The Future of SME Financing: Collaboration Instead of Competition?

In the business world, competition has often driven progress – it fosters innovation, improves products, and pushes competitors to excel. However, in the world of SME financing, a different dynamic might be crucial for success: collaboration instead of rivalry. Especially between traditional banks and fintechs, an exciting development i emerging, where both sides could benefit from one another. Although banks and fintechs take different approaches, they share a common goal: financing small and medium-sized enterprises (SMEs). However, the challenges they face are just as different as their strengths.

Banks: Stability and Trust, but with Limits

Banks have long established themselves as reliable partners for SMEs. They provide access to affordable capital and enjoy the trust that comes with their decades of market presence and stable business models. However, in an increasingly digital world, banks are hitting their limits: slow processes, complex requirements, and rigid lending guidelines make it difficult to ease access to capital for young and rapidly growing companies - especially when these companies expect to obtain financing anywhere, quickly, and fully digitally. Moreover, the acceptance rate for loan applications is decreasing: less than 50% of applications are approved by banks – and the trend is downward.

Fintechs: Agility and Technology, but Without Capital Strength

In contrast, fintechs have revolutionized the lending model. With modern technologies like artificial Intelligence and open banking, they can assess loan applications faster and more efficiently. They use real-time data from account information and transaction histories to make well-informed lending decisions in just a few seconds – mostly automated. However, fintechs face a significant disadvantage: access to affordable capital. Their funding options are more limited than those of banks, which hampers their competitiveness. Additionally, they often lack the trust and credibility that banks have built with SMEs.

The Solution: A Collaboration That Strengthens All Parties

The key to a sustainable future for SME financing lies in collaboration – not competition. Banks and fintechs bring valuable strengths to the table, which can complement each other:

• Banks provide the necessary capital, regulatory knowledge, and trust.
• Fintechs bring technological innovation, agility, and quick decision-making processes.

For SMEs, this means: fast, flexible, and easily accessible financing solutions that combine both security and efficiency.

What could this collaboration look like in practice?

A promising model for the future is Lending as a Service (LaaS). In this modular approach, the entire lending process is broken down into components, which are taken over by the respective specialists – banks and fintechs. This allows for seamless and efficient loan provision, where both parties can play to their strengths.

How could fintechs support banks in this modular model

• Acquisition: Fintechs handle customer outreach, reach hard-to-access target groups, and use data-driven marketing methods or, in the case of embedded lending, integrate into platforms that their customers use to target them directly.
• Onboarding: Through automated processes such as digital identity checks and regulatory verifications (KYC, AML), the onboarding process for SMEs is made quick and simple.
• Loan Decisions: Fintechs use innovative scoring models and real-time data to make fast, precise, cashflow-based credit decisions.
• Servicing: Fintechs handle the entire loan management process, from payment collection to dunning and debt collection, thereby easing the burden on banks.
• Lending SPV: Banks provide the capital and regulatory knowledge, while fintechs manage special purpose vehicles (SPVs) and deliver transparent reports. This makes the capital requirements for banks, which are particularly significant in loans to SMEs, more efficient (RWA efficiency).

LaaS: The Win-Win-Win Situation

The result of this collaboration is a clear division of labor: banks focus on their core competencies – providing capital – while fintechs leverage their technological expertise to optimize and automate processes. This combination creates a win-win-win situation:

• For banks: Increased efficiency and access to new target groups.
• For fintechs: Access to affordable capital and greater scalability.
• For SMEs: Fast, flexible, and hassle-free financing solutions.

Conclusion: A Collaborative Future for SME Financing

Lending as a Service has the potential to fundamentally transform SME financing. By combining the strengths of banks and fintechs, a financing model is created that is not only faster and more efficient but also better meets the needs of SMEs. When banks and fintechs combine their resources and capabilities, they can offer a financing solution that aligns with the future of the economy. The collaboration between traditional banks and fintechs could be the key to the next era of SME financing. However, it requires concrete steps and close cooperation to fully unlock this potential.

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Banks - must come to terms with outsourcing essential processes to fintechs. The legal framework for this already exists. However, internal processes need to be reconsidered, and processes for onboarding, monitoring, and auditing fintechs must be developed to ensure that outsourcing is fully compliant with regulations.

Fintechs - must accept that they will be the extended arm of the bank in key processes, and therefore, be subject to the same regulations in the respective areas as the bank. Processes, especially related to customer onboarding, credit decision-making, and payment processing in loan management, can be elevated to banking standards without losing efficiency.

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