The dust may be slowly settling on the Greensill scandal itself, but its ramifications are rumbling on for the alternative finance sector.
Post launch, Greensill was feted in the community, receiving large investments as it grew and racking up numerous plaudits for transforming how business financing can evolve to better suit the payments exchange between small businesses and larger ones with lengthy contractual terms.
When the house of cards collapsed, even S&P reported on a potential loss in confidence, industry-wide, when it comes to supply chain finance options. But the legacy will be its controversial failure. With investigations still ongoing, and part one of the Boardman Review into the scandal published today, there is a risk confidence in other alternative finance options will plummet.
When it comes to invoice financing, which Greensill took further than most by providing finance on future, to-be-issued invoices, it’s not the technique itself which led to the company’s collapse. It was the higher, suspect types of lending risks that the business took on. Yet, the size of the scandal has made people scrutinise the broader and specifically invoice financing space – an area which is ripe for reinvention and one set to see tremendous growth.
Looking at the market, alternative finance in the UK is in a massive growth phase. The government has called fintech a “growth engine” for the country, and alternative business banking and lending providers make up 21 per cent of fintech, according to Deloitte. Pre-pandemic, invoice financing was shaking off its long-held poor reputation, and originations had grown by two-thirds. Even as growth slowed during the coronavirus crisis, it’s more likely the associations with Greensill will hamper further expansion through a lack of understanding about the variety of approaches.
Alternative finance, does, however, deserve to be given space to grow and step out of the Greensill shadow. Doing so will take a commitment to ethics and transparency from providers. Invoice financing in particular carries a perception of unfavourable rates back to businesses and lining banks’ pockets through high fees at the expense of the little guy.
This is changing, driven by the emergence of new operators who are not wedded to the banks as the investors in this process. The fact of their emergence is a sign that long term shifts are at work and the foundations are shifting.
Economies are becoming asset light, as many businesses are set up online, with lower initial costs, but with a corresponding requirement for higher working capital.Traditional players are pulling back and struggling to service SMES because of the ever-more stringent banking regulations requiring them to post additional collateral. This is a tall order when they have few owned assets.
At the same time, technology is allowing new entrants to bring more efficient services to small businesses. Still, it will take dedication and education to win SMEs and their financial advisors over to trying a new way of unlocking cashflow. Emerging alternative finance entities have to be genuine and clear about the benefits to SMEs to win them over. In the US, where financial needs are less condensed with the big banks, things are set to develop much more rapidly than in Europe, where 80 per cent of finance needs remain in the hands of traditional providers.
Given the speed of technical innovation in the market, regulation around the alternative finance is still ill-defined. As such, it is vital that providers engage in clear articulation about the processes involved, this being central to overcoming any misconceptions about alternative financing options.
For these emerging alternatives to put clear water between themselves and Greensill, they have to be able to leverage their data properly, provide a transparent process, and demonstrate clearly the ins and outs of their proposition. After all, what many in this space offer is the application of technology to speed up processes which have been in place for decades. It’s the technology which has the danger of obscuring the benefits of these approaches – rather than any implication that these models have been in need of innovation themselves.