What happens when technology weds capital
Lending tech, insurTech, blockchain, oh my! The financial world is changing dramatically, but what on earth does it mean for business owners who don’t live in the cloud?
Overall, the term fintech can be applied to just about any technology that enables an easier transfer of money, so it’s incredibly broad. It can apply to everything from PayPal’s millennial favorite Venmo—heck, it can apply to PayPal itself—to all the various crowdfunding portals that allow investors big and small to fund businesses.
Instead of looking at all the 12,000 fintech companies out there according to research firm McKinsey, it’s best to break the industry down to find useful cases for franchised businesses.
Fintech overall is difficult to quantify. According to Goldman Sachs, payment and money transfer technologies stand to eat $10.9 billion in bank profits alone. Financing in the franchise space is about a $60 billion market, but fintech has hardly touched it, at least so far.
Starting at the front of the house, straddling the line between the consumer and the business, lies payment technology. Everything from Apple Pay to Google Wallet and dozens of others allow payment via mobile device. There are clear benefits and clear hurdles here. Benefits fall on the consumer side: there’s the ease of payment (just hold up the phone to a scanner), and security.
“Security and privacy is at the core of Apple Pay. When you’re using Apple Pay in a store, restaurant or other merchant, cashiers will no longer see your name, credit card number or security code, helping to reduce the potential for fraud,” said Eddy Cue, Apple’s senior vice president of internet software and services.
Hurdles, as many companies have seen firsthand, include buying those scanners and integrating them with the point-of-sale system for the very few people that actively use such apps.
Tangential to those wallet apps are the various peer-to-peer money transferring methods, like PayPal’s Venmo, Snapchat’s Snapcash, Facebook’s Messenger and many more.
Mostly, these are used to pay friends small sums, but as White Castle has shown in a new partnership that connected Venmo with online ordering, some can also be used to pay businesses as well.
The financing angle of fintech is full of change. This area is getting a lot of attention as it has been proven as a way to get borrowers money faster and easier—which just about every business wants.
Franchisees can use this financing to open a new location, fund a remodel, get some new equipment or refinance a prior loan with ugly terms.
Fintech eases the burden of getting financing in a few ways. First, there is the new loan landscape, empowered by technology to connect borrowers with lenders in an extremely efficient way. These firms take the legwork out of finding a loan by putting as much of the work as legally possible online or in an app.
This includes signing paperwork, connecting systems so lenders can do due diligence (for example, opening up QuickBooks to a bank) and creating a place for lenders and borrowers to connect digitally.
Boefly is an early example of a loan marketplace, and one tailored for franchising. The loan marketplace partners with brands and empowers borrowers to connect with lenders directly. Benefits here are obvious: Getting a loan faster and with less time sitting in a bank or with a lawyer is well worth the slim rate hike over traditional banks.
Then there’s the small-business lending generalists like Kabbage, Lending Club, OnDeck, Fundbox, Prosper and dozens of others. These outfits all vary slightly, but offer smaller loans in short order but with rates and fees generally higher than a traditional bank and higher than specialized lenders. Again, the benefits are speed and ease if the borrower can swallow the higher fees.
Many niche operators are in this space like Kountable, which offers short-term loans for supply chain entrepreneurs. These entrepreneurs need capital to buy goods, but the end user doesn’t want to pay until they see the merchandise. So Kountable “disintermediates the transaction,” as CEO Chris Hale said, financing the purchase for a short time until the end buyer pays, funneling profits back to the entrepreneur.
And then there’s crowdfunding, which most everyone is familiar with via consumer-driven sites like IndieGoGo or Kickstarter. Despite those household names, crowdfunding for business financing is still a nascent industry, and one mostly reserved for consumer products funded by high-net worth, accredited investors.
Many of these outfits aren’t exactly crowdfunding as seen on the consumer side; instead it’s a way for investors to buy into a loan or securitized investment vehicle, not actually loan money to a business. And that’s a good thing for business owners looking for money—having 100 investors or more at the table is a logistical nightmare.
Still, there are those that are trying proper crowdfudning. One such company, Funding Wonder, will open a small-business crowdfunding platform in 2017, and others have had some success by finding a niche as StreetShares has done with veteran businesses. All these operate under 2015 crowdfunding regulations known as Regulation A+. Few were ready for prime time, but like any innovation, it comes in fits and starts, so don’t write off business crowdfunding just yet.
Finally, there’s blockchain. The buzzword shows up every few months along with promises of a radically different world. But so far, nobody has really figured out how to bring it to market. The technology, dubbed a shared ledger, is the same sort of technological infrastructure that runs Bitcoin.
Certainly there is an opportunity for businesses here—having the same shared ledger could drastically reduce time spent ensuring that all parties in any sort of transaction are on the same page. That could create efficiencies in supply chains and even link all sorts of data together. But blockchain is in its infancy—think the internet in 1995 without the dancing hamsters.
And for all the industry is doing now, banks could easily come in and replicate the great ideas, what Kountable’s Hale calls the inventor’s dilemma in the space. “If you’re holding on to a first-mover advantages you had five years ago, you basically have this commoditized product and someone bigger than you is going to give it away,” said Hale. “So you need to find the new chinks in the armor or the new spots you can land a blow.”
In short, fintech will continue to find new ways to make financing, lending and transacting easier, bringing new opportunities and lowering hurdles bit by bit—but also causing disruption as this brave new world is sorted out.