The definition of a “law of nature” is “a regular occurring or apparently inevitable phenomenon observable in human society.” The sun rises in the east, sets in the west. Death and taxes are inevitable. In finance and business, capital needs to come before debt in the construction of a sustainable business balance sheet. Are we seeing a FinTech force that is trying to work against a law of nature? Is there a bait and switch tactic going on in the industry that is being masked by “digital experience” and technology?
Going back to basic finance and accounting, undercapitalization of a business is an age old problem. Businesses that are starting out just need "money" to keep the doors open. We used to see this all the time. How am I going to meet payroll? How am I going to buy inventory to meet a purchase order? How am I going to finance the piece of equipment I need to expand my business? All legitimate questions that are asked every day by businesses everywhere. A business would go to a bank for funds to answer those questions. A new business would go to the bank to present their business plans in hopes of obtaining startup capital.
What they really need is permanent risk capital, not debt. High performing banks know the difference and are not in the business of providing permanent risk capital.
FinTechs today are doing businesses a disservice by waving “debt money” in front of businesses needing permanent risk capital. The rates being charged are not debt/loan rates, they are risk capital rates of return. From the businesses perspective, it has all the negative features of debt, primarily the fact that it needs to pay the money back, with the negative feature of risk capital, high required rate. If the business would get permanent risk capital, they would be a much healthier and viable long term business.
How should banks play in this new game? Should they stick to their typical client base or chase the marginally bankable customers that are attracted to FinTechs today? Are FinTechs really the payday lenders for the business segment of the market? Most FinTechs are really just lenders of last resort, taking away business from credit card providers. How many times have you heard startup businesses being funded by the owner’s credit cards?
Banks should be looking for partners that can help them help their business clients guide their businesses to proper capital structure. This in turn will help the businesses be viable long term entities and ultimately long term bankable client.
Banks should also learn from FinTechs and take the positive elements from their entry into the financial services world. Refresh their online presence. Review their credit policy and approval process for efficiency opportunities. These reviews will not only improve the experience for internal clients, but external clients as well.