We are now over a decade into the third era of fintech innovation, which grew out of the fallout from the 2008 global financial crisis and the advent of the smartphone. With record amounts of investment flowing into the sector again in 2018, the innovation train shows no signs of slowing. In the past couple of years, it has rounded a curve and started to branch off in some interesting new directions.
The curve? Consumers reaped most of the benefits of the early part of this wave, with more efficient payment and lending products leading the way. However, investment in B2B fintech startups has been ramping up for the past couple of years, and in 2019 we’ll start to see businesses reaping the benefits of the fintech wave in three major ways:
Now that a broad swath of consumers has experienced the ease and efficiency of fintech products, changed expectations are starting to influence business buyers. Accounts payable is really starting to question why so much inefficiency still exists in their world and they’re looking for better ways to handle payments. Treasury and finance are waking up to all the new lending and financing options for consumers and starting to think beyond the bank for the first time.
At the end of the day, it’s the business customer that benefits from all this innovation. When there is more choice in the market, whether it's for payments or lending or other kinds of services, the customer wins. So, while I think it’s going to be a great year for B2B payments and lending companies, and for bank-fintech partnerships, businesses are going to be the really big winners in 2019.
The early years of this third era saw a lot of very cool consumer payment products. The use of checks and physical wallets declined as people paid with smart phone apps. Mobile phones also proved to be a boon for the unbanked—people without credit cards, or even bank accounts—with Kenya’s mPesa leading the way by letting people in markets long underserved by banks store and transfer money using their phones.
All the while, B2B payments fintechs have been chugging along slowly and steadily, but lately they’ve really picked up speed. This is a market that has long been underserved by banks. Business payments are rife with complexity, manual processes, and paper checks. Technology solutions have to be able to automate the whole process, not just move money electronically from point A to point B, which is all that banks do.
Cloud-based business payment automation solutions are in the market now, and more are on the way. Consumers have gotten comfortable turning to tech companies handle financial transactions when they have a better product, and businesses are going to follow suit. As a result, we’ll see much wider adoption of B2B payments automation in 2019.
As anyone who’s ever tried to get a bank loan knows, the application process can be arduous and credit is hard to get. Banks tightened lending rules significantly following the financial crisis, and they really haven’t loosened them much. That’s left the playing field wide open for FinTechs using big data and advanced technologies to speed up underwriting and create new financing options for a wider range of people.
In 2019, we’re going to see that mirrored in the B2B world. Business lending is going to dramatically increase as fintechs draw on a wide variety of data sources to offer loans and lines of credit to small and midsize businesses, which have been hit the hardest by tighter credit.
We’ll also see a dramatic increase in supply chain finance options. People have talked about the supply chain finance opportunity for a long time, but the reality is it's not a very big segment today. B2B platforms, networks and marketplaces that sit in the middle of automated transactions between buyers and suppliers have amassed huge stores of transactional data. They can combine their own data with external data sources and make all of that data visible to a wide range of potential funders who’d be willing to lend against invoices or POs. These lending offers could be offered, underwritten and accepted right there on the platform as part of the transactional flow. Banks will probably provide a lot of the capital, but it’s the tech companies that will bring the parties together to transact.
Back when all this started in 2008, banks and traditional financial institutions were really on the ropes, and the common wisdom was that tech companies were going to come into the market and eat their lunch.
That didn’t happen, but fintechs did put a lot of pressure on banks and banks have very wisely embraced fintech companies and vice versa. Banks have tremendous assets, big customer bases, and big reach. But they don't have the technology that fintechs have or the ability to sell it like fintechs do.
The combination of strengths really makes a lot of sense for banks to embrace fintechs. But to date, it's only been the biggest banks that are partnering with and buying up fintechs. But I think if B2B payments and lending fintechs pick up steam, the pressure on banks increases and we’ll see the number of bank-fintech partnerships increase and second tier banks will start to get in the game.
It’s interesting that payments and lending drove the early, consumer-oriented part of the third wave—probably because those are the broadest use cases and the area where there’s the most pain for the most people.