The Future of Small Business Financing: Where We’re Going, We Don’t Need Banks

“We need banking, but we don’t need banks.”

—Bill Gates, 1996

When asked to think about challenges facing small businesses as they attempt to access capital, I could not help but think of the famous quip above, which essentially predicts the end of banking as we know it. None could predict the calamitous rise and fall of the stock market, but with the near death—and eventual resurrection—of the “too big to fail” institutions, it is not hard to see the roots of this crisis running through the last 30 years.

The nature of our relationship to institutions has fundamentally changed. Whereas financial and corporate institutions held the public’s trust in the past, that trust has now shifted to networks—to shared risk, collaborative capitalism, and peer-based lending models. To future generations, the idea of one financial company providing all of our financial needs will seem foreign.

Often, crowds can better predict elections and stock prices than markets; similarly, social intelligence and signals often are more predictive of consumer behavior than past financial history. Today, credit risk can be inferred from one’s peer network, the health of a business better predicted by Yelp than by a balance sheet.

Contemporary fund-based approaches to providing access to capital often fail. Most of the funds are unprofitable, and the expectations and pressure put on early firms is antithetical to the goal of funding and supporting innovative new businesses.

In my thought brief, I speculate that the various forms of collaborative and social finance evolving since the Great Recession will build a new financial system—one that can provide a range of affordable, fast, and transparent financial services to the businesses that need them. These new models will supplant the finance industry that has systematically failed to ensure businesses have access to needed capital.

By 2040, people may read Bill Gates’s quote and wonder, what did he mean by “banks”? The future is bright. The convergence of technology, big data, and social networks has empowered a dynamic generation of fintech entrepreneurs who will create an unimaginable array of new financial products and services. In response, all but the incumbent institutions will celebrate.