Access to capital is a cornerstone for the survival and growth of small and medium-sized businesses (SMBs). Traditionally, these businesses relied on strong relationships with community banks and Community Development Financial Institutions (CDFIs). However,
as banks consolidate capital and smaller institutions disappear, the financing landscape is undergoing a significant shift.

Despite concerns about the diminishing role of banks in SMB financing, there’s a growing opportunity for these businesses to access financing in a new way, one which often fits them better and can serve a wider range of companies. Where traditional banks
have relied on credit scores and financial statements, this new wave of financing is powered by real-time data from payment systems—often industry-specific—giving it the power to minimize risks and increase financial access to many small businesses that would
otherwise be shut out.

The question is, will these fintech solutions replace banks for small businesses, or will they power the banks of the future?

The Vertical Revolution: Specialized ISVs and Financing

Two of the major catalysts for this are the increasing verticalization of software and the rapid growth of data.  Increasingly, small businesses are running more and more of their operations through verticalized software. Where they previously may have used
a generic billing and accounting tool, they now have payment processing software designed specifically for their industry, often packaged with many other tools to run their day-to-day operations.  Understandably, they spend far more time in this software than
in the former. 

As these platforms drill deeper and deeper into the daily operations of a business, they gather a massive amount of data about transactions, revenue, expenses, and the patterns these businesses go through. This data can serve not as a proxy for traditional
financial statements and credit checks but actually as a far more accurate and less biased view of the financial health of a small business. 

It’s this data that fintechs can now leverage to underwrite businesses more quickly and with fewer blind spots. And it’s within these vertical platforms where embedded finance solutions work best.

Data-Driven Financing: The Role of Fintech

In recent years—especially since the COVID-19 pandemic—the fit between small businesses and big banks has become a mismatch. With increasing regulation making it tough for small banks to compete, large banks have been trying to fit SMBs into their mold.
As more and more small businesses start and operate light—with very few collateral assets, thin credit files, and bare-bones teams—trying to fit into a system designed for larger companies has left many out in the cold.

Fintech offers an opportunity to underwrite these businesses based not on their past—and years of financial statements—but on their health and ability to service payments right now. The data tells the story even if a business doesn’t have a robust accounting
team to prepare financials. This brings us back to the question: will fintech replace banks for small businesses, or will it help banks grow into the future?

The future of SMB financing

Gone are the days when small business owners walked into their local bank branch with a deposit bag and were greeted on a first-name basis. They need a new way to access capital that fits where and how they do business. This is the strong suit of embedded
finance, powered by fintech, and one of the challenges traditional banks have struggled to overcome. But that doesn’t mean banks won’t benefit as well.

While I believe the future of SMB financing is embedded, most fintech solutions require a partner bank. The growth of embedded capital solutions isn’t about the extinction of banks for SMBs, but is actually a big opportunity for banks to diversify. Embedded
financing can allow partner banks to deploy capital and bring in deposits from a whole new segment of the market without the need for marketing and manual underwriting. In other words, they can focus on their strengths and allow their fintech partners to take
care of their weaknesses. This is exactly the kind of specialization that creates efficiencies and gives small businesses access to the best of both worlds.

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• Source: https://www.finextra.com/blogposting/25811/why-it-doesnt-matter-that-banks-are-disappearing-as-the-lenders-for-smbs?utm_medium=rssfinextra&utm_source=finextrablogs