Fintech disruptors prepare banking for the 4th industrial revolution

From APIs to Blockchain a host of financial technology, or fintech, platforms are helping manufacturers raise the money and funding they need to drive growth. Will Stirling explains.

As the government seeks to boost industry with a shiny new Industrial Strategy, it is worth remembering the basics. Among the building blocks for the engineering sector is access to finance, especially for smaller firms.

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Access to finance is key if industry is to deliver on government’s industrial strategy

During and immediately after the financial crisis of 2007-9 was a dire time for small businesses (SMEs) as liquidity dried up and when it returned, most credit was lent on less risky residential mortgages not business loans.

An improving economy and market innovation has helped recapitalise British industry and 10-years on the situation is much healthier. The body UK Finance finds that eight out of ten business loan applications by SMEs are successful and its latest SME Finance Monitor, a survey of around 4,500 SMEs, found an increase in demand for finance in the final quarter of 2017. Liquidity is back and today access to finance is characterised by innovation and choice.

In addition to the big high street banks and challengers such as Aldermore and Metro Bank, SMEs can now also turn to a clutch of sources known as “alternative finance” to raise money. This includes financial technology, or fintech, platforms that use digital technologies including blockchain and APIs (application programming interface)  to source capital in a peer-to-peer model. And whilst other peer-to-peer structures such as crowd funding are also increasingly used to fund growth, fintech has made arguably the biggest dent on the bank loan market.

London-based fintech company MarketInvoice published a survey in September 2017 that found 65 per cent of 3,482 UK businesses have adopted at least one fintech solution, with 19 per cent making use of four services. Such fintech products are helping firms to save on average over £5,500 a year. MarketInvoice extrapolated the findings to 1.3m UK businesses, to produce a total net saving of £4.6bn. Meanwhile, the firm’s own loan book to manufacturing companies is growing; in 2015 it was £4.3m, and is £12.1m in 2017.

MarketInvoice makes use of various application programming interfaces, or APIs, to analyse customers’ creditworthiness. These include a wide range of metrics for the borrower, including data from the electoral role, Companies House and other information sources, to produce an arguably more “holistic” credit profile. Banks tend to focus on credit history and profits declared to assess a borrower.

Speed is a factor for fintech platforms such as MarketInvoice. “For our API model, about 65% of the result is underwritten through the API algorithm that takes about 15 seconds to run,” says Craig Flyger, Senior Partnerships Manager at MarketInvoice. “The rest is run by our underwriting team, by looking at the individual’s credit history and industry trends.” A borrower typically does not need such a long credit history to secure an API-based lending decision.

Assessing the sector the customer operates in is also relevant. “Our real time data analysis means we are more nimble at approvals, but we can also respond better with industry trend analysis,” Craig adds. “If an industry sector is having a downturn or experiencing rapid growth we can adjust the rating or decision accordingly.”

Blockchain is coming

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Blockchain is the most famous example of distributed ledger technology, the same technology that Bitcoin is based on. A blockchain is a list of records, typically managed across a peer-to-peer network that collectively adheres to a protocol for “inter-node communication” and for validating new records, known as ‘blocks’. This allows multiple participants in a network to see and verify the authenticity of each block or record, which improves security and reduces fraud. Blockchain allows individuals to exchange money and other assets with one another, without requiring an intermediary to do so.

With so much capital equipment to finance in manufacturing, the sector has attracted the attention of innovative financiers who are actively exploring blockchain advantages, for both borrower and funder.

“The technology protects the funder from fraud by offering a robust, incorruptible ownership and financing ledger, that can be inspected before granting finance. A blockchain serving the entire asset finance industry would benefit all participants” says Eamonn McMahon, managing director of EquipmentConnect, an asset finance start-up that is developing a blockchain solution.

The start-up company is at the vanguard of bringing blockchain into asset financing. It has secured Innovate UK funding to complete a feasibilty study on applying blockchain to sectors that the Industrial Strategy focuses on; manufacturing, construction and logistics. While banks are doing their job and approving more loans to SMEs, fintech disruption is ensuring a focus on speed and low cost delivery while also introducing fresh sources of funding to the manufacturing sector.

Security against centralised failure and continuation of the service is a big part of a blockchain solution, advocates claim. “A key feature of the credit process is the importance of back-up servicing,” Eamonn says. “That is, in the event the original funder is no longer a going concern, there is infrastructure in place to continue the administration of the loan or lease. The role of back-up servicing is a lot easier if an immutable database, synchronised across the different infrastructure partners is already in place. A blockchain helps achieve this.”

Blockchain is about facilitating an exchange of value with minimum friction; it is intended to enable individuals to exchange currency and other assets with one another without relying on a third party to manage the transactions. This has appeal to a new generation of wealth creators less dependent on the business, and indeed social, institutions of old.

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The team at EquipmentConnect is at the vanguard of bringing blockchain into asset financing

How are the banks and traditional lenders responding to this disruption?

Santander has become the first international bank to launch a cross-border payments system based on blockchain, using the new technology with a view to taking on specialist fintechs. Lloyds is spending £3bn on a digital transformation programme, but blockchain is not currently part of this. RBS is pushing ESME, its independent digital lending platform, with a bold new marketing campaign.

Like other asset finance providers, Close Brothers Asset Finance’s approach has been predicated on a face-to-face sales model, where it forms strong and long-lasting relationships with customers.

“Technological advance has brought with it new funding models, for example crowd funding, which works for some but not for others,” says Ian Barker, Managing Director, Engineering & Manufacturing division, Close Brothers Asset Finance. “The types of deals we get involved in tend to be at the more complex end of the scale, and are therefore – in many cases – bespoke. By its nature, this involves a consultative approach to better understand a business’s requirements, which can change over the course of a discussion, and it’s here that the human element comes into its own.”

But he adds, “We see no reason why various funding models can’t be complementary rather than competitive – there is a balance that can be struck.”

Fintech companies and banks need to get their collective act together in preparation for a potential investment drive. “Industry 4.0” is coming and while low cost digitalisation is possible, this will inevitably mean more capex investment. Auditors PwC, in a 2016 report, said total worldwide industrial investment in Industry 4.0 technology is expected to be $907bn p/a until 2020.

Any finance solution that improves speed of approval, lowers funding costs, and offers fraud prevention and security will likely have a captive market in the new, digitally-native manufacturing sector.