How banks can take a new look at SMEs
Nadia Sood, CreditEnable: banks and SMEs are experiencing digital disenfranchisement
SMEs are hailed as nation builders and the backbones of developed and emerging economies alike, and yet adequate financing from the formal market is still elusive for most SMEs at home and abroad.
The primary reason is that the extraordinary array of technology that enables banks to underwrite competitive loans for consumer, in seconds, has hardly penetrated the SME lending segment. As a result, banks and SMEs are experiencing digital disenfranchisement.
The UK has lost almost two thirds of its bank branches in the last 30 years. In 1988 the UK had 20,583 high street bank branches. Today only 7,586 remain. This has had a disproportionately negative impact on lenders, SMEs and the broader UK economy.
As these bank branches closed, the SMEs’ relationships with the bank managers who provided significant value beyond the loans they were underwriting also ended. The “soft interventions” which included helping SMEs manage their finances, avoid the pitfalls of unmanaged growth, and understand the broader, macro economic issues that could impact on them also disappeared. Lenders also lost out on the data collection engines that their branch managers had previously provided where it came to SMEs. So both sides endued up worse off.
In the consumer lending space the story has been fundamentally different. The historic relationship between bank and borrower has been replaced by technology: chat bots and virtual assistants – all of which help consumers gain better access to credit.
While the bank branch closures meant that consumers lost the personal touch, this was made up for by the fact that they gained speed of decision making and greater access to differentiated and affordable product. The story for the SME was vastly different, SMEs just got lost. Investment into the automation of credit underwriting never really happened, and SMEs ended up in no-mans land, too small to be processed by the corporate bank and too large to process through the tools that the consumer automation revolution brought into the market.
What does this matter?
In the UK, SMEs account for 99.9% of all private sector businesses and 60% of all private sector employment, but the value of annual total lending approved for micro- and small business plunged by 38.7% between 2013 and 2017, down to £7.2 billion.
Abroad, MSMEs account for nine out of ten businesses, two out of three jobs and a half of global GDP. SMEs everywhere are forced to depend on the informal and alternative market for credit: friends, family and moneylenders to support their growing businesses with a shocking 70% of them in emerging markets lacking access to credit.
Globally, banks recognise that the SME segment is attractive because of its low default rates and the rapacious appetite SMEs have for new lending products as they grow. To mine this potential, banks need to be able to apply technology the way it has been applied in the consumer and corporate sectors to the SME sector. They also need to build a life-long digital relationship with their SME clients that allows them to pivot, test and experiment with new products and services that will keep these clients engaged over the lifecycle of their business.
Unless this happens, the credit gap for SMEs is not going to reduce.
Ten years after the toughest financial crisis since the 1930s cut credit across the board, the global credit gap between SME need and finance availability is in the trillions.
Even harder to innumerate is the trust gap between SMEs and lenders. An SME that has been consistently repaying at 15% for years cannot understand why a bank will not extend credit at 4%. Another that tries to secure credit cannot understand why a rejection this year could mean it cannot secure a loan for the next three years despite improvements to its profitability and growth. A bank bereft of information finds itself no longer equipped to assess the risk of lending so pulls out of the segment.
Technology with humanity
Technology holds the key to unlocking this dilemma but it is best served when we blend it with traditional values. A classic example came earlier this year when we signed a unique partnership with the world’s largest SME association, The Confederation of All India Traders (CAIT), representing 70 million SMEs in India.
India is a land of amazing contrasts, but its SMEs face the same challenges as those the world over. India brings over 1 million young people to their workforce every month but despite its status as the sixth largest economy on earth, hard on the heels of the UK, the vast majority of its SMEs still are forced to borrow from friends, family, money lenders and credit cards, just to keep up with the 7% growth in their economy. Even those with successful track records still borrow from money lenders because banks have no accurate metrics with which to assess them.
Our objective is to move the £250 billion in debt these 70 million SMEs take each year from the alternative lending sector at interest rates of 30-40%, into the formal lending sector, saving SMEs some £38 billion ($50 billion) a year while enabling competent and creditworthy entrepreneurs to grow and expand their businesses. We are also enabling our banking partners to take back market share lost to alternative lenders who are quicker and in a better position because of their personal relationship to deliver various products SMEs need to finance their businesses.
To achieve such demanding objectives, we are integrating our platform technology into CAIT’s existing social and commercial structures, training 1,000 well known SME leaders – “changemakers” – to reach out to 25.000 SME hubs across 14 Indian states and help SMEs use technology to enable an efficient marketplace.
The platform’s analytics give SMEs a solid grounding and are validated by all lenders we work with. It accurately assesses the capacity to pay, and filters the risk levels of borrowers who lack a credit rating. The platform is built around an integrated AI solution which combines automatic data capture, data mining, algorithms, rule-based and statistical anomaly detection, with which to acquire data on SMEs’ financials and other relevant datasets, to objectively categorise creditworthiness and risk levels. It has predictive analytics that allow lenders to obtain borrowers who have absorptive capacity and creditworthiness to borrow as well as their appetite to take out a loan.
SMEs come to understand the loan process and banks gain a forensic, 360-degree understanding that drills down to an individual SME in ways that simply never existed before.
That’s how we are bridge building between two parties who need each other but lack the common ground on which to build a relationship. As SMEs enter our technology space we assess and match them with the right lender, or help them avoid the damaging consequences of a rejection on future applications. Technology is the great enabler, but it benefits from a personal touch in the hands of these enthusiastic, street smart “changemakers”.
The global market for SME credit is £6.1 trillion. If banks are to make headway, they need to look at SMEs through new eyes, with the same urgency and devotion they give to Millennials and Generation Y. Customer understanding and feedback, so earnestly sought from retail customers, should be extended to SMEs, so that real-time understanding can be matched by substantive innovation. Key to that are the brand new, designed from the ground up, fit for purpose platforms, that enable the creation of trust by unlocking the door to data.
Nadia Sood, CEO, CreditEnable
This article is also featured in the summer July/August 2019 issue of the Banking Technology magazine.
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