as an alternative or not, given its backed by NatWest. Pretty clever if it does.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

Small Business Banking, WealthTech

Is cryptoeconomics the key to better DD on ‘hard basket’ investments?

The more I think about due diligence, the more flawed I realise it is.

Not because the act of due diligence itself is a bad idea – it’s not – but more that the process and steps that are taken to achieve it are so outdated and inefficient.

As an example, let’s consider a pension fund, who decides to invest in a mid-size businesses in the airport space. They might choose to do this as an experiment, or because they are being encouraged from a political/social perspective to deploy more capital into the business sector, as banks retreat. Rather than hand out the cash to private equity, this one they do direct.

In this instance, there are likely to be a few consistent factors.

  • It is highly likely the pension fund has never invested in the space, therefore has no internal due diligence experience
  • We can imagine the ticket size will be relatively small, compared to traditional investments
  • The cost to upskill the internal investment team, or hire consultants will impact ROI more than traditional listed equity investments, harming the deal optics

If we assume the project was run well, then once due diligence is completed, some very good and useful intellectual capital will now exist inside the fund. However given it’s not every day an airport goes out looking for investment, that intellectual capital is likely to sit unused, gathering dust.

Not terribly productive.

But surely there is another way? I mean, if AirBnB can help us rent out spare rooms, is there something similar that could help a fund ‘rent’ out its knowledge?

And if we take this one step further, who’s to say the investment team needed the knowledge at all in the first place – could they have simply rented it from others to start off with?

Investing in businesses is often deemed a due diligence problem. It’s getting worse, as the rate at which new business models are emerging is increasing, and digital complexity is compounding. The gap between traditional bankers and even fintech lenders, private equity firms and VCs will continue to grow – so long as we keep the same in-house model of due diligence. No man is an island. Or more aptly, no fund.

I think there may be a solution, powered by the crowd and underpinned by cryptoeconomics. There is a powerful collective wisdom in the market, that simply needs to be structured in a way that aligns incentives correctly throughout the entire process.

For those more complex, finicky deals, that just fall into the ‘too hard basket’, there must be a better way forward.

I will be in London from the 26th of November to 29th. If you would like to connect drop me a line on Twitter, or connect with me on Linkedin!

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

Small Business Banking, WealthTech

Crowd Sourced DD the future to unlisted asset investment explosion

Lately I’ve been thinking a lot about the flow of capital.

You do that when you run a super fund. Especially when you are thinking about the opportunities that exist when you have the ability to be significantly more agile with your investment strategy.

And when you link the use of capital to where it is needed most, to grow the economy, you naturally gravitate towards the small business sector, and the unlisted asset space.

It’s not as easy as flicking a switch though – investing pension fund money is a huge responsibility, and how it is handled is a serious business. Small business and the unlisted space is notoriously risky, and pricing and handling that risk is the dark art of this game.

But it is relatively patient capital, and there are some interesting dynamics that can be explored, based on this principle.

But before you even get to that point, you need to find good businesses, and that is another huge problem that still needs to be solved.

One fintech in that space trying to solve part of that particular problem for wealth managers, like pension funds, is Delio. Based out of Cardiff, Wales, the platform offers ‘infrastructure as a service’ to help manage the entire unlisted asset investment process, from origination to exit.

Wealth managers, private banks, investment banks, family offices and many more can use the platform’s white label digital insfrastructure to upload deals and manage the entire process, end to end. The company is already partnered with UK Business Angels Association, connecting over 15,000 angel investors with high quality deal flow.

DelioConnect also offers platform to platform integration, so clients can originate, syndicate or distribute within the trusted network.

These sorts of platforms are the future of getting capital to small business. They are potentially far more powerful than neobanks in the SME space. And they solve the crowd-sourced due diligence problem. Which until technology is sophisticated enough to manage on its own – for which we are still a way off – is critical to increasing the flow of money into productive, growth investments.

The principles behind how platforms like Delio work should be attractive to smart pension funds and new age wealth managers, looking for efficiencies and an edge in the unlisted space.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

Small Business Banking

Lenders Avant and On Deck spin out new platform businesses

Fintech is often viewed through the challenger, disruptor lens. But more often than not, fintech is an incubation vehicle for banking proof-of-concepts. Not many banks deeply, organisationally get this. Even their Corporate Venture Capital arms struggle to deliver. If they did, the pace of banking innovation would be tremendous. It’s not.

But fintech lenders like On Deck and Avant do, and are now in the maturity phase of their fintech lifecycle that this ‘incubation’ phase is starting to produce white label opportunities for their proprietary technology.

Small business lender On Deck has launched ODX, a separate company that helps banks build digital SME lending products, while personal loan startup Avant is taking a similar tack, launching a new infrastructure platform called Amount that will help banks build digital consumer lending products.

Many startups struggle with the white label or disrupt model early on in their lifecycle. White-labelling is often appealing when cash flow is tight, and the hurdle to achieve market share seems overwhelming.

But as On Deck and Avant have shown, if you time things correctly, it really is possible to do both – and do them well. On Deck for example has originated over $10 billion in loans since 2006 and Avant has issued over 750,000 personal loan, auto loan and credit card products through its technology platform.

The financial institution of the past obsessed about owning the customer at every step of the financial journey. The fintech first financial institution of the future possibly cares less about that, and more about owning the technology layer.

What is interesting is that beyond one to one partnerships with banks, of which both Avant and On Deck have established in the past, both fintechs see a business case in creating a platform strategy and business line specifically focused on this area. This suggests a fundamental shift in attitudes in banks to work with alternative technology platform providers who are also, in many senses competitors.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

Small Business Banking

UK set to land a Funding Circle sized Unicorn

Back in October 2015, Bernard covered what was then a fledgling UK fintech startup in a promising space – Funding Circle. He spotted the company’s potential, and noted it could also be the future ‘unicorn’ the UK needed to back up its ambition to be the centre of the fintech universe.

“So it looks like Funding Circle could be one of those big winners that London needs in order to earn its coveted Fintech Capital of the World status. Lots of exciting new ventures is not enough. London needs a couple that scale to be global winners” 

He also speculated on Funding Circle’s IPO. An IPO that has just been announced in the past few days.

“The question for Funding Circle is, when they get to that stage, do they IPO in America or the UK? In the days when Israeli ventures pioneered the “American flip” (switch to look like an American company) there was no choice – you did your IPO in America.”

Luckily for Bernard and his fellow UK fintech followers, Funding Circle looks set to make good on its UK origins, indicating it intends to float on the London Stock Exchange, in a formal announcement, prior to the release of the prospectus.

The company is reported to be aiming for a valuation north of £2 billion.

So what’s to like?

  • The business has originated more than £5 billion in loans to over 50,000 SMEs, across the UK, US, Germany and the Netherlands.
  • In doing so, it claims it has helped create more than 75,000 jobs
  • 32% of lending (ex property loans) is to repeat purchasers, which must dramatically lower customer acquisition costs across the board. In H1 2018, more than 40% of revenue came from existing customers.

And what’s the risk?

  • While revenue grew to £63.0 million in H1 2018, from £40.9 million in H1 2017, the company is yet to turn a profit. Investors will be asked to buy into the growth over profitability story for the foreseeable future.Revenue is growing as fast as operating costs are growing, when you compare H1 2017 with H1 2018. Expansion is an expensive game, although the company must have a relatively solid playbook for it now, having already completed a few sojourns.
  • Focus will be another question mark. The announcement claims the business has only tapped into an estimated 1.9% of the addressable market in the UK. Use of funds is partly slated for opportunities in new geographies.

Either way you slice Funding Circle, there is no question what they have achieved to date is phenomenal. We will be watching this one with significant interest going forward!

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

amazon, Consumer Banking, Small Business Banking, sme lending

A true story: Techfins (Amazin) beat Fintechs and Banks on SME lending

No – the title doesn’t have a typo. It actually started as a typo, but I chose to keep it that way. Google SEO will learn.

amazon-lending

They are really Amazing Amazon for the work they do in the SME lending space (not for just that). This is a real life story, where I was involved with an SME and witnessed first hand how hard they had to struggle before they got funded by Amazon.

The SME is Ausha foods, I know them personally as they are run by a friend. After a few months of ideation and planning in 2016, they launched in 2017. They sell organic food products in the UK, based out of London. Their supply comes from Kerala (mostly) in South India.

They made sure they went for all the top certifications and are very quality focused across their supply chain. Now, this is not to provide free marketing for them, but just to set the ground for the firm under discussion.

Ausha listed themselves on Amazon as seller, and for a year have seen some serious sales happen through the platform. They have sold 18 products on Amazon over the past 12 months. After hitting good revenues there, and with 4.8 stars on Amazon reviews, they decided to expand. They wanted to ship larger volumes of their products, and needed some financing options. And like any typical funding request, they wanted the monies in 2 weeks.

For an SME who haven’t done fund raising for expansion before, it can be quite daunting. They reached out to me, and I gave them a few tips, and suggested to go for debt rather than equity as their need was small, and my ecosystem of equity investors were largely tech focused.

I put them in touch with a Fintech I knew, who were good at connecting SMEs to lenders. They got two lenders who were interested in talking to them. But both lenders wanted them to fill in tonnes of paper work, and gave a minimum time line of 6 weeks to even get to the approval stage. The result could also be a reject.

The founding team didn’t give up, and reached out to Amazon for financing their expansion. Amazon already had all the details about their products (about 18 products listed on the platform), the sale they make and the reviews they have from customers. They knew that the business was scalable, and gave them the approval for the funding request on the same day of applying. Ausha got the money in their bank account in 2 working days.

I met the founding team at a party, and I was surprised when they told me what had happened, and felt compelled to write this story.

Its critical that SMEs felt well supported by the financial services ecosystem they operated in. The founders of Ausha were well educated engineers who knew the right doors to knock on – but most SMEs don’t.

Its critical that SMEs atleast have the information on who to reach out to when they need funding. Despite the efforts of the British Business Bank, I believe, there is still a lot of work to be done in the UK to bring awareness in this space. It is also critical for these lenders to tap into data available on social media and other platforms where a borrower trades.

In an open banking day and age, they can proactively reach out to these firms when they see anomalies in their transactions, and find out if they needed any funding help. How hard can that be?

Techfins like Amazon and Alibaba have an information advantage over the Banks, and even Fintechs. These giants have transaction level information on the SMEs trading on their platform and get to see demand for their products. And when an SME fully relies on, say Amazon, it is an Amazon family SME. By funding the SME, Amazon are really funding their own growth in the e-commerce space and in the Financial Services space.

Amazon rules. Go Ausha.

Arunkumar Krishnakumar is a VC investor focusing on Impact investments, a writer and a speaker.

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