|Christoph Rieche, co-founder and CEO of iwoca|
The flow of venture capital investment into fintech disruptors to the banking industry continues, as these new providers seek to boost funding to small and medium-size businesses that have been poorly served by traditional lenders.
Iwoca (it stands for instant working capital), one of the fastest growing SME lending platforms in Europe, carried out a $20 million Series B equity financing round led by Acton Capital Partners, the specialist German venture capital firm, and CommerzVentures, the corporate venture capital subsidiary of Commerzbank in July. Redline Capital and other existing investors also participated.
The funds raised will be leveraged up through iwoca’s own credit facilities, mainly with institutional investors into $150 million of lending capacity to support rapid expansion of iwoca’s UK operations and further enlarge its presence across Europe, notably in Germany, Spain and Poland.
“Our mission is to fund the millions of small businesses across Europe that have annual turnovers in the hundreds of thousands of euros and typically less than 10 employees,” Christoph Rieche, co-founder and CEO of iwoca, tells Euromoney. “These are online and offline retailers, restaurants, cleaners, small professional service firms: not the medium-size businesses with turnovers of €2 million and up which are the typical focus of the discussion around boosting lending to SMEs.”
Recent data from the British Bankers’ Association (BBA) and the ECB point to an uptick in the first months of 2015 in the number of applications and approvals for SME loans. But that does not mean that venture capital money is flooding into new lenders to this sector just as the opportunity disappears. The BBA also noted a 10% rise in the first quarter of 2015 over the same period in 2014 in cash balances at SMEs, as companies continue to conserve cash and pay down debt.
Rieche says his company is targeting a particular business segment that banks have never catered well to and where founders and owners have had to rely on consumer credit – personal loans and credit cards – that is not particularly suitable to businesses.
“The key issue for lenders is understanding the idiosyncratic risks of these customers because the smaller you go in commercial lending the higher the risks,” Rieche says. “And they are just as hard to understand as medium size businesses, each having their own balance sheet, cash flow, P&L, governance, ownership and business strategy issues.”
Iwoca believes there are 20 million or so such businesses around Europe and that it has developed a breakthrough model for analyzing these customers’ cash flows, drawing on the vast and growing store of financial data held, for example, by online platforms such as Amazon and eBay on which many merchants operate, as well as on Alibaba with which it has partnered.
It can thus measure seasonal variations in the cash flows of businesses looking past the outgoings on large stock purchases through to the drip feed of revenue from multiple small customer orders. It also considers customer feed back scores from such platforms.
Rieche says: “We believe that if we can put out money at scale to this segment, which no one else really has, then these customers will immediately put that money back to work in the real economy. So there is potential here to contribute to supply-side economic growth with multiplier effects.”
He adds: “Banks have traditionally wanted to extend three to five-year term loans to medium-size businesses, when what our customers typically need are six to 12-month revolving credit facilities and overdrafts that don’t produce enough revenue to compensate banks’ overheads to analyze and process them.”
Rieche says it take just hours for iwoca to assess, approve and fund credit facilities for small businesses of up to $150,000. That compares to the weeks if not months of form filling and checking required by banks. Indeed, by making its process easy to use for customers, iwoca hopes they will increasingly permission electronic insight into their own traditional bank accounts.
|SME financing: special focus|
Rieche does not rail against the banks, as many Fintech types used to do. He joins the growing ranks of those that want to work with them. “I could see us working with banks, perhaps providing our credit scoring processes so that banks can service and underwrite credit to this client segment whether that be in their own name or in ours," says Rieche.
"Working with a specialist like ourselves could be a good way for banks to make much better use of the millions of relationships they already have with small businesses. And certainly banks are much more interested in Fintech now than they were four years ago when we first started up.”
Patrick Meisberger, managing director at CommerzVentures, says: “Digital disruption is transforming the banking landscape. We respond to these changes by investing in players who offer visionary and game-changing solutions.
“Iwoca’s cutting-edge technology provides a scalable way to understand and lend to small businesses, and is therefore a very attractive business model. With its impressive track record, we are convinced the company is set to show extraordinary growth.”
In a July report on disruptive innovations, analysts at Citi predicted a formidable rise in what they call marketplace banking as fintech lenders now nibbling round the edges of bank’s commercial and consumer lending businesses take an ever-larger share. For now, they have well-under 1% of the market and leaders such as Lending Club and Prosper originated loans of $6 billion last year.
The Citi analysts wrote: “We forecast the addressable market for P2P players such as Lending Club and its peers is $254 billion (8% of consumer credit in the US). Lending Club has already evolved from just consumer credit and P2P lending into SME lending and now about 80% of lenders are institutional investors.”