Big data for small business and the quant opportunity for fintech business banks

A lot of fintech startups in the small business space focus on reducing bank fees, streamlining payments and increasing access to capital. All of which are problems most people universally agree need to be solved.

But all of these things are minor band aids for the much bigger issue small businesses have – simply staying in business.

According to data compiled by InsuranceQuotes, 20% of businesses fail in the first year, followed by 34% in year 2, 50% in year 5 and 70% in year 10.

If you think about the additional factors a founder would need to put into a small business banking forecast, this is significant. I mean, in consumer banking, it’s almost equivalent to your customers dying. Ok, maybe not quite as dire, but you get the point.

Why they fail differs. The research suggests 19% are outcompeted, 23% don’t have the right team, 29% run out of cash, 42% find there is no market need for their products and services, and 82% experience cash flow problems.

If we look at these problems, most of them could be avoided by doing better upfront modelling of the business opportunity, before jumping in. But modelling is hard, and even when it is done by owners before sinking capital, it’s often back of the envelope calculations, or basic Excel modelling, with weak data inputs based on problematic assumptions.

And while no model is perfect, as any quant will tell you, many are useful. There is undoubtedly a set of small business blueprints for cafes, restaurants, boutique retailers and hairdressers that could be used to better estimate the probability a small business would be successful.

Big business has been doing this for years, utilising big data to optimise for store locations and foot traffic. Why can’t this sort of dynamic data be exposed to small businesses too, through a user friendly interface and set of off the shelf models? That would be a competitive offering for a small business banking startup, who had a vested interest in a business surviving, would it not?

Just think about the degree of analytics now available when purchasing a home. Platforms in Australia like offer median property prices, supply and demand metrics, lifestyle attributes of residents and comparison data on like for like suburbs. Imagine translating this into the bricks and mortar small business sector, with things like foot traffic, employment rates, public transport, access to professional services, buying habits. And then imagine all of this data being able to be sucked in, at a push of a button, into your business model.

The reality is, people starting businesses are victims of the same financial literacy woes the rest of the general populous suffer from. Sure, perhaps they are a little more gung-ho and risk seeking, but that doesn’t mean they know how to manage a P&L from day 1, or pick a great business model. Yet all of these things can be codified, and the data is available. Someone just needs to connect the dots.

In my opinion, a smart business bank looking for a competitive advantage should be the business bank they helps you get into, and stay in business longer. Kind of like a Quantopian meets Square. That would be a powerful incentive to switch from the incumbents. And the data is all sitting there waiting for someone smart enough to leverage it.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy.

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