London Summit 2015 - Innovative Finance: Solving SMEs’ Capital Access Dilemma (I)

Market Context & Drivers

• A post-2008 banking retrenchment from small business lending created a capital gap for Small and Medium-sized Enterprises (SMEs).
• Regulatory environments in the US and UK shifted, with the UK FCA forming an "Innovation Hub" to support fintech development, while US regulation remains fragmented across state and federal levels.
• Traditional banks face high cost-to-serve ratios for small loans due to Basel regulations favoring secured property lending, creating an opening for alternative finance platforms.
• A cultural shift is occurring where individual investors are directly engaged by businesses, moving capital access beyond traditional bank and institutional channels.

Panelist Profiles & Business Models

• OnDeck (Rob Young): US-listed (NYSE) tech platform lending to SMEs in the US, Canada, and soon Australia; uses "OnDeck Score" and real-time data to assess creditworthiness faster than traditional banks.
• Funding Circle (Lucy Vernal): UK's largest SME marketplace connecting investors to borrowers; regulated by the FCA since April of the previous year; expanding US operations.
• E2E Exchange (Shalini Kempker): Non-profit and for-profit connector focusing on entrepreneurship, investor introductions, and executive mentorship for scale-ups.
• Seedrs (Tom Davies): UK-based equity crowdfunding platform with the lowest investment threshold (£10); operates across Europe with imminent US launch; designed the regulatory model for others to follow.

Key Innovations

• Technology & Speed: Platforms utilize mobile-first interfaces and data analytics to reduce loan approval times from weeks to minutes, solving the "hassle factor" for time-poor business owners.
• Regulatory Adaptation: Innovation involves lobbying for regulations to catch up with modern tech (e.g., UK's specific P2P rules) rather than operating in unregulated gray areas.
• Transparency: Platforms provide unprecedented data access, allowing investors to download loan books and analyze specific transaction performance, a capability absent in traditional banking.
• Democratization of Investment: Equity models have expanded access from the top 1% of wealth holders to the top 20%, allowing non-millionaires to invest in startups with as little as £10–£200.

Target Demographics & Use Cases

• Borrower Suitability: Best suited for SMEs (95% of business entities) that need speed over lowest cost; less ideal for large corporations with CFOs capable of navigating traditional bank processes.
• Sector Specifics: Equity crowdfunding works best for consumer-facing brands with loyal communities (e.g., wine makers, artisanal goods) rather than capital-intensive industrial sectors like mining.
• Lifecycle Fit: Companies often utilize different platforms at different stages (e.g., Seedrs for early equity, Funding Circle/OnDeck for later debt) as they mature and gain trading history.

Capital Sources & Investor Base

• Retail Dominance: Initial growth driven by retail investors (median investment ~£200), but shifting toward institutional capital as returns data matures.
• Institutional Entry: Traditional banks (e.g., Metro Bank) and Venture Capitalists are increasingly partnering with or funding capital on these platforms to diversify lending portfolios and increase deal flow.
• Diversification Needs: Platforms aim to blend retail and institutional capital (including pension funds) to scale lending volumes beyond what retail alone can support.

Regulatory Landscape & Challenges

• UK Model: Regarded as balanced and supportive; FCA and Treasury collaborated to create specific handbooks, though compliance costs remain high for small startups.
• US Model: Characterized as complex and unclear, with overlapping state and federal jurisdictions causing friction for digital-first lenders lacking physical presence.
• Global Warning: Panels cite China's lack of early regulation leading to market disasters, and European over-regulation stifling innovation, as cautionary tales for the US.
• Trust Imperative: Regulation is viewed as essential for consumer and investor trust; without it, the industry risks collapse due to "rogue player" failures.

Risks & Threats

• Reputational Contagion: A failure or fraud at a single major platform could disproportionately damage the entire sector's credibility.
• Economic Sensitivity: The industry thrives in low-interest-rate environments; rising rates or economic downturns could increase default risks.
• Regulatory Red Tape: Excessive bureaucracy could slow down business formation and application processes, negating the speed advantage of fintech.
• Hype Cycle: The sector faces risk of deflation if media hype outpaces actual financial returns, particularly in the equity space where exits take 5–10 years.

Future Outlook (5-Year Horizon)

• Normalization: "Alternative finance" will cease to be a distinct category, becoming a standard, integrated part of the financial ecosystem.
• Direct Financing: Savvy founders will increasingly self-source funding via mobile platforms, bypassing intermediaries while utilizing platform infrastructure for compliance.
• Cross-Border Expansion: Expect increased international lending and investment flows as platforms expand beyond national borders.
• Bancorporate Partnerships: Traditional banks will likely survive by partnering with fintechs to access underserved SME markets rather than attempting to replicate their tech internally.