Alternative Lending Innovation: A Lifeline for Consumers and Small Businesses in Europe During the Pandemic

Financial health innovation in Europe is having a moment: there are dozens of quickly growing fintech startups offering creative ways to help people and small business owners build a credit history and access safe and affordable loans.This is the first in a series that will explore what’s coming next in financial health innovation in the region.

When Yiannis Giokas graduated from business school in Athens in 2008, he secured a job with a major multinational corporation that had him moving around Eastern European countries every year. Despite having a solid credit history back in Greece, he could not open a bank account to manage his personal and business finances. Everytime, he had to start again from scratch, an issue that countless Europeans face when moving from one EU member state to another.

In 2018, when the EU rolled out the new PSD2 regulations and open data sharing, Giokas saw an opportunity to solve this problem. That same year he co-founded Finclude (originally called Verge.Capital), an API that allows Europeans to transfer their financial profile between EU countries, opening up opportunities for them to open bank accounts and access lending and credit products. 

Finclude is just one of dozens of tech-driven startups built in the past five years that are helping European families and small business owners build a credit history and access safe and affordable credit. Each of these startups has a unique and creative approach to offering services that traditional banks cannot.

Traditional financial institutions have struggled to serve vulnerable populations during the coronavirus pandemic. Large banks were not designed to help consumers with scattered financial histories and sporadic income. This leaves millions of people across Europe vulnerable, like refugees, who are 60% more likely than their hosts to work in industries highly impacted by the pandemic.

Traditional banks have also struggled to serve small business owners. Small and medium sized businesses account for more than two-thirds of the workforce in the EU, and more than half of the economic value of the Eurozone economy. But while the EU’s biggest corporations have been helped through generous government bailouts and access to liquid credit markets, smaller businesses have struggled. According to McKinsey, one in five small business owners across the EU is at risk of defaulting on outstanding loans and laying off its workforce. 

Financial health-oriented startups are filling the gap.

Perhaps the most well-known startup in the alternative spending space is Klarna, a Swedish fintech that offers a buy-now-pay-later (BNPL) service, allowing consumers to delay payment on needed products. It is now the most valuable startup in Europe, valued at $10.65B. By offering zero interest products (the majority of revenue comes from the merchants rather than customers) Klarna has racked up 85m customers across 17 countries; and frequently does over 100 transactions every second.

Klarna has come under scrutiny for potentially making borrowing too easy for the financially vulnerable. More recently, we’ve seen a wave of startups that are more explicitly focused on meeting consumers and small business owners where they are.

For instance, Fellow Pay (formerly known as CreditStretcher), based out of Denmark, offers a product that allows business owners to access financing during the period of time when a company finishes work, files its invoice, and gets paid. “We offer 60 to 90 days of credit for a very small fee, based on unpaid invoices,” explains founder Christian Thisted. Customers pay a fee of 3.75%. Thisted explains that mainstream banks don’t provide these services because there is often little financial upside and additionally “many SME owners are afraid to go to the bank because they think that if they disclose their poor finances to them, it’ll affect their whole standing with the bank.”

Zopa and Capcito are two other notable names in the European lending space. Zopa is a UK peer-to-peer lending platform that helps individuals secure small ticket loans for personal expenses such as buying a car, or covering home improvements or weddings. In 2018, Zopa secured a banking license to offer other financial services in the UK. Capcito is a Sweedish financing platform for SMEs that automates the credit assessment process to provide financing instantaneously based on real-time data from invoice or accounting software. To date, Capcito has deployed more than $100 million to SMEs on their platform. 

As we enter 2021 hopeful that a vaccine will allow Europeans and businesses across the continent to recover and begin to thrive again, demand for alternative lending products will only increase. Agile fintech products that can cater to the niche circumstances of low and middle income groups are set to play an ever increasing role in the lending sector. 

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