Small business credit and receivables financing are going through enormous changes in the FinTech era. This interview delves into some complex issues. Fascinating discussion!
Sramana Mitra: Let’s start by introducing our audience to yourself as well as to Fundbox. We’ve had Fundbox before. Let’s do a quick recap.
Eyal Shinar: I’m the Co-Founder and CEO of Fundbox. There are many ways to describe a company but the most precise and a very high level way is, we’re building the world’s first, and hopefully the largest, B2B payment and credit network.
What I mean is we’re solving the net terms economy issue. This is a global problem. What I mean by that is, as you probably know, whether it’s in the US, Brazil, or India, most of the economy is done through businesses. The volume of transactions in the economy of B2B is between 3x and 10x the size of B2C.
The issue here is that you have a bunch of vendors and sellers who are waiting to get paid. Let’s say you have a furniture store. You’re buying the materials from someone else. Let’s say you’re ordering enough materials to build 200 decks. You’ve negotiated the price but most of the time, you’re also negotiating the payment terms.
After you agree on that, it’s net plus 60 or 30. You get the materials and you get an invoice. In the US once you get the invoice, you have a certain amount of time to pay. When you do check or transfer, both of them are very old ways. That additional 30 to 90 days, the seller has to wait. It increases their need for working capital.
Overall, they need short-term cash flow and working capital solution. If you achieve what Visa and Mastercard achieved in the B2C space, which is immediate payment, you’re going to solve more than 98% of the problem. That’s what we’re building.
Sramana Mitra: Let’s talk a bit about the space of small business lending. There’re a lot of people in the space. I’m going to try to segment the space a little bit and I would like your help in completing this ecosystem picture.
Then we can double-click down on areas that make sense. There are players like OnDeck and Kabbage. They’re primarily using their signal transaction data on online platforms to give people very fast working capital loans. There are players like American Express who have proprietary data that’s based on people’s usage of their credit cards.
There’s another body of proprietary dataset available in Intuit and other accounting platform providers. Quickbooks Financing is drawing on the proprietary dataset sitting in Quickbooks online. That’s how they’re driving their lending decisions.
What other proprietary datasets have you seen based on which people have developed meaningful small business lending platforms?
Eyal Shinar: Just from the get-go, we’re not really playing in that space. Our customers are the small business and the medium-sized businesses, but what we’re offering is not lending. It’s the ability to get payment in real-time. We complement that with credit.
Let’s say we have lunch or coffee back in the 50s, we would probably pay in cash or put it on a tab. Then in 1954, FICO emerged. It allowed credit and payment platforms to underwrite the risk of the buyer. The first company that comes to mind is Diners Club. That was the first one that went to merchants in New York and offered the merchants to accept the credit card as a method of payment.
The value proposition to the merchants was, you don’t wait to get paid. Get paid now. The second value proposition was, this card is going to give much more purchase power even if you don’t have the cash now. We’re going to help you sell more.
Over time, that became a very efficient ecosystem. This is a rough distinction. There is the Amex model where Amex is bundling payments and credit. If we were going to the same restaurant, we can swipe our card. The merchants would get paid instantly for up to three days.
Then we, as consumers, are going to have 20 days of grace period where we can decide to pay everything or finance it with credit. The distinction is a little bit fuzzy. The credit card industry started like that.
Companies like Bank of America cards that later became Visa decided to syndicate out to banks. Today’s Visa is not holding any balance sheet risk. That’s being held by the issuer. Visa is making very good money by permitting the usage on the network and charging an interchange fee. That never happens on the B2B side.