• Sanjeev Kumar & Afshan Dadan

The FinTech Unbundling of SME Finance

When you read the word SME, you may be used to associating it with a traditionally analogue, offline business. Where do early-stage startups, e-commerce merchants or online creators fit in that picture? Aren't they also SMEs? The simple answer is yes, but the nuanced one would be that it's an apples-to-oranges comparison. 🤷🏻‍♀️


With the advent of the internet economy, the definition of small and medium enterprises (SMEs) has evolved to become a dynamic one. Out-of-the-box business models and organisation structures all now fit into the expanding definition. It's only natural that the financial services industry has developed in a similar fashion.


SMEs are a BIG market opportunity. We won't bore you with the numbers you've already read a thousand times – 90% of businesses and 50% of employment worldwide; you know the drill. What we instead want you to pay close attention to is just how extensive the SME finance opportunity is and how FinTech is writing a new chapter in the story.


(Having said that, we at WhiteSight believe in the recognition of new players in the space and are always on the lookout for FinTech trailblazers. If you're an SME FinTech, reach out to us at hello@whitesight.net, or comment below with your name and website, and we'll be sure to take note!)


The Shifting Narrative

Like the evolution of SMEs, solutions built for businesses have evolved from being one-size-fits-all to niche industry segments or business model-specific ones. You have –

  • banking for e-commerce merchants (Juni), freelancers and self-employed (Found);

  • financing for SaaS startups (Pipe), YouTube creators (Spotter), and exporters (Marco);

  • insurance for technology companies (Superscript), rideshare insurance for gig workers (Buckle);

  • tax management for self-employed (Hnry);

  • payroll for international teams (Deel); self-employed (Catch)

  • bookkeeping for microbusinesses (Treinta, Khatabook); and the list goes on.


This shifting narrative defines how dynamic the SMEs of the twenty-first century are. The solutions being built for them need to be equally dynamic. As per the World Payments Report 2022, 89% of SMEs are reconsidering relationships with their primary banks across various product categories. When hundreds of companies today are building to solve hundreds of different (SME) problems, there is bound to be more resultant innovation than one or few banks solving for the same concerns and diverse population. FinTechs have managed to take the upper hand from banks in this aspect. However, banks are now realising the importance of innovation for SME solutions and are actively implementing their build/buy/partner strategies.


Unbundling SME Finance

Exhibit (1) presents the SME FinTech landscape across two primary categories – financial services and value-added services. The first has everything to do with the core financial needs of a business, from payments to banking, financing and insurance. The latter consists of operational areas such as accounting, taxation, human resources management (HRM) and e-commerce operations that are serviced by specialist or FinTech providers.


An indirectly related but vital segment is that of the tech infrastructure providers, which offer solutions that enable SME finance propositions in both of the above categories. This also includes other FinTech infrastructure players (not highlighted below) that may be focused on segments broader than just SME finance – think the Plaids and Tinks of the FinTech world.

Layer 1: Financial Services

Of the core financial services, almost 97% of global B2B FinTech providers are populated in the payments and financing segments. It's a no-brainer given that these are two of the most lucrative SME finance segments owing to interchange and interest revenue, respectively. Startups and scaleups in the business payments space have raised a total of $6.5B in 2022 YTD, while the business lending or financing segment has fundraised $4.2B this year. Several specialised business models have emerged – such as revenue-based financing, B2B buy now pay later (BNPL), merchant cash advance, and employer-led earned-wage access in business financing; cross-border payments, point-of-sale payments, and more in B2B payments.


Companies are also looking to develop primary relations through business banking and complementary services in and around it, essentially from all the other segments. The likes of Qonto, Juni, Novo, Open, and Found have raised some serious growth capital this year. Business insurance for small businesses is picking up steam across categories like property, mobility, cybersecurity, employee health insurance and more. On the other hand, business expense management using prepaid or credit cards, for founders, executives and employees, has gained significant traction across various regions over the past two years. In 2022 so far, a total of $1.1B has been raised across 19 rounds.


Layer 2: Value-added Services

While not consisting of all value-added services that a business needs, the ones highlighted in exhibit (1) overlap with FinTech offerings in varying capacities. Accounting & bookkeeping are integral to any business. Linking this function with financial services such as banking or financing can streamline business operations – and that is exactly what these solutions providers are pitching for. Business tax management is also an area that is witnessing a fair bit of FinTech disruption supported by open banking connectivity.


On the human resources (HR) front, functions like payroll, employee benefits, and reimbursements are closely linked to business finances. FinTech use cases like earned-wage access, employee insurance, and spend management tools are actively being embedded in HR management solutions (HRMS).


Given the e-commerce boom of recent years, the burgeoning segment of e-commerce enablers across all functions has seen a sizeable boost. Payments and financing form two key functionalities of this segment, with BNPL providers like Klarna, Afterpay, Zilch, Tabby, Tamara and more offering e-commerce merchants effective sales-enhancing mechanisms. Platforms like Shopify, WooCommerce, and BigCommerce are also enabling various payment and financing solutions for their SME customers.


BTS: Not the K-pop band, but the Tech Infrastructure behind the scenes

The unsung heroes of the financial industry, i.e. the technology infrastructure providers, are key orchestrators in any financial services application. Specialist tech infrastructure for SME finance is being spearheaded by companies like Codat, Bankifi, Rutter, BANKINGSTACK, Railz, and more. Technology infrastructure being built using payroll, insurance, and credit data is setting the building blocks for better business solutions. This story in FinTech infrastructure has only begun and will make a big difference as it matures further, providing more opportunities for those building for underserved businesses.


The SME Finance Opportunity

SMEs account for 50% of global GDP, which is approximately equal to $48T (add 12 zeroes), considering the world GDP in 2021. Even a tiny proportion of that GDP considered as market size, say 1%, which equals $480B, is a *huge* market potential for SME finance. Embedded finance for SMEs in itself presents a $110B revenue opportunity, as per BCG analysis.

In the FinTech world, companies in the business finance space have raised a total of about $130B in the last decade and birthed several unicorns in the process. Payments and financing, the two highest funded segments, have collectively raised about 73% of the total and comprise 32 unicorn+ valuation companies. However, the segments of Banking, Expense Management, and E-commerce Enablers are emerging as fast-growing value pools for builders and investors. These segments have raised about 62% of their total historical funding only in the past two years (i.e. 2021 and 2022 YTD). This speaks volumes about the future potential and opportunities.


Running Up That Hill

SME FinTech is far from its maturity, and that is the most exciting thing about the market segment. The pain points to solve, the opportunities they present, and the value to be created is immense. Technology-driven solutions will enable both scalability and efficiency. The only question that remains is by whom? While FinTech innovation will be crucial, a mass effort from incumbents and challengers alike will be what makes reaching up that hill a possibility.