As the ripple effects of the pandemic continue to impact economies globally, small and mid-size enterprises (SMEs) continue to be squeezed.
Lockdowns, travel bans, social distancing measures and curtailed economic activity more broadly have pushed SMEs to the brink – and sometimes over. Revenues have been hit, and operations untenable.
Even for well-run businesses, obtaining credit at the point of need at a reasonable rate has been an Achilles' heel for a long time. While several banks have been more forthcoming in lending to SMEs since the onset of the pandemic—predominantly driven by government-assisted financing and risk-sharing schemes—the reality is their businesses have been hit hard.
Moreover, even with the government’s relief measures, it has not been enough to push the funding needle for many SMEs due to banks’ demands for certain formal financial information and reports that smaller businesses don’t always have, making the process difficult.
Even where useful, these schemes are still time-bound and will be phased out at some stage, which could result in banks restricting credit to the SME segment once again.
The impact of data and digitisation
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There are two key enablers that will have a positive impact for SMEs to access credit faster and for financial institutions to assess SMEs.
First, increased digitalisation has accelerated the creation and availability of new forms of data across Asia. The near ubiquity of smartphone penetration has meant the smartphone is central to several important, daily activities. All of this generates data that can provide useful insights into businesses and individuals.
Governments across Asia have made a strong push to digitise the technology stack of their respective countries. For example, SingPass in Singapore and Adhaar in India to facilitate Know-Your-Customer (KYC) is a great example.
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Second, online marketplaces and e-commerce merchant sites have exploded in terms of user volumes, generating tremendous amounts of daily transactional data. From ride-hailing to food delivery services, and from digital payments to entertainment services, we are seeing a data explosion, opening opportunities for lenders who have the right mindset and technological capabilities to use data to make better and faster decisions.
These developments notwithstanding, the SME financing gap remains large. Much of this has to do with a focus on the “fin” and mere lip service being paid to the “tech”.
Indeed, FinTech companies have addressed some of the woes of SMEs, but loan application processes still remain filled with friction and continue to be very manual.
In many cases, the application processes are not very different from applying for loans with banks. While approval times have come down significantly from the traditional two to three months that banks take, the process is still frustratingly slow, at about two to four weeks.
Given what technology can achieve now, there is a big opportunity to cut these approval times even further and to make the loan application and review process simpler, more efficient, and quicker. Data science can also be relied on to make smarter credit decisions.
In this context, the licences awarded to digital banks are a welcome sign because SMEs need all the help that can be provided. The challenge for the digital banks is that they are banks that will need to follow the same rules around capital and risk-weighted assets.
But the opportunity for them lies in the data they have access to – whether related to e-commerce, digital wallets, ride sharing data and wi-fi usage. Much will depend on how this data is used.
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Improving efficiencies, filling a gap
Cognisant of these challenges, we’re seeking to do things differently at CrediLinq.Ai, by focusing on technology, which we feel is the way forward for both SMEs and financial institutions to benefit from.
One of the benefits of digitalisation is the capability to utilise API integrations with a variety of counterparties, allowing for user experiences to be digital-first and seamless.
For example, the total time taken from when an SME applies for a loan, to documentation and approvals can be drastically shortened to two or three days depending on their readiness to upload the required information. This is because of two key differences between technology-focused FinTechs and banks.
Number one, to better understand any customers against their peers, we are now seeing an increasing reliance on data.
Lenders now have access to data from numerous companies across various sectors, geographics and sizes to determine the probability of an industry sector default in that space. The data is analysed in predicting potential credit repayment behaviours and patterns by understanding how businesses in a particular space behave in response to different macroeconomic contexts and cycles, and how revenue and margins are impacted, for instance.
Cutting-edge technology enables accurate analysis, more intelligent underwriting, better risk management and ongoing data collection provides early-warning signals for efficient and ongoing monitoring.
Number two, optical character recognition (OCR) technology is used to qualify information and data from bank statements and alternative sources, with that data being used to predict future repayment behaviour.
This data can be customised to any organisations’ needs. Present technology allows for flexibility for SMEs in terms of income documentation and when they grant FinTechs access to their accounting software, they can extract the data using APIs and analyse it instantaneously.
Technological advancements and a data-centric approach will allow FinTechs to paint a picture of the business and gives clear visibility over a borrower’s average performance cycles, minimum earnings and fixed and variable expenses. This helps to predict the borrower’s cash flows for the next 6 to 12 months and enable lenders to make intelligent decisions.
By leveraging technology and data, FinTechs will be capable of providing SMEs with faster, more efficient, and more transparent access to credit.
A change in direction
The answers to many of the challenges faced in providing credit to SMEs lie with technology and a change in the underwriting mindset for lenders. This allows them to offer credit and the point of need with greater accuracy, more efficiency and enables financial institutions to help SMEs.
More broadly speaking, the effective use of technology will help FinTechs companies serve the interests of SMEs. As an industry, we need to develop sustainable business models that allow us to disburse loans to SMEs quickly, and at respectable rates and interest.
Technology can make this possible.
Deep Singh is the founder and CEO of CrediLinq.Ai
Photo: CrediLinq.Ai
