It may seem to be that the status quo surrounding traditional finance entities is that they are slow to new trends and often require the services of burgeoning fintechs to catch up to speed.
However, in the loans and lending department, Lasse Mäkelä – Chief Strategy & Investor Relations Officer at Multitude – reveals to Payment Expert how this status quo has remained relatively the same.
Mäkelä speaks on how alternative digital lending solutions have adapted to SME needs, as well as on the state of M&A activity over the last several years and what are the key trends investors are looking for in 2024.
Payment Expert: Firstly Lasse, what are the key differences between traditional banking and alternative bank loans when it comes to providing them for SMEs?
Lasse Mäkelä: The key difference is pure availability. The reason alternative lenders have had such success with SMEs is because they are consistently willing to provide these businesses with the capital they need to grow.
More traditional banking institutions tend not to want to take on the risk an SME presents and have far stricter eligibility criteria and credit requirements. Growing SMEs are often rejected because they naturally don’t have a surplus of historical performance and cash flow indicators. Many traditional loans also require collateral, which can be a barrier to early-stage SMEs in particular.
But beyond actually making these loans available to SMEs, alternative lenders have also been incredibly adept at meeting these SMEs where they are, which means providing loans within a matter of hours, accepting more diverse criteria as collateral, and providing more personalised attention.
There’s a sense of mutual partnership and benefit you see within alternative lending companies and SMEs that you’re not necessarily going to get with these enormous corporate banks, and that’s very valuable.
PE: Amongst other European competitors, what is Multitude doing differently in providing digital loans to small businesses?
LM: Within Multitude, we have a separate company, CapitalBox, which deals with SMEs financing. Yes, there’s a lot of competition in this market. One key factor for us as a group is the access to deposit funding.
Many non-bank lenders must operate with higher levels of cost of debt. That’s why CapitalBox is able to offer a variety of products for SMEs and sometimes at lower rates than our competitors. Besides, unlike others that may be more tech-enabled, we differentiate ourselves by being a technology-first company.
We provide a range of online solutions, allowing us to offer significant loan amounts to SMEs. For instance, we start with products like Buy Now, Pay Later currently available in Finland, ranging from €5,000 up to €3m with our factoring and collateral lending products. This diversity and scale of offerings set us apart in the market.
We’re also actively working on the launching of daily banking services for SMEs. This is just the beginning of our efforts to utilise our tools and capabilities to offer comprehensive banking solutions. What we have in our group needs to be slightly adjusted for SME needs, and we aim to build something that is truly needed by the customers.
It’s not only about offering basic accounts and payments but also adding convenience features like reporting, expense management, and savings products that may be of interest to SMEs.
PE: The industry is seeing a rise in Electronic Money Institutions (EMIs) lately. Do you believe these entities have the potential to bridge the divide between fintechs and traditional banks?
LM: The rise of EMIs is promising as they are pushing the entire finance space forward and expanding the scope of what banks and neobanks can offer.
It’s heartening to see traditional banks embrace this, and it’s heartening to see regulators monitor it so closely so that it can be implemented within existing institutions quickly. The future of every sector of finance is not just digital but hyper-responsive and AI-assisted, and EMIs are helping get us there.
It is interesting to note that we see growth in this sector. Multitude’s new business unit, Wholesale Banking, has selected EMIs as one of its customer segments in order to provide them with Secured Debt funding opportunities, as well as infrastructure for payment services.
PE: Moreover, what are some of the modern day needs Multitude has learned from working with its partners and merchants when it comes to finance support from both traditional banks and fintechs, and how far do these needs differ?
LM: We see the service gap widening between SMEs needs and traditional banks offerings, which has created an opportunity for alt finance companies and specifically CapitalBox here in Europe.
Not all major banks are keen to open accounts and lend to SMEs. The process is time-consuming for banks, and the level of enthusiasm varies significantly from country to country. For example, there’s a high demand in Denmark, where businesses frequently express their desire for services to be made available as soon as possible. In contrast, Sweden has a more saturated market with numerous players already offering such services digitally.
Nevertheless, even small customers attempt to open accounts with large banks, although not all banks have digitised their services. Consequently, there’s a strong desire for more options and simpler processes.
If obtaining an account requires presenting numerous physical documents, answering many questions, and visiting the bank multiple times, it becomes inconvenient. While most everyone desires a digital onboarding and digital experience, they also want the possibility to have human interactions. Talking to a robot for the entire process is not the best customer communication method.
PE: Have you observed any changes into how businesses are handling M&A activity in recent years? Has the current economic climate slowed this process down at all?
LM: It has been a difficult few years in the M&A arena, and businesses have obviously had to respond to that.
The pandemic torpedoed the space in 2020. 2021 provided a stunning recovery that continued into 2022, and then we saw serious decline again in 2023. 2024 thus far has seemed a bit like a year for steadying the ship in terms of market durability.
In fintech, we are still seeing quite high prices from sellers, which do not meet with the lower prices offered from buyers influenced by the increased cost of capital, otherwise, the current economic climate is just one factor influencing businesses to expand, but it’s been promising nonetheless.
We’re seeing a general decrease in unemployment across the US and the Eurozone and associated increase in consumer spending, which again increases the confidence in the markets. But there are other detrimental factors too, such as the unstable geopolitical climate, and those have taken a major toll in the last three or four years on the number of deals getting made.
PE: Lastly Lasse, and thank you for your time, what are going to be some of the key trends and themes to follow throughout 2024 that will impact both the digital lending and M&A space?
LM: ESG is already a major trend within the lending and M&A spaces, and I expect that to continue. It wasn’t so long ago that the idea of ESG being the rationale for a transaction or a crucial part of corporate valuation was basically unheard of. Now it’s increasing in importance.
Private equity is going to bounce back. That will also have a huge impact on lending and M&As. Simply put, more cash on the playing field means more and bigger loans. The future is wide open, and its emphasis is on sustainability, ESG, and AI integration.
