Since March 2020, you’ve probably read countless articles
hyping the acceleration of e-commerce, the digitalization of financial
services, and other clichéd FinTech predictions. But now what? If indeed
COVID-19 kicked down doors for FinTech, where will the industry focus next, and
what problems remain to be solved?
To answer those questions, we joined forces. Coming from the
payment space and digital auto financing, respectively, we each can offer a
distinct perspective. We will consider three areas of FinTech that merit your
attention.
“Corona-Free” Payments, Now Widely Available, Need
Automation
In the 2010s, conventional wisdom said that digital payments
would supplant cash, cheques, and other paper relics—eventually. Paper remained
ingrained in accounts receivable (AR) and accounts payables (AP) processes,
small purchases, tipping, dinner-table bill splitting, etc. Then, thanks to the
pandemic, no one wanted to touch paper. Even though the danger was
overdramatized, people demanded “Corona-Free” (i.e., digital) payments. Now
that organizations have embraced NFC credit cards, digital wallets, and Faster
Payments, what is left to do?
In a word, automation. Small businesses have too much of
their monthly revenue tied up in accounts receivable (AR) and accounts payable
(AP) processes. Exactly how much is a topic of ongoing research at Ralph’s firm
BlueSnap. Preliminary results suggest that the cash flow problems are severe
enough to be a factor in business failures. Harvard University’s
tracktherecovery.org, a nonprofit data project, finds that 33.6% of U.S. small
businesses have closed since January 2020. How many of these cases could have
been prevented with better FinTech?
Companies that automatically email and text invoices and
auto-reconcile them on the backend will save time and perhaps alleviate their
cash flow crunch—maybe by enough to keep their doors open. Those that continue
to manually email, mail, and fax invoices, mail paper invoices, and fax
invoices do so at their own peril. Throughout 2021, automation of AR, AP, and
other accounting processes will be competitive in the FinTech field.
Where “Buy Now, Pay Later” Can Expand
Buy Now, Pay Later (BNPL) platforms are divvying up consumer
e-commerce. Whether you shop for a £1,000 electric scooter or £50 shoes,
chances are, the e-commerce site will invite you to pay in instalments through
a partner like Splitit, Affirm or Klarna. For many shoppers, this is rather
convenient. Why not spread out the payments over six months while enjoying a 0%
APR—something most credit card providers don’t allow.
Until recently, 25 or so BNPL players fought for the same
customers: B2C e-commerce sites. Unless they diversify, most will either fail
or get acquired at a bargain. Where to diversify is the question. BNPL
technology is not well-suited to complex markets.
For example, digital financing for auto purchases and
repairs (Richard’s focus at DigniFi) have been BNPL-proof because the platforms
are not equipped to assess the risks. Financing £2,000 in repairs on a 2013
Toyota Highlander is a lot different from extending £150 to buy an air fryer.
One may improve the individual’s ability to repay the loan; the other almost
certainly will not.
Unable to penetrate auto, home, and student loans, BNPL
platforms probably will funnel into generic B2B loans. From plumbers and
electricians to medical clinics and law firms to coffee shops and family-owned
stores, many small-to-midsize businesses need financing. Traditionally, they
would open a line of credit with a bank. But if the BNPL players offer a better
value proposition—immediate approval online, lower APRs, and flexible 0%
payment plans—businesses will at least try BNPL. A big FinTech of 2021 is, what
will banks and credit networks do in response?
FinTech Fight Between Online Car Marketplaces and Dealerships
Cazoo, an online marketplace for used cars in the UK, has
had a banner year. It joined the “unicorn” club of startups worth $1 billion
USD or more, even as the tally of global unicorns dropped by 38% in 2020. UK
dealerships embraced the shift to e-commerce as well. The automotive retail
platform GForces reported that UK car purchases made through its software
increased 1,228% in 2020 and were worth £500 million.
Demand for Corona-Free payments and the allure of easy
financing both fed this trend. Cazoo offers an online loan decision in minutes
and APRs as low as 8.9%. That sounds more pleasant than negotiating with the
dealership finance guy for three hours in a windowless office wearing masks,
doesn’t it? No wonder GForces is working to digitize financing and instant
approvals for its dealership partners.
If digital financing options at hybrid dealerships gain
parity with the online-only Cazoo, which will be more competitive? The US,
roughly a year ahead of the UK in this battle, offers some insight. The US
versions of Cazoo—Carvana and Vroom—initially startled physical dealerships,
which clung to their brick-and-mortar model, at least until COVID-19.
Now, dealerships realize that a physical presence is a
competitive edge. They, unlike online-only platforms, are members of their
communities. They sponsor youth sports teams, donate to local charities, and
build solid referral networks. Once digital financing tech evens the playing
field, Cazoo may find itself on defense rather than offence.
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