Hello Quartz readers!
Today we published a feature about Scotland, a place that has inadvertently become a laboratory for what happens when local economies go cashless. I hope you read the long version, but here’s a summary: So-called “cash deserts” put a lot of stress on village economies by pushing commerce to larger towns that still have banks and cash machines. Businesses are less likely to seek out financing when there isn’t a bank branch nearby, and small entrepreneurs in the UK say they’re less likely to set up in a place that doesn’t have a bank.
Scotland is at the leading edge of this phenomenon, but it’s happening just about everywhere. In the EU, more than 50,000 bank branches have closed since 2008, a decline of more than 20%, according to the European Banking Federation. Closures are accelerating in the US, too, with nearly 2,000 shuttering last year. Customers are rapidly switching to mobile apps to do their banking, while banks themselves come under pressure from shareholders to cut costs, and from digital upstarts without branch networks to maintain.
Some of this is natural, as banks adjust to changes in customer behavior. Some of it’s not: Cash handling is more expensive for banks, which can profit from digital transactions. There are signs that financial firms are closing branches faster than would happen organically, and faster than many towns and villages are ready for.
The demise of local bank branches can be bad news for small businesses. They’ve already been suffering since the financial crisis in 2008 as banks shift resources towards bigger, more profitable customers. A new crop of fintechs, meanwhile, says online lending is a solution to this problem. Square Capital, led by Goldman Sachs and Yahoo alum Jacqueline Reses, lent out more than $500 million in the first quarter, a 50% increase from a year ago. PayPal, another San Francisco-based company, says it is now providing $1 billion of credit to small business each quarter, more than half of which goes to US enterprises. (There were more than $600 billion of small business loans outstanding in 2016.)
Darrell Esch, head of global credit at PayPal, says the company’s lending is much more than just a drop in the bucket, but agreed that there is far more demand than supply for small businesses financing. Square’s Reses says a lot of small businesses lending in the US comes through friends and family, and by maxing out credit cards. Entrepreneurs often have to damage their credit profile to get a business off the ground.
Esch says automation is the future for loans smaller than $100,000; PayPal uses transaction data to make credit decisions instantly, and the funds are transferred almost immediately. There is no way the human loan officer in a bank branch will be able to compete with algorithms when it comes to financing on this scale.
But our reporting shows that not everyone is ready for this future. Mick McAteer, a former board member of the UK’s Financial Conduct Authority, said “fintech has been one of the most overhyped things I can remember, and I’ve been involved in this for a long, long time.” Plenty of people want to have a face-to-face meeting when they make a decision involving money. Some don’t realize online financing is an option, while others don’t trust or feel comfortable with digital transactions.
Whatever the case, the rise in digital finance is undeniable. Tech upstarts say their credit algorithms are less biased than human loan officers, and take into account more data than traditional credit scores, meaning more businesses are likely to get financing, boosting financial inclusion. They’re getting the word out so entrepreneurs know that digital options are available: In the UK, Square has been meeting with small business and local politicians in villages.
“We understand their projected risk dynamics better than almost anyone, including sometimes the entrepreneurs themselves,” Reses said. “We will prove that algorithmic lending is more successful than relationship lending.”
This week’s top stories
1️⃣ Payment tech is in an M&A boomlet. The latest deal is Global Payments, which is buying Total System for $21.5 billion in stock. The sector is consolidating rapidly as fintechs like Stripe and Adyen gain market share.
2️⃣ SoFi closed a $500 million fundraising round, led by Qatar Investment Authority. The big news, however, is that its $4.3 billion valuation was flat (or even a bit lower) versus two years ago.
3️⃣ One in 10 European retail banks will disappear in the next five years. Banks that provide digital-only services have gained 15 million customers, while traditional banks have lost 2 million clients.
4️⃣ Mega asset managers like BlackRock and Vanguard are investing in tech they can sell to investment advisors. However, the industry and potential customers have long been wary of conflicts of interest.
5️⃣ Germany’s central bank found that distributed ledger tech is slower and more costly than traditional financial tech. It’s worth noting that blockchain’s strength is redundancy, which could be worth the extra friction for some purposes.
Heard on headphones
“They’ve been shutting away clients that have less money because they’re less profitable and it’s just not worth it since the crisis,” Anna Irrera, fintech correspondent and financial companies team leader at Reuters, said on the 11:FS Fintech Insider podcast about the banking sector. “There’s all these practices that are quite insane and quite counter intuitive, and it’s not like anyone is hiding it.”
The future of finance at Quartz
Plaid arrives in the UK. The San Francisco-based company says its software can give British companies instant access to 70% of personal current accounts in the country, a potential boost for open banking.
Money costs more when you don’t have much of it. If you are poor in the UK, no matter where you live in the country, the chances are higher that an ATM in your area will charge a fee.
Kin is crowdfunding its legal defense. The messaging platform raised almost $100 million through a crypto token sale in 2017, and wants people to give it more money to go up against the SEC in court. It says the legal proceedings will provide regulatory clarity about sales of digital assets.
Always be closing
- Robinhood is nearing the close of a funding round that would value the company at as much as $8 billion, according to The Information. The stock-trading app is reportedly looking to expand into banking products and the UK.
- Brex is raising investment and could double its valuation, to $2 billion. The company provides credit cards to tech companies and startups.
- A fintech joint venture between China CITIC Bank and Baidu is looking to raise as much as 7 billion yuan ($1 billion) in private funding, Bloomberg reports.
- Lightning round: ClauseMatch raised $2.5 million in a venture debt funding round from Silicon Valley Bank. London-based Yapily secured £4.3 million ($5.4 million) from investors including TransferWise co-founders Taavet Hinrikus and Ott Kaukver. Barclays led a $5.5 million Series A investment into Crowdz, a blockchain invoice exchange. Swedbank was part of a £4 million investment into Kaching Retail, a mobile point-of-sale startup.