The services economy in the UK powers some 80% of the British GDP and around 10% is from financial services alone. Of the services exports, 29% are from financial services. These are multibillion pound markets and employ a huge number of 'knowledge workers' who can work with these abstract financial concepts.
Yet, the SME financial services market is not particularly efficient; for customers it is still fairly opaque, demand isn't matched to supply so working with an impartial third party to find the most suitable and best value provider often pays dividends.
In 1971, Peter Diamond, an American economist, showed that even small 'search costs,' such as the time it takes to walk down the street to see what is on offer at a rival shop, can seriously undermine competition on price. Hence, intermediation has served a long purpose of getting the best price for the customer.
So, what does this look like in the digital era?
Intermediation in it's simplest (non-consultative) form is really aggregation of supply. This is nothing new since, according to Mintel, 60% of Brits are 'most likely' to use a price comparison site when researching or buying a financial product.
In the digital era both comparison websites and platforms are ubiquitous. In fact many of the largest service companies in the world, such as Uber, Airbnb and - arguably - Netflix and Spotify are just thin layers of supply aggregation. The bulk of the value the customer is paying for is not something they control and they leave the cost of production (the expensive bit) to the individuals within the network.
Turning on the marketing firehose of leads can feel like good progress, however the cost to lenders of qualifying and sorting leads efficiently can be a challenge for those with a single-product or specific lending requirements.
So, where can digital intermediaries in SME finance add value? For starters:
1. Match businesses to your criteria and you pay for their ability to do success
2. Bear the cost of dealing with time-wasting leads who are scoping the market (tyre kickers)
3. Triage businesses to only those lenders willing to consider their application
On a success basis and a cost of sale of around 20% of fees, this can make an attractive proposition to lenders and particularly new lenders in the market who haven't yet developed channels or a brand.
This most basic form of intermediary that matches to your criteria and is paid on success, offers a very lean, accessible model for lenders. Enter the era of DIGITAL INTERMEDIARY.
Google aggregates products and homogeneous services amazingly well. Buying a flight, a pair of shoes or other real-world products with fixed attributes but it doesn't work so well for purchasing services.
If we look at this from the businesses' perspective, how much can you convey about your lending criteria in the two lines of text? The answer is VERY LITTLE - and - NOT ENOUGH.
Businesses typically only leave just 7 days to find finance and most stop after their first application to a finance provider; based on being turned down, difficult process or other factors. This feels broken to us - there is much work for intermediaries to do in this space.
With the increased number of SME lenders in the UK, the choice for a traditional broker and introducer network has increased hugely.
There are now over 200 alternative and independent lenders, offering a variety of finance produts to SMEs in the UK. Many are FCA authorised and regulated; however, over the coming months we're sure to see the FCA driving harder to enforce regulation.
Consequently, intermediaries in the space are now beginning to look much more lik aggregators of the modern world. So why now and what has changed? With the emergence of digitally mature SME lenders (often called alternative lenders) the process of getting an offer in SME finance is much faster. Average response rates at Funding Circle is just 2 hours and 3 hours for MarketInvoice.
Products, such as our own, are starting to change this. These new, intuitive online platforms demonstrate a strong emerging trend (and market need) for more digital intermediaries or aggregators.
The role of these aggregators is to make it much easier for businesses find, compare and select lenders. In my next article, I'll look at the implications of SME lenders and opportunities alongside these new intermediaries.