Mel Tsiaprazis, COO of Nivaura
The global financial services sector has over the past ten years or so been naturally transitioning to operational processes facilitated by digitisation, automation and artificial intelligence. We’ve seen this in the personal finance industry worldwide, with digital banks such as Starling Bank and Nubank and international payment services such as TransferWise, MyVoice and Khalti. These fintechs democratised personal finance, enabling a broader group of people access to financial services that were previously overlooked by traditional financial service institutions.
One segment of financial services, Capital Markets, remains the exclusive stronghold of established corporations and their service providers (such as investment banks and major law firms). Due to the high cost of capital acquisition, many small and medium sized businesses are excluded from this form of financial service, despite the fact that it could aid their corporate growth and fuel ideas.
Why is the democratisation of Capital Markets important?
Capital Markets have driven hyper growth and underpinned many major developments in products and services we use every day, from telephones and cars to oil and even children’s toys. Imagine the power of extending this capital to SMEs.
Capital Markets democratisation will enable the provision of capital to all organisations, Multinational enterprises, Small Medium Enterprises and New Fund Offers included. Access will drive company growth and fund great ideas that will ultimately improve our world.
To achieve this requires two fundamental changes. First, we must reduce the high cost of capital acquisition, which is driven primarily by inefficient workflows. This is recognised across the end-to-end value chain and infrastructure, in labour intensive processes, high operational costs, and risks and accessibility challenges associated with a lack of real-time data. Second, we need to tackle the lack of accurate credit assessments for SMEs, caused by the highly fragmented financial data on these companies.
History has shown that the human race doesn’t lack ideas. It is the lack of funding of good ideas that hinders growth.
Tackling the cost of capital acquisition for SMEs
SMEs typically seek funding of £15,000 to £1,000,000 which becomes costly (and at times counterintuitive) when to access a funding programme could cost£150,000+ in fees. So, do SMEs even need access to Capital Markets?
In the UK, 99.9% of all private sector businesses are SMEs. American Express shared in 2019 that over 30% of SMEs find it difficult to access the finance they need and are turning to new sources of finance. This was especially prevalent in 2020 during COVID-19, where accessing capital to survive and/or grow businesses was challenging to say the least. Many turned to alternative sources such as credit cards and crowdfunding. This is not just a challenge for the western world, but a global issue.
In Africa, according to an LSEG 2020 Report, 40% of SMEs say that accessing capital is the primary factor constraining their growth. This is particularly important, considering that employees of African SMEs make up more than 50% of the workforce. Likewise, in Asia, SMEs make up more than 96% of all businesses, providing two out of three private-sector jobs on the continent. They too have numerous challenges in accessing capital to drive growth.
Fintechs to the rescue
Democratisation of capital markets can be achieved by fintechs tackling the current constraints of old technology and manual processes which are slow, expensive and inefficient. Imagine the impact simplifying access to capital would have in fueling growth and enabling great ideas to finally be delivered on. The impact of COVID-19 only accelerated the need for both the capital markets to be digitised and for SMEs to gain access to capital safely, securely and efficiently.
Many SMEs are eager to use digital solutions that enable them access to more efficient, secure and lower cost liquidity in markets worldwide. The question is which fintechs are up to the challenge of financial inclusions next frontier.
Why now?
Democratisation of capital markets was being discussed as far back as the 1970s (and mostly likely even before that!), so why is it only being tackled now? Well, it took a pandemic to shake the capital markets behemoth and to bring this issue to the forefront!
As the pandemic has progressed over the course of the last year, we’ve seen an acceleration in the request for digitisation as well as automation. Capital market participants have shifted from wanting an improved value chain to demanding it. Remote workers demand greater user experience, access to cloud based technologies accessible from various mobile devices and a seamless mechanism to communicate not only within but between organisations, all while meeting regulatory requirements.
By addressing value chain inefficiencies, driving greater levels of frictionless cross-party engagement, automating documentation and related audit/compliance requirements will drive down costs. Increased competition that is agnostic to bank branding will encourage participants to look to new paths for growth. You need only look at the vast SME market internationally.
