Silver as an investment

EU SMBs Can Benefit from Smart Financial Regulation

In the aftermath of the 2008 financial crisis, countries all over the world suffered dire consequences. The irresponsibility of the globe’s biggest banking institutions, institutional investors, regulators, and consumers plunged economies in the United States, Europe, and Asia into a panic. The blame lies with those who exercised poor judgment in their creation and sale of shoddy derivative assets, but also with regulators for perpetuating a broken system of opacity.


While the United States has largely plowed ahead in the post-crisis era with little due diligence for avoiding another crash apart from the Dodd-Frank ban on proprietary trading in banking institutions, Europe is taking a more cautious approach. A wide range of new legislation has been introduced by European lawmakers.  In addition, new regulatory bodies like the European Securities Markets Authority (ESMA) and European Banking Authority (EBA) have been established, with markets now seeing a slow rollout of rules designed to stop the kind of negligence that caused the crisis from proliferating once again.


More than any other party, small and medium-sized businesses are using the new status quo to remain competitive and grow. Make no mistake, individuals and even larger corporations benefit from the spread of new regulations and fintech solutions, but small firms are leaving them in the dust thanks to a more beneficial financing landscape that enables them to thrive.


Remembering The “Good” Times

Despite the upside-down mortgages, unmanageable interest payments and widespread joblessness that was common between 2008 and 2012, few remember that the pre-crisis period was far from perfect either. The secretive methods of financial data storage that banks utilized meant that it was inconvenient and expensive for consumers to take advantage of financial products available to them, like loans, stocks, bonds and more.


Most of this data was kept on paper, as banks were afraid that digitization would expose their proprietary strategies and other informational advantages. Accordingly, a process as simple as borrowing money often took weeks to complete, with the lag time attributed to sluggish underwriting processes that hadn’t been revisited in decades.


Small and medium-sized businesses had the most to lose from such a situation. As many understand, these leaner firms are more susceptible to adverse circumstances like a shortage of working capital. Lacking the funds necessary to keep payroll afloat, take advantage of a new opportunity, or upgrade their office space means that small businesses lag disproportionately behind their more established peers. Larger businesses can sidestep these problems with credit facilities, and therefore can deal with challenges head-on as they arise.


New regulations are helping to diversify the financial sector by making it easy for new technology companies to enter the market, whether in competition or partnership with their institutional peers. In turn, the customers of these new “fintech” companies, like individuals and small businesses, benefit from the changing financial environment through cheaper and more accessible financial services that are streamlined for quicker financing turnaround.


Welcome A New World

Laws like Payment Services Directive (PSD2) and Markets in Financial Instruments Directive (MiFID II) help significantly, not just because they require larger EU banks, exchanges, and other institutions to share their financial data (on customers, rates, asset performance) with smaller players, but also because the entrenched interests are no longer able to obscure their own behavior to gain a qualifiable advantage.


PSD2 makes data transparency the standard for all countries within the EU, while MiFID II prohibits financial institutions from using “dark pools”, or hidden exchanges, to access better liquidity and prices for their largest asset trades. The more level playing field has helped early fintech companies thrive and serve an increasing number of satisfied clients.


Ezbob is one such company that has flourished since the introduction of new finance laws to European markets. The company uses their cutting-edge data technology to find fast, efficient loans for businesses. PSD2 is crucial for companies like ezbob, which were once unable to access the same sources of financial information that big banks kept within their walls.


“Working with the banks is no easy task. I can tell you that we were trying for 4 or 5 years to partner with banks and luckily enough we decided to lend money ourselves using our platform. The company wouldn’t have been able to survive if we sat around waiting for a contract with a bank,” said Tomer Guriel, ezbob’s CEO.


Now, this fintech leader is able to aggregate this flood of new data to optimize their lending processes for all participants. Loans through its platform take days as opposed to weeks or months and are much more affordable, thanks to the overhead that the company saves by employing algorithms and automation instead of paper bureaucracy.


Apart from streamlining the process, these new regulatory directives have also opened new funding channels to borrowers when it comes to sourcing the financing for SMBs.  The explosion of peer-to-peer (P2P) lending models like Funding Circle are helping connect investors tired of the prevailing low-interest rate environment perpetuated by central banks to capitalize on higher rates of return available from lending.


The advent of more automated underwriting processes helps evaluate creditworthiness in minutes instead of weeks, helping investors determine applicable avenues for their capital while opening SMBs to a wider audience of possible lenders. At the end of the day, both parties win while the P2P network profits by connecting parties without risking its own capital.


A New Future For Finance

Europe is proving to onlookers that deliberate, careful consideration of new financial initiatives can give all market participants an advantage. Growing businesses have the most to gain, but institutions also benefit from allowing their young fintech partners to bring new customers, who have already been efficiently and inexpensively vetted for the products that suit them best.


The future of fintech in Europe is a bright one and will see the small business sector bloom in a way it hasn’t in years.  After the sovereign debt crisis fallout that brought lending on the continent to a halt, fintech led the way for innovation at a precarious juncture. Fast forward, and a greater number of small-scale operations and their effective competition with embedded interests will assist retail participants as well. The result is a greater variety of higher-quality financing options for smarter borrowing and investing as well.