The £3bn FinTech opportunity in the UK SME market

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It’s not just big banks and corporations fintech startups are trying to serve. Small and medium sized enterprises (SMEs) offer a massive market for fintech companies.

From business lenders to payroll platforms, VCs are placing more bets on tech companies bringing software solutions and automation to this huge market segment that is not served by traditional businesses technology providers.

Speaking to FinTech Global Nick Heller, CEO of automated financial assistant-provider Fractal Labs, highlighted the size of the potential market and said SMEs “make up 50% of the global GDP and 75% of the work force”.

Even as more startups and traditionally enterprise-focused companies enter the space he believes there’s still plenty of room for competition.

“Xero, as an accounting platform, now has somewhere close to 200,000 users in the UK, but that’s still only a fraction of the 2.5 million SMEs in the region,” said Heller.

Fractal Labs targets the 70% of SMEs worldwide that have no financially qualified person on their team. Its web and mobile app is designed to help small businesses interpret and understand their financial information as well as connect them to other stake holders such as banks and accountants.

“With the growth of tech and cloud computing more data than ever before is accessible, meaning even the smallest business can track many different things – but they don’t necessarily have the skills in-house to manage that data,” Heller said.

The result of this lack of expertise is more than £3bn lost in financial mismanagement in the UK, as well as a £59bn funding gap in the market where businesses’ failure to manage their financial data has caused them to miss opportunities to raise capital and grow, according to  the House of Commons Treasury Committee.  

The rise of affordable AI

The way that Fractal Labs and other SME software companies are aiming to plug this knowledge gap is with increasingly affordable artificial intelligence (AI) to “surface the right information at the right time to run the business,” said Heller.

He highlighted the growth of access to data as spurring the recent developments in AI, however, pointing out that, “it’s not necessarily the best algorithm that wins -there are a lot of open source algorithms these days- it’s who has access to the right data.”

AI is permeating all aspects of businesses well beyond finance and increasingly coming into direct contact with consumers. One of the first ways this is happening is in wealthtech and financial advice chat bots that users can communicate with through messaging interfaces using natural language.

The consumerisation of many business technologies is bringing them closer to those employees use in their personal life. Fractal Labs aims to do the same with its delivery of financial information offering a chat bot interface that allows users to find information using natural language as well as loop in third parties.

“We think it is the future in terms of how users are going to be interacting. Not only on mobile but across devices” said Heller. “We’re seeing the emergence of many IoT interfaces, like Google Home and Amazon’s Alexa, that will become more pervasive.

“These interfaces will become connections to data sets and our vision is to be prepared for the time when you’re using voice commands and natural language processing to get your financial information whether you’re in the office or on the go through these different devices.”

Getting into users’ hands

In the consumer space startups such as Plum, Cleo and Ernest (to name just three operating in London alone) are all competing to get their chatbot-based advisors into consumers’ hands. Gaining early traction is one of the major challenges for any startup and Fractal Labs aims to get businesses on board through partnerships with banks and the financial institutions working with SMEs.

This approach comes as more traditional institutions look to startups as a source of innovation and as a way to cater to underserved SME clients.

“They realise they’re not able to innovate fast enough,” said Heller. “I’ve seen a structural shift in how they work with smaller fintech businesses, and they have in some senses outsourced their R&D to the fintech community in more of a partnership model.

“As a result, we see a lot of inbound requests from the banks to meet with them to help them understand what we’re doing and how we can work together.”

The long-standing problem for startups working with incumbent institutions, however, remains.

“I would be lying if I told you they weren’t still slow,” said Heller. “They’re trying to be faster but decision making is still slow. They realise the repercussions could be grave if they do anything to upset the customer base or the regulator.”

Be prepared to be patient 

His advice for startups looking to banks for partnerships? “It takes patience” and not just from startups but investors too.

“It will be the patient businesses that address problems with the right solutions that will be successful,” said Heller. “That requires patient capital from investors, founders and businesses that are really in it for the longer term.

“We want businesses to see it as a value-added service over the long term not a quick fix. We’re not transactional like fintech business in loans. What we’re doing is a solution sell. It’s a longer road but I believe it will have the greatest impact over time.”

The artificial intelligence and machine learning powering solutions such as Fractal Labs’ means that over time it will become progressively more useful as it improves its understanding of what a business’ decision maker needs and when.

“In order to be an assistant, you can’t just throw information at the user you have to give contextually relevant information at the right time and this becomes better and better with more data,” said Heller.

Providing SMEs with a replacement for a human financial manager is the ultimate end goal for Fractal Labs, and while automation and AI continue to improve Heller believes replacing humans with bots is still some way off.

“Algorithms and constantly improving the signals we’re using will enable us over time to mimic more and more what a financial manger would do and bring it as close to the judgment as a human,” he said. “I say that with caution because we’re still some ways away but I think automation will bring us within this field.”

Copyright © 2017 FINTECH GLOBAL

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