What’s Gone Wrong with Traditional SME Lending – And How to Fix It
Many SMEs don’t apply for loans or credit lines because the hassle is too great. How could banks fix this? FintechOS spotted five key steps to an SME-friendly strategy.
A large segment of customers feel overlooked and underserved by the digital revolution in banking: SMEs. In a recent FintechOS webinar on next-gen digital SME lending, all panellists agreed that many SMEs don’t necessarily apply for loans or credit lines because the hassle is too great. And of those who do apply, roughly 30 percent of them do not get the loan or the credit line that they wish.
The webinar panel included Ed Herman, Global FSI Leader at Microsoft; Todi Pruteanu, VP, Ecosystem at FintechOS, Catalin Dediu, VP, Product Management, FintechOS, and Robin Amlot, Managing Editor at IBS Intelligence.
FintechOS’ webinar explored the current state of SME lending, investigated practical examples of who’s done SME lending right, and looked at how banks can improve lending. You can read below the webinar’s key findings.
Caught in no man’s land
There are more than 25 million SMEs in the EU, accounting for 65% of the private-sector employment, according to Eurostat. Because of their size – by definition, they employ fewer than 250 employees in Europe – SMEs sit in the no man’s land between retail and corporate banking.
“SME lending is complicated because of the wide variety of businesses that you are trying to manage as a bank”, says Robin Amlot, Managing Editor at IBS Intelligence. Catalin Dediu, VP, Product Management at FintechOS agrees: “SMEs are often overlooked and underserved, falling between retail and corporate”. Why that sentiment? They are critically dependent on debt, especially bank loans, for financing. But in some markets “the average time-to-yes for an SME applying for a loan in the UK is three to five weeks. And the average time to cash (…) is three months”, Dediu pointed out.
A flash poll among participants run at the beginning of the webinar revealed that “a shorter time to cash” is the most important criterion for SMEs when selecting a lending institution.
Last year’s crisis brought a major threat to the viability of SMEs. As the International Monetary Fund (IMF) puts it, “despite their importance, SMEs are exposed to a major vulnerability” these days. During a crisis such as COVID-19, the IMF observes that “SMEs’ dependence on bank financing and the inability to raise other sources of funds at short notice can turn a liquidity shortage into a solvency problem”.
Ed Herman, Global FSI Leader at Microsoft summarizes it this way: “their cash flow is their lifeblood”.
The webinar spotted five causes that shape the current state of (wrong) SME lending.
#1 SMEs are often overlooked and underserved, falling between retail and corporate
In many banks, we see that both the system and the processes serving SMEs are either inspired by or replicated from the systems and processes that serve retail customers, or from the ones that serve corporate customers. And none of them are optimized for SMEs.
How to fix it:
“The key to solving the SME lending challenge has two pillars, namely personalization and automation”, thinks Catalin Dediu of FintechOS.
- Personalisation: Offer bespoke products and services that are contextually relevant to SMEs needs.
- Automation: Achieve true process automation. This will improve customer experience while lowering costs. Banks should aim to redesign back-end processes to eliminate manual input and enable real-time decision-making.
In short, “banks need to have that flexibility in their systems to be in a position to accommodate fast to an ever-changing environment” says Todi Pruteanu, VP, Ecosystem at FintechOS.
#2 Missing credit ratings for small businesses mixed with inflexible risk assessment technology
The wrong technology can mean banks don’t have sufficient data on SMEs applying for credit, and the banks’ credit rating systems are not flexible enough to use the data to come up with a risk assessment measure. Hence, a lot of SMEs simply do not qualify.
How to fix it:
Amazon is offering SME loans to some of their merchants because they have access to data. Amazon knows who’s doing well, who’s not doing well, and what their merchants’ sales look like. And of course, it’s very easy to make decisions on whom to give credit to and whom not to with access to deep data like this Transactions happen seamlessly.
Banks aren’t threatened in a big way by fintechs, but they will need to keep up. They could learn from fintech lenders, who take a very different approach. The latter utilize different data sets. “They don’t get the traditional forms of documentation that banks have asked for. They look at different forms or they look at different factors. It could be social data. They can be cell phone data. All kinds of different algorithms are now deployed by the different lenders” – Ed Herman, Microsoft.
#3 Rigid data systems that create information silos
When an SME is going through a lending process with a bank, the data is not available in a centralized way within the customer journey. Therefore, personalisation is not possible. Nor a quick risk assessment because data lives in different information silos.
How to fix it:
Banks should embrace the use of data-driven platforms designed to allow multiple parties, from SME clients to legacy systems and third-party data providers, to seamlessly connect and interact as part of end-to-end solutions.
“Ecosystem integrations are essential”, says Todi Pruteanu, VP, Ecosystem at FintechOS. “Connect to and make use of the huge amount of useful data available in the SME ecosystem. This is also key to pursuing value add services.”
#4 Legacy face-to-face interactions between banks and SMEs
This is a tricky one, because while some tech companies are advocating for automation and the use of data in the relationship with SMEs, they not necessarily advocate for the complete removal of a relationship manager. “In some cases, we think that’s actually useful and fruitful”, says Catalin Dediu.
How to fix it:
However, even when banks have face-to-face interactions with their customers, they want those interactions to be enabled by data and by automated processes that can solve different tasks seamlessly.
“SMEs don’t have the resources to be able to go and send people into the bank branches and provide the necessary forms. So, they’re looking for the way to expedite the entire process. And an online experience is absolutely the way that it’s been heading for several years. It’s the reason that a lot of fintech have arisen in this space (…) Banks have started to look at how they serve those SMEs in a better way. They have created partnerships in different geographies,” says Ed Herman, Global FSI Leader at Microsoft.
#5 A barrage of regulation and credit constraints stemming from the 2008 financial crisis, as well as AML and KYC rules and requirements
It’s not necessarily up to the banks to manage it. However, there is good news here. We’ve seen pledges from the European Union looking to cut down on red tape and regulatory challenges.
How to fix it:
Governments take a proactive approach beyond providing access to finance. They effectively want to build marketplaces where SMEs can benefit from a structure that provides easier access to multiple financial services providers.
“Our job as technology providers is to make sure that, first of all, we establish a climate of trust with the financial services providers, such as launching a product fast does not necessarily bring risk” – Todi Pruteanu, FintechOS.
Banks play a vital role for SMEs’ sustainability. But modernizing themselves to better serve this segment will strengthen banks’ own growth in this fast-changing environment. Automation of processes will significantly reduce the cost structure while increasing the profitability of the SME segment.
Register now to watch the full recording of the webinar: https://fintechos.com/webinar/next-gen-digital-sme-lending/
For more findings on this industry, ➡️download our whitepaper “Seize the Moment: How Data and Tech Can Bring an SME Lending Surge for Bank”: https://fintechos.com/whitepaper/sme-lending-how-data-and-tech-can-bring-a-surge-for-banks/
On the same topic➡️ https://bit.ly/2z0FpGT.