The Future of FinTech: A Paradigm Shift in Small Business Finance

Global Agenda Council on the Future of Financing & CapitalThe Future of FinTech A Paradigm Shift in Small Business FinanceOctober 2015 © WORLD ECONOMIC FORUM, 2015 – All rights reserved.No part of this publication may be reproduced ortransmitted in any form or by any means, includingphotocopying and recording, or by any informationstorage and retrieval system.REF 131015 3A Paradigm Shift in Small Business FinanceContentsForeword3 Foreword5 Acknowledgements7 Executive Summary8 Small Business Finance Is a Global Issue Worth Addressing10 The Opportunity: FinTech as a Game Changer for SME Finance12 a. Marketplace (peer-to-peer) lending17 b. Merchant and e-commerce finance20 c. Invoice finance21 d. Supply chain finance24 e. Trade finance26 The New Role of Public Institutions – National and International30 4. Conclusion: FinTech Can Change Small Business Finance in a Significant and Sustainable Way31 References34 About the Authors35 EndnotesSmall and medium sized enterprises (SMEs) are often cited as the major driver of economies and a force in job creation, but they still have difficulty securing proper financing to prosper.The global financial crisis of 2007-2008, coupled with higher regulation and capital costs for loans to SMEs, has made it even more difficult for SMEs to secure financing. However, the financial crisis has also created a plethora of disruptors in the FinTech area (“FinTech”, a contraction of “finance” and “technology”, is defined as the use of technology and innovative business models in financial services) who, with their innovative ways to originate, assess credit risk and fund SME loans, have provided alternative ways for SMEs to secure funding for their growth.Over the last year, the Global Agenda Council on the Future of Financing & Capital, formed of industry leaders, academics, finance ministers and central bankers, has tackled the question of the lack of financing for SMEs, although ample cash is ready to be deployed. This report synthesizes the authors’ efforts to take stock of what the finance industry has provided to date and how the FinTech industry has taken over some of the funding with its innovative business models and products.On behalf of the World Economic Forum and the Global Agenda Council on the Future of Financing & Capital, we wish to thank all who have contributed their time and expertise to this report, particularly Arnaud Ventura 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.Michael KoenitzerProject ManagerPromoting Global Financial InclusionGlobal Agenda Council on the Future of Financing & CapitalWorld Economic ForumGiancarlo BrunoHead of Financial Services IndustryWorld Economic Forum 4The Future of FinTechInnovation tends to challenge and sometimes displace traditional sectors and practices. The printing press, internal combustion engine, and computer are all examples of technological innovations that transformed societies and economies. In the last 15 years and with the creation of a connected world, tech-led innovations are challenging established industries. For example, structural upheaval is happening in sectors such as hospitality or transport with players such as Airbnb and UBER.While the last three decades of financial innovation have already led to massive changes in financial services, we believe that a new wave of innovation will continue to transform the industry. Innovation, through what has been called FinTech, is already disrupting the ways financial services are being offered, promising to provide access to underserved markets in new ways. Considering the importance of small and medium sized enterprises – and their need for funding – we focus on this particular aspect of FinTech in this 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.Peer SteinDirectorWorld Bank GroupArnaud VenturaCo-founder Positive Planet FoundationFounder & CEO Microcred GroupPeter TufanoDean, Saïd Business SchoolUniversity of Oxford 5A Paradigm Shift in Small Business FinanceAcknowledgementsThis report has been supervised by the Global Agenda Council on the Future of Financing & Capital, headed by Peer Stein, Director in the Finance and Markets Global Practice of the World Bank Group. Council management was provided by Michael Koenitzer, Project Manager at the World Economic Forum. The report was produced in cooperation with Saïd Business School at the University of Oxford.The project was led by Arnaud Ventura (Co-Founder, Positive Planet Foundation and Founder and Chief Executive Officer, Microcred Group) and supported by the core group members Peter Tufano (