Should consumer lenders migrate to SMEs?
It seems pathetic to compare America’s westward migration of the 1800s to a well-funded fintech expanding its product line. But that’s exactly what I do.
150 years ago, traveling west to find greener pastures (and maybe even gold) was a route fraught with hopes, dreams, and extreme danger.
You could stay in the built-up towns of Eastern New York or Boston. While living in cramped and messy conditions, families could earn enough to support themselves. And so many remained.
Yet the promise and aura of the west, with its vast lands, fresh air and opportunity to start a new life, has forced large numbers of people to pack up their livelihoods and migrate via enormous wagon trains. Train tickets were too expensive for most.
Facing these groups to the west, however, were months plagued by disease, hunger, dehydration, exposure and of course the risk of being scalped alive and killed.
So it is today, even with an abundance of skim lattes and ping-pong tables at the ready, the management of a well-funded B2C lender must navigate difficult terrain if they are to expand their offering to consumers to SMEs.
If the physical consequences remain reduced, for a company like Zopa (on the eve of a potential IPO), the risk of investor scalping is an ever-present threat.
Recent News articles announced that the P2P consumer lender will seek to serve SMEs with a potential average transaction size of £100,000. This niche will place Zopa in new territory. Very far to the west.
I’m skeptical of claims that this move is a natural extension for Zopa. Overall, I find it interesting that B2C lenders aren’t focusing more on circling their wagons around financing the individual entrepreneur or micro-SMEs as early movers.
Even in an acquisition transaction, i.e. the purchase of an existing alternative lender for SMEs, this is an important supply gap to maintain. From a £500 loan for an employee still living at home, to providing a £100,000 risk price facility to a company and its directors.
If one is not careful, offering two products in such vast ranges can cause an identity friction point in hyper-growth organizations. Especially within the sales, product and marketing teams.
Consumer lending is all about speed, low contact, and user growth.
While SME loans (around £100,000) are indeed getting faster and more automated; it’s fundamentally more relational and focused on the price of risk (especially if you want your customers to come back).
I find micro SME and sole proprietorship financing (under £25,000) more closely aligned with a B2C offer for two reasons:
First, the regulations. In the UK, for example, loans to individual traders of less than £25,000 are classified as “consumer credit” and therefore must be regulated (unless the product is a special exclusion, e.g. advance merchant’s cash flow).
Second, and why the first point exists, when you lend to a sole proprietorship or a micro-SME, you are more or less trying to determine the strength of the individual behind the business. Rather than the company itself.
My purpose here is not to attempt to discredit Zopa’s plans to acquire or build an SME financing offering. Just to wonder how it’s done.
Many of those who took part in the gold rush over a century ago found their fortunes, and there is no doubt that Zopa’s rulers are full of smart individuals with good fighting odds. .
For me, a more natural migration is the westward opportunity for B2C lenders to move their intuitive lending experiences (and hard-fought regulation) into the vast and underserved space of micro-SMEs.
Why join the wagon train when you can afford to take the train.