Fintech, the use of technology in the delivery of financial services, is thriving. Companies and products such as Monzo and Apple Card improve how consumers spend their money while FNZ and Money Dashboard help with managing finances. Even the very nature of money itself is evolving with Bitcoin and Facebook’s Libra.
Technological innovation tends to be consumer-led with new ideas taking hold fast because individuals are more willing to try new approaches to finance and are openly sharing their experiences on social media. On the other hand, business owners tend to wait until a product can be proven reliable, secure and cost-efficient before trying something critical to their existence. While this trend is set to continue, we are also now seeing an increasing shift in corporate fintech with both developers and investors gaining a better understanding and confidence in the opportunities available.
Blockchain and other distributed ledger technologies is probably the most widely used fintech in the corporate market. Last year alone, HSBC settled $250bn worth of foreign exchange trades using blockchain. The World Bank also launched the world’s first public bond, created and managed using only blockchain.
This increase in the use of data and technology in the corporate sector is making it easier for some businesses to access cheaper finance. Spanish bank BBVA, one of the first to issue a corporate loan using blockchain technology, recently announced a new business loan whose interest rate is tied to digital milestones. The rate of interest charged will decline as the borrower makes progress against an agreed set of milestones, encouraging strong performance. These digital milestones could cover anything from revenue, sales and marketing to other metrics relevant to the business’s success.
As accounting and monitoring technology advances, expect to see financial covenants (limits, often financial, on the company’s operations when it takes out a loan) being digitally tested in real time. For example, a covenant that requires a company to maintain a certain level of cash flow could be monitored in real time using advanced accounting software. The interest rate charged, or the covenant itself, would then adjust in real time using smart ‘live’ contracts. Technical innovation in the corporate lending market is long overdue and will result in more affordable means of finance while also encouraging strong stewardship of companies and the adoption of new technology. RBS’s recent purchase of Edinburgh-based Free-Agent, the cloud-based accounting software for small and medium sized enterprises (SMEs), demonstrates the potential synergies and innovative financial products that could be offered going forward.
The use of real time monitoring and smart contracts is very similar to the innovation seen in maritime insurance. Advanced satellite technology monitors when a ship enters or leaves high-risk areas and then notifies the insurers which results in the premium increasing or decreasing.
Smart loan contracts may be best suited, initially at least, to the high growth business sector (think technology start-ups), as lenders look for ways to transform the products they offer to best match the unique characteristics of these companies. Many of these companies are technology-focused and often unsuited to traditional forms of finance that depend on core assets, such as real estate, being offered as collateral. Smart loan contracts, which accommodate the unique potential of these companies, such as rapid subscription growth or website page views, will offer a bridge into a market that is often overlooked by debt finance.
The growing corporate fintech market can also be seen at the investment level as investors are being offered new ways to compare and analyse opportunities. ThinCats’ data modelling system PRISM is used to help price credit risk in corporate borrowers and identify future funding needs. While Brismo, which recently partnered with LendingCrowd, provides independently verified performance data to compare the performance of loan books against other lending platforms.
Just as we are seeing the rapid growth of consumer fintech, due in part to the open banking revolution and shifts in consumer habits and expectations, expect to see more of the tech-driven revolution that is taking hold within the corporate banking world.
With this emerging market, there comes a challenge for Scottish-based SMEs to grasp and understand the opportunities offered by corporate fintech solutions. The biggest challenges to fintech adoption amongst SMEs are inertia and cost, as major disruption to core business functions can be a tough sell. This will improve as traditional financial service providers and banks work with fintechs to develop innovative solutions and build trust in their products.
Stuart Gillies, Associate at CMS