The term 'fintech' covers a wide and ever-growing range of technologies. This article explores some of the biggest game-changers, and how they’re impacting the way businesses are managing their financial affairs.
Treasurer Scott Morrison said of fintech in 2016:
“It has the power to completely bring in a new environment of competition. For small businesses out there who find it difficult to attract capital, for large government agencies who are struggling with convoluted and difficult payment systems … to medium-sized businesses that are trying to bring their products up to date and to connect with their consumers in ways they haven’t before."
Then on his visit to a G20 Conference on digitising finance and financial inclusion in Germany on 27 January 2017, he was even more effusive in showing his passion for fintech:
"Fintech is the way of the future. There is, without doubt, a paradigm shift taking place. But while we cannot go backwards, the success of fintech is not guaranteed. It is important that all of us work together, across borders, to help build this industry so that it can deliver for consumers, for businesses and for our respective economies. That is what this moment, this opportunity, demands of us."
The advantages of digital wallets
Payment systems such as PayPal, and digital ‘cryptocurrencies’ like Bitcoin, enable anyone to do business without involving a bank, cutting out the fees, delays, and restrictions imposed by traditional financial institutions, and enabling truly global commerce.
Digital payments stimulate sales because they make it fast and convenient for consumers to purchase goods or services, which is why many businesses across every sector now accept them as an alternative to credit card payments and direct bank deposits.
One of the greatest advantages to digital payments is that they facilitate one-tap, on-the-go transactions via mobile device, enabling businesses to capture prospects at the moment of impulse and immediately convert them to customers. With 79% of Australians now owning a smartphone (and collectively looking at them 440 million times a day), mobile commerce is a channel no modern business can afford to ignore.
Blockchain is going mainstream
Blockchain is a database or ‘public ledger’ originally developed by Bitcoin as a way of verifying transactions but it’s rapidly being adapted to other purposes and it’s even being heralded as a technological revolution.
Blockchain allows people or businesses to transfer any item of value – from intellectual property to money or physical assets – instantly and securely, without the need for a bank or other trusted third party.
Offering security over personal information and transparency over the actual transaction, blockchain technology is already being adopted by financial giants like JP Morgan, with global consultancies such as PwC developing capabilities to help businesses across the world tap into its potential.
Crowdsourced funding platforms
Crowdsourced funding operates in two main areas: equity-based investing and peer-to-peer lending.
Crowdfunding platforms facilitating both types of funding are edging out the banks as the first port of call for businesses looking to raise finance, for three main reasons:
- Speed – crowdsource funding platforms tend to be more agile and fast-moving when assessing applications
- Accessibility – for growing businesses that don’t meet the conservative criteria of banks or venture capitalists, crowdfunding provides an opportunity to access cash from investors with broader appetite for risk
- Cost – established businesses can benefit from cutting out the time and costs involved in traditional equity raising campaigns, and sharing some of the savings with investors.
Alternative lending in Australia
There are more than two million small businesses in Australia, and more than half of them have some form of debt facility. Borrowing is one route for small businesses to upscale performance or expand into new markets.
The cash injection from a business loan allows businesses to take advantage of too-good-to-miss opportunities, like the chance to buy out a supplier or competitor, or buy equipment or inventory.
Bear in mind these three fundamental principles:
- The type and term of finance must match the business need
Long-term needs, like buying property, need to be matched with long-term financing like a mortgage or term loan, to avoid needing finance again when the loan matures. On the other hand, fluctuations in working capital should be covered with a flexible form of short-term financing, like an overdraft or business credit card.
- Keep the cash flowing
Running out of cash is the number one reason small businesses fail. A profitable business can be brought to its knees by late-paying clients or seasonal fluctuations, so it’s essential to have funds available when needed. But flexibility comes at a price, as at-call financing can be more expensive.
- The higher the risk, the more the cost
There are many different types, terms and structures of business financing, but one simple rule underlies them all: the bigger the risk, the more the loan will cost. Offering collateral can give rise to lower rates than on an unsecured loan. Super-risky financing options like Merchant Cash Advances can attract interest rates of up to 200% per annum because the lender has no recourse if sales are insufficient to repay the advance.
Instant bank transfers in 2017
The New Payments Platform (otherwise known as instant bank transfers) will go live in 2017 making Australia one of only three countries worldwide that do this (along with Sweden and Mexico).
As reported in the Sydney Morning Herald here are the key features that will be switched on:
- 24/7, 365 day instant transfers (no weekend or public holiday delays).
- New ‘Identifier’ technology that eliminates the need to know someone’s BSB or account number.
- The possibility for new payment apps and an overhaul of the direct debit system.
- Multiple payments for complex purchases (like buying a new car) can be synchronised simultaneously, including insurance payments for example.
- Changing financial service arrangements will be a lot easier as the ‘Identifier’ technology will remove the need to update direct debit authorities.
Check the official New Payments Platform site for more information.
A business that is profitable on paper can still end up bankrupt if the cash doesn’t come in on time to pay the bills. The alternative finance market can help with accessible finance options to small businesses.
“The speed of your success is limited only by your dedication and what you're willing to sacrifice” - Nathan W. Morris
Mary Paterson is a freelance journalist who writes about small business finance from personal experience.