No one can deny the importance of having a growing SME sector in a country as its regularly cited by governments and economists as key to any countries growth as a nation. In Singapore, SMEs account for nearly two-thirds of the working people and a large portion of GDP growth. But if these firms fail to get funding, their failure to thrive has a dampening effect on the larger economy.
For big national level companies and multinationals, the options are endless for accessing credit are established and numerous, but for startups and small businesses, the only solution is to seek a loan. Their normal route for sourcing loans has been to contact the banks, but for those with no credit history, insufficient collateral, or no proof of a stable revenue stream for repayments, credit solutions offered by banks have remained out of reach – a situation ripe for technological disruption.
This situation was even become worse by the Global Financial Crisis and subsequent credit crunch in 2008 when banks were no longer able or willing to extend credit of any kind, and small businesses or startups were mostly at the receiving end. With limited credit resources available, they found few alternatives to the established banks and difficult choices regarding the future viability of their businesses.
The traditional or manual banking system was too slow for SME’s to get funds to keep their business running and fuel its growth. According to McKinsey, traditional banks’ average ‘time to decision’ for small business and corporate lending is between three and five weeks, while the average ‘time to cash’ is nearly three months. For those needing access to short-term funding, this effectively renders a loan solution irrelevant, creating a class of businesses underserved by existing institutional offerings.
How technology can help us overcome this obstacle
Innovation and automation provided the breath of fresh air into lending markets. Computerized applications and back-office processes go part of the way towards delivering the kind of accessible solution that will ease SMEs’ short-term needs. Many existing lenders realized that it is necessary to shift from traditional system to the new digitalized system they have caught on to this necessity and in some cases have leveraged technology to improve their response times. Digital technology, not just a way of delivering efficiency to existing processes, instead it is proving to be a paradigm shift in how such businesses are structured and run. FinTech firms are putting pressure on the banks which have the advantage of building their business and systems from scratch and remaining nimble. FinTech firms are moving rapidly into the gaps not covered by the banks, thus they are filling the credit vacuum small businesses previously faced. They are bringing the change which is much-needed innovation to move forward to a space that has remained traditional for too long.
Utilizing the potential of new technologies such as blockchain, big data, and smart analytics enables new business models to emerge: FinTechs have sharply realized that analyzing client data, including the flows of payments and remittances between counterparties, gives them a powerful tool for accurately assessing risk and creditworthiness.
In addition to that, digital networks enable innovators to establish lending models that don’t rely on any 3rd party to manage risk and provide liquidity. Other forms of lending are lean, efficient and able to reach parts of the market previously seen as unprofitable or difficult to risk-assess. This process of avoiding 3rd parties has leverages the inherent flexibility of electronic networks, putting borrowers in touch with lenders in a more direct and efficient way, with smart analysis functioning just like a match-maker to introduce borrowers to lender.
It’s time to move to new lending models
Apart from making the process smooth, automation has removed the costs out of the process has transformed the economics of lending so as to result it is making smaller amounts cost-efficient to lend to, and smaller borrowers more feasible for both parties. Additionally, technological solutions have also provided convenience in the ways small borrowers can make repayments: in Singapore, technology-based lenders first enhanced the customer experience by offering simple repayments at post offices and via AXS machines. Today, repayments are run largely through online platforms, positively improving business processes for many SMEs each day.
If you study the business case for FinTechs is mostly very compelling. It is funded by investors instead of the banks’ reliance on depositors, FinTechs offering very innovative ways of lending are experiencing rapid growth and size of transactions they are handling are set to skyrocket. Statista projects from $64 billion in 2016, the global total could reach $1 trillion by 2025.
And for lenders, the investment case can be very appealing, as they have to provide relatively low upfront capital demand, alternative lending can offer handsome mid-range return on investment. Across the U.S. industry, lenders gain an average 4.4% return, making alternative lending significantly more profitable than a savings account or other low-yield investments. Investors willing to offer higher-risk loans can access yields of 10% to 12%. In some markets, like India, returns can reach 18-26%, according to lender Faircent.com.
Responsible business practices you must follow
We have to keep in mind that the alternative lending space for SMEs is still very new and both parties involved need to take a responsible approach to some forms of alternative lending. China, which took to the Peer-to-Peer (P2P, one of the faster-moving types of alternative lending) model very passionately and experienced rapid growth. China has recently introduced rules and regulations to protect consumers after concerns that the model could be misused by some unethical operators. Having snowballed, growth has now decreased as greater regulatory oversight has driven many platforms out of business. With protections for both lenders and borrowers a key element of ongoing market health, responsible FinTech firms should keep abreast with relevant regulatory developments and ensure compliance.
For Capital C Corporation, taking a proactive approach is key when it comes to feeding new ways of lending. We see the success of FinTechs’ alternative offerings as something with very long-term potential so avoiding the issues experienced in markets like China is the only way to build confidence and trust. As a result, confidence and trust make for a strong foundation for long-lasting lending businesses. They build a trustworthy base of returning clients who, satisfied with the service they have received, will come back again and again.
A responsible approach to building alternative lending businesses will eventually lead to a sustainable and flexible alternative credit space occupied by companies providing suitable and sustainable sources of finance. A growing SME sector is important for any country’s economy and we feel strongly that with suitable lending options in place SMEs that were in the past underserved by traditional credit institutions can continue to in the long term as Fintech is the only way forward.