Global Agenda Council on the Future of Financing & Capital The Future of FinTech A Paradigm Shift in Small Business Finance October 2015 © WORLD ECONOMIC FORUM, 2015 – All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF 131015 Contents Foreword 3 Foreword Michael Koenitzer Small and medium sized enterprises (SMEs) are often cited Project Manager as the major driver of economies and a force in job creation, 5 Acknowledgements Promoting Global but they still have difficulty securing proper financing to Financial Inclusion prosper. 7 Executive Summary Global Agenda 8 Small Business Finance Is a Global Council on The global financial crisis of 2007-2008, coupled with higher Issue Worth Addressing the Future of regulation and capital costs for loans to SMEs, has made it Financing & even more difficult for SMEs to secure financing. However, 10 The Opportunity: FinTech as a Capital the financial crisis has also created a plethora of disruptors Game Changer for SME Finance World Economic in the FinTech area (“FinTech”, a contraction of “finance” Forum and “technology”, is defined as the use of technology and 12 a. Marketplace (peer-to-peer) innovative business models in financial services) who, with lending Giancarlo Bruno their innovative ways to originate, assess credit risk and 17 b. Merchant and e-commerce Head of Financial fund SME loans, have provided alternative ways for SMEs to finance Services Industry secure funding for their growth. World Economic 20 c. Invoice finance Forum Over the last year, the Global Agenda Council on the Future of Financing & Capital, formed of industry leaders, 21 d. Supply chain finance academics, finance ministers and central bankers, has 24 e. Trade finance tackled the question of the lack of financing for SMEs, although ample cash is ready to be deployed. 26 The New Role of Public Institutions – National and International This report synthesizes the authors’ efforts to take stock of what the finance industry has provided to date and how the 30 4. Conclusion: FinTech Can FinTech industry has taken over some of the funding with its Change Small Business Finance in innovative business models and products. a Significant and Sustainable Way On behalf of the World Economic Forum and the Global 31 References Agenda Council on the Future of Financing & Capital, 34 About the Authors we wish to thank all who have contributed their time and expertise to this report, particularly Arnaud Ventura 35 Endnotes and Peter Tufano, who led this work stream, and Daniel Drummer, who led the research and editing of this work. We hope the report proves to be insightful and a helpful reference in your quest to understand how disruptors in the FinTech industry are providing alternative ways of funding for SMEs. A Paradigm Shift in Small Business Finance 3 Peer Stein Innovation tends to challenge and sometimes displace traditional sectors Director and practices. The printing press, internal combustion engine, and computer World Bank are all examples of technological innovations that transformed societies and Group economies. In the last 15 years and with the creation of a connected world, tech- led innovations are challenging established industries. For example, structural Arnaud Ventura upheaval is happening in sectors such as hospitality or transport with players Co-founder such as Airbnb and UBER. Positive Planet Foundation While the last three decades of financial innovation have already led to massive Founder & CEO changes in financial services, we believe that a new wave of innovation will Microcred Group continue to transform the industry. Innovation, through what has been called FinTech, is already disrupting the ways financial services are being offered, Peter Tufano promising to provide access to underserved markets in new ways. Dean, Saïd Business School Considering the importance of small and medium sized enterprises – and University of their need for funding – we focus on this particular aspect of FinTech in this Oxford report. We hope that innovations in this field – and others in payments, wealth management and elsewhere – will make a lasting contribution to the creation of a better and more stable world. 4 The Future of FinTech Acknowledgements This report has been supervised by the Global Agenda The Future of FinTech study team was led by Daniel Council on the Future of Financing & Capital, headed by Drummer (Senior Consultant, McKinsey & Company), Peer Stein, Director in the Finance and Markets Global and the report was co-authored by Chahinaze Chalabi, Practice of the World Bank Group. Council management Shailendra Sason and Bhanu Birla (all four holding a was provided by Michael Koenitzer, Project Manager at master’s degree in business administration from Oxford the World Economic Forum. The report was produced in Saïd). cooperation with Saïd Business School at the University of Oxford. Academic support was provided by Oxford Saïd, its faculty and staff. Further research facilities were kindly provided by The project was led by Arnaud Ventura (Co-Founder, the Oxford Internet Institute and the University of Oxford. Positive Planet Foundation and Founder and Chief Executive Officer, Microcred Group) and supported by the Further thanks go to the Advisory Board, comprised core group members Peter Tufano (Dean, Saïd Business of Janos Barberis, Arthur de Catheu, Kathleen Utecht, School, University of Oxford), Tilman Ehrbeck (Partner, Alexander Prokhorov, John Donovan, Udayan Goyal, Cédric Omidyar Network), Matteo Stefanel (Founder and Managing Teissier, Arjan Schutte and Huy Nguyen Trieu. Partner, Apis Partners), Njuguna Ndung’u (Governor of the Central Bank of Kenya [2007-2015]) and François Robinet A special thanks goes to all participants who provided input, (Chairman, Axa Strategic Ventures). guidance and opinions in the course of creating this report, as depicted in Figure 1. Figure 1 Figure 1: Interviews Conducted Banks FinTech companies Investors Ecosystem A Paradigm Shift in Small Business Finance 5 6 The Future of FinTech Executive Summary Small and medium sized enterprises (SMEs) are a major, yet This trend has the potential to become a game changer often overlooked driver of the world economy. They account for small businesses. Because FinTech solutions are for more than half of the world’s gross domestic product efficient and effective at lower scale, small businesses will be (GDP) and employ almost two-thirds of the global work one of the main beneficiaries of FinTech’s disruptive power. force.1 FinTech embodies a new set of products tailored to the However, around the globe, SMEs often have one major needs of small businesses. These include marketplace pain point – dealing with their financesand ensuring (“peer-to-peer”) lending, merchant and e-commerce finance, appropriate funding. As reported by the International invoice finance, online supply chain finance and online trade Financial Corporation (IFC), a “funding gap” of more than finance. $2 trillion exists for small businesses in emerging markets alone.2 A global phenomenon for small businesses, FinTech has rapidly emerging new players across developed and growth Reasons for this issue are manifold: the finances of SMEs markets. Some innovative business models are seen in are characterized by high complexity, yet are low scale. emerging markets first and may spread to the rest of the For traditional lenders such as banks, extending credit to world over subsequent years.4 small businesses is often too costly, given the small loan size. Driven further by regulation, banks have reduced their Several enabling factors are critical to ensure rapid exposure to smaller businesses in recent years. Internally, growth, with the availability of data, a supportive regulatory small businesses often lack the skills and resources to environment, the provision of sufficient investor capital and handle finance in a sophisticated manner and to conduct financial education among the most relevant. systematic fundraising. While FinTech’s impact is expected to be powerful, several risk factors need to be taken into account, on the micro Acknowledging the importance of small businesses, and macro levels. Risks include limited protection of retail governments, state agencies and international investors, the potential extension of funding to unworthy organizations have made many attempts to improve the borrowers, but also systemic risk following from a partly situation. Measures include government guarantees, direct unregulated and opaque sector. government lending, supporting SME banks or driving the implementation of credit bureaus. While some of those The overall potential of FinTech for small business and efforts have shown positive results, a vast funding gap still thus for the economy as a whole seems tremendous. remains. Opportunities exist for national governments, development finance institutions, entrepreneurs and investors to support In recent years, FinTech – a contraction of “finance” and and, at the same time, benefit from this trend. Incumbents “technology”, and defined as the use of technology and have the option to cooperate with new players, innovate innovative business models in financial services – has from within or strategically acquire companies. become a powerful trend. From 2013 to 2014, equity investment into FinTech companies has quadrupled from $4 While the pace of change is still