The recent news that Tide is to acquire Funding Options got me thinking. 🤔
Why is that market places have struggled to dominate in B2B Finance?
Surely, as a concept, "MoneySupermarket for business finance" should fly. The market for business finance has never been so varied and SME's relationships with their banks have become ever more distant.
What could possibly stand in their way?
Well, a fair bit it seems.
Firstly, there is the simple question of awareness.
Do enough small businesses know that these marketplaces exist? In fairness, Funding Options has done an excellent job with its search marketing strategies, and features prominently in search results for a great many products.
But, as MoneySuperMarket and others will attest, it takes investors with nerves of steel and pockets as deep as oceans to build and maintain the awareness that a mass-market provider needs.
Then there is delivery.
The theory of "go online, find a product, fill in the application, get a decision, drawdown the funds" is much more nuanced in practice, as any traditional broker will tell you.
“Fintech’s want scale, low touch and standardisation. Business finance, especially the quirkier end of it, requires a bespoke, hands on approach in most instances.”
Deals need structuring, business cases need presenting and terms need negotiating. A marketplace might be part of an initial search process, but it is easy to see how a small business owner could become overwhelmed midstream and either abandon the process or resort to something more traditional.
The other side of the delivery coin for a broker business is, of course, delivering for the lenders.
Lenders are particular. They don’t want to be on the receiving end of introductions they can’t write or left holding the baby if a deal goes wrong through default or fraud. Get it wrong too many times and lenders quickly turn away. This diminishes the options that can be offered to the customer.
And finally, the small issue of profitability.
Marketing is expensive (there, I said it) and so too are the people and infrastructure needed to support delivery. The business model needs to generate revenues in excess of these costs - or at least have the potential to generate the revenues in the future.
A small commission on a deal requires a significant amount of deal volume. That is hard enough for a lender that is keeping all the margin, let alone for an introducer that is only "clipping the ticket".
Added to this, only a small percentage of the deals originated generate revenue. Applications are declined and borrowers change their minds - all creating cost without income.
So, we quickly go from a brilliantly simple idea in concept, to one that is high in overhead and low in margin - not your typical formula for success.
Can the new owners make it work?
The rationale for the deal has a familiar ring to it: "We know that getting credit is even more important to our members in these challenging times: not just in terms of the rising cost of doing business, but also when High Street banks are typically slower to offer smaller businesses loans” says Oliver Prill, CEO of Tide.
But this hasn't just happened. We’ve been hearing it since 2008.
Tide will bring to Funding Options access to a customer base approaching half a million, which should, in theory, lower acquisition costs. This will only work in practice if Tide customers are of the right credit quality and have an appetite to borrow.
Economies of scale might be achievable across the combined marketing and infrastructure budgets allowing costs to be cut or a bigger assault to be made on the market.
Elsewhere, the Funding Options technology could be the draw, new products or new markets could be in the planning. There are no hints to either in the initial announcement, although we do know Tide plans to launch in India soon.
Time (and the Tide) will tell. One thing is for certain, other marketplaces will be watching with interest.
by Neil Edwards, 4 minute read
by Neil Edwards, 3 minute read