Despite the significant contribution in strengthening countries’ economic growth and driving the engine of employment generation, the SME sector still toils to procure working capital owing to the unavailability of sufficient documents to demonstrate to the banks. Information with regard to the USP of business, balance sheet, products description, history of business operation, and business projection for the next three to five years define the creditworthiness of the borrower. Failure of submitting all the documents minimizes the chances of getting the loan approved.
Even if the credit is available, the cumbersome loan disbursement process of banks and exorbitant interest rates put immense pressure on growth prospects. Though banks do not have a dearth of money, they lack a proper risk management framework to assess the creditworthiness of small businesses (due to information asymmetry).
The unmet SME lending requirements, however, present huge opportunities for new-age alternative lending providers to intrude into the system, reshaping the way lending has been done by legacy banks so far. These players have witnessed innovation across loan origination, underwriting, documentation, data management, profile management, and loan servicing. Unlike traditional lending, alternate lending requires the company’s bank statement for the previous 12 months, supporting documents such as invoice copy, receipts against payments, references, canceled check, digital footprints of the borrowers, online transaction history, and more.
Having realized the potential of addressing the existing credit gap among small businesses, banks now have started reinventing the SME loan approval & disbursement process by leveraging the latest technologies like data analytics, big data, and artificial intelligence.
The glitches in the SME lending
Most of the time, banks refuse to lend money to those whose revenue is less than $2 million.
Banks view SME loans as a high-risk proposition and challenging customer segment (because most of them lack documents on income statements, balance sheet, operating performance, etc. and their performance-related data is hardly available on any public forum) that might have a higher rate to default.
After approaching multiple banks, SMEs need to spend more than 24 hours on loan origination paperwork and have to wait weeks or months to get the loan approved by banks.
Many banks are still involved in a paper-intensive, manual, cumbersome process and are yet to embark on the digital world with online application features and automated approval processes. Maintaining Excel sheets often lead to losing data, which calls for the integration of data management solutions with loan origination and other processes.
SMEs today expect banks to provide personalized advice on banking products & services as well as on their various business issues. For example, Barclays has launched ‘MyBusinessWorks,’ a fee-based service which offers the flexibility to pick and choose the right combination of elements to meet the changing needs of business at a cost-effective price.
Automation of onboarding customers and loan origination
Despite having valuable customers’ information on the premise, banks lack a proper repository to store the information in an organized way. Doing due diligence to ensure KYC, AML, Foreign Account Tax Compliance Act (FATCA), and other regulatory norms is central to onboarding customers. The faster verification of documents & the loan application process, self-service interface (in both website and app), transparent communication, and meaningful engagement with banks collectively define the seamless onboarding of customers.
Centralized onboarding experience with the unified view of the customers’ data will enable banks to offer customized product offerings to customers, reduces the hassles & costs associated with the manual processes, and add numbers to the revenue.
New-age SME lending solutions ensure smooth lending cycle for all types of SME loans-from loan origination, loan approval, electronic monitoring the documents, underwriting, auto-KYC verification, document capture automation, document management system, automated management of collateral, error-free data entry, decreased onboarding time, and personalized services (even after the disbursement of loan).
A comprehensive credit assessment tool enables hassle-free due diligence of the documents through an automated and standardized process. The insights derived from the due diligence report helps to provide customized loan packages based on the requirements of individual small-business owners.
Transition to digitization will help banks overcome the existing challenges, accelerate the onboarding time, and improve customer experience. For example, JP Morgan Chase has tied up with online marketplace lender On Deck Capital in 2015 to lend money to small businesses based on algorithms. In 2016, BancAlliance, a network of more than 200 community banks has partnered with online small-business direct lender Fundation to enhance the small-business lending capabilities of community banks.
How can banks become game changers in the SME lending business?
SME loans traditionally have been viewed as a hassle-filled task for banks because of its lengthy paperwork, longer turnaround time, and high transaction cost to process SME loans. The cost and time taken to process a large number of small-ticket-sized loan applications are similar to that of processing a small number of large-ticket-size loans, thereby affecting the revenue growth of banks.
The other challenges include the dependency on manual underwriting, lack of reliable data, paper-intensive work, manually arranging the customer data, credit risk analysis, credit approval, and collateral management. SMEs mostly are heterogeneous in nature, making it difficult for banks to assess the loan applications. And most of the banks lack a skilled staff to evaluate the borrowers’ creditworthiness, given the shift towards algorithmic-based credit assessment model in recent times.
By leveraging innovative credit scoring solutions, banks can tap into new customer segments (which were earlier underserved) and reduce the overall operating costs associated with loan disbursement. For example, mining non-traditional/alternative data from social media platforms, e-commerce transactions (reflects users’ lifestyle patterns and discretionary incomes), bill payments, psychometric profiles (defines borrowers’ personality trait), etc. using big data analytics and machine learning will help banks assess the creditworthiness of the borrowers.
Since the ticket size of the loan is relatively small for SMEs, banks should focus on innovations and reduce the efforts of credit rating analysts who spend a huge amount of time in thoroughly reviewing all the lending applications. In 2017, the global alternative lending market was estimated to have a transaction value of $380.6 billion.
In order to tap into early-stage SMEs, banks need to go beyond loan disbursement and start providing value-added services like personalized advice, guidance, legal advice, and support. For example, HSBC has launched a Knowledge Center, a one-stop online magazine and information center for small businesses which features interviews with thought leaders & inspirational entrepreneurs, along with blogs, editorials, videos as well as the latest news.
Enabling self-service capabilities in the form of an online portal/dashboard is very conducive to aid SMEs. The digital platform should offer end-to-end services across the entire lifecycle of the loan like documentation imaging, expedient underwriting, digital exchange of documents, online credit assessment, and monitoring. For example, Australia-based startup Kikka Capital has launched a small-business lending solution using Kabbage’s platform, which provides end-to-end to lending solutions for onboarding, underwriting, and monitoring.
Banks should deploy virtual relationships managers who can work remotely in addressing the needs of SMEs in a cost-effective way through live chat or phone. Moreover, banks can also go a step further and initiate a social media platform to help SMEs seek answers on all their queries. For example, Spanish bank Bankinter has partnered with Dutch telecom operator KPN to offer mobile phone services at special rates for its banking clients.
It’s the need of the hour for banks to act as a unified lending platform and grow organically in the SME lending business by providing the customized services and taking multiple steps towards automation.