In 2015, fintech was seen as a disruptor of traditional financial services models. In 2019, globally, fintech companies are becoming formidable competitors, challenging the banking status quo and increasingly finding traction as lenders to small and medium enterprises (SMEs).

In its third global report in four years, EY went as far as to say fintech had become the “new normal” as the pace of innovation continues to accelerate. The consumer adoption rate globally, EY reported, was 64%. Emerging markets are leading the way, with South Africa and Russia sitting on 82%, just behind China and India at 87%.

The outlook on SMEs is different in that they are at a different stage of adoption. South Africa (with China and Mexico) was among the three countries surveyed for the report. SME adopters were defined as businesses that had used fintech services in the past six months for banking and payments, financing and insurance. A look at SME fintech adoption across five countries showed China leading at 61%, the US at 23%, the UK at 18%, South Africa on 16% and Mexico at 11%.

SME uptake of fintech services was “poised to rise”, the financial services provider added. The World Economic Forum is on the same page. In a report, it said fintech was set to bridge a $2-trillion funding gap for millions of small businesses worldwide. Fintech disruptors were filling the gap left by banks and investors. The World Bank’s director of finance and markets practice at the World Bank noted SMEs were responsible for 50% of the world’s GDP and if “fintech can provide levers to help them succeed, we should create the right environment to make this happen”.

This positive outlook certainly sets the scene for growth in South Africa, where ensuring a thriving SME sector is vital for the economic and social health of the country, especially with job creation being a top priority for the government. The fact that the number of online business lenders in South Africa has grown substantially in the last four years, is indicative of the need for this kind of financing.

Yet, doing business is especially hard for small and medium businesses in South Africa, and the government needs to move fast, as well as being creative and innovative in producing a more fertile environment for growth. South African SMEs are daily confronted with the complexities of doing business in an emerging market.

Red tape is exceedingly onerous. Businesses can take months to be registered when the process should take days. Tax breaks are essential for SMEs, as are incentives for opening businesses.

Still, for all the problems, there are positive indications out there. Online business lender Pollen Finance has loaned R1-billion to SMEs in just four years, reached via loans ranging between R50,000 and R1.5-million, and delivered in three days. But it has hardly scratched the surface when it comes to the funding requirements of the sector. This shows South African business owners are out there investing in what they do.

They are in too many cases under-served by traditional banks often mired in ungainly and slow legacy systems. SMEs need to be agile and responsive to opportunities and require fast processes and approvals to make the most of them. That’s where the online business lenders step in, supported by ongoing advances in technology and platforms built with the specific characteristics of SMEs in mind.

Online lenders are able to use data to determine if the business owner is able to pay back the loan, creating a snapshot of their creditworthiness and risk profile in a short period of time. Pollen’s debt default ratio, for example, is a mere 3.5%, which is a testament to the effectiveness of the lending criteria and online application and vetting platform. Certainly, indiscriminate lending is not a feature of the lending model.

It is essential to build awareness within the SME sector, underlining the message that online business lending can help them grow. The unsecured lending aspect of the model speeds up the application process and demonstrates that fintech lenders are willing to take huge risks, another major differentiator from banks, and one that works for them.

For all the positive developments, there are still a number of questions that need answers in order for both the SME funding sector and the SMEs themselves to flourish. Recent research undertaken by the South African SME fund, using 2017 data sets, estimates the SMME credit gap in South Africa is between R86-billion and R346 billion.

The Access to Finance Report underlines what alternative lenders know already: that the SME sector in South Africa has a “compelling, largely untapped market opportunity for innovative funders who are able to develop new lending models and risk assessment tools tailored to address the challenges of this complex and burgeoning market”.

And it asks a vitally important question that urgently needs an answer: If all businesses eligible for funding were able to access the finance they are seeking, how much would they contribute to job growth and GDP growth? BM

Louis du Plessis is the CEO of Pollen Finance. He launched the online lending company in 2015, financed by Anglo African, the company run by his brother, JP du Plessis. South Africa’s first online business lender specialising in small to medium enterprises is forging ahead in the financial technology space, hitting the R1-billion mark in just four years.