By Leon Gauhman, Chief Strategy Officer, Elsewhen
As the global economy reels from the ongoing impact of Covid-19, spare a thought for SMEs, many of whom are facing a fight for survival through no fault of their own.
Here in the UK, sixty-nine percent of small businesses are now facing significant pressure on cash-flow according to a recent report, while a fifth of business owners fear they won’t survive without additional funds to support them. It’s likely to be a similar picture for SMEs internationally.
With SMEs responsible for around 50% of employment worldwide, their cash flow crisis has serious consequences for the global economy as a whole.
Ever since the 2008 global financial crash, the track record of the UK’s incumbent banks has made it hard for small-to-medium sized enterprises (SMEs) to access adequate financing solutions. As a result, the level of big bank lending to SMEs has been on the slide.
Until now alternative fintech companies have helped to fill that gap. However, the sheer scale and global nature of the current crisis suggests that the big banks and traditional lenders will need to step in and save SMEs.
Here in the UK, the signs that banks are prepared to fund small businesses on fair terms aren’t promising, with leading banks fiercely criticised for demanding personal guarantees and/or setting exorbitant interest rates for small businesses applying for emergency loans under the government backed Coronavirus Business Interruption Loan Scheme. As a result, the government is being forced to overhaul the legal terms under which banks provide loans.
Bottom line, at a time of global crisis, banks and traditional lenders simply cannot afford to make the wrong call. Just look at the reputational backlash against Virgin, Wetherspoons and Sports Direct.
The irony is that making lending easier, quicker and more accessible for small businesses doesn’t have to be complicated or time consuming: in many cases banks and traditional lenders already have the data they need, they just need to be prepared to act on it.
Once markets across the globe start to emerge from the Covid-19 crisis, here are five lending lessons banks and traditional lenders could learn from the Fintech sector to stimulate recovery and keep this essential sector alive.
- Keep it simple
One of the clearest ways in which the disruptors have taken advantage of banks’ inertia is by making access to credit fast, intuitive and more transparent. Key to this has been a more sophisticated use of data sources to assess SME creditworthiness. Traditionally, banks and established lenders have relied on credit bureaus and company accounts to make decisions. But this can work against new or early-stage companies (particularly in sectors where value lies in user base or brand equity – a point recognised by the Bank of England).
One company that big banks might learn from is iwoca, which offers loans between £1,000 – £200,000 for cash flow, stock or investments. Two factors set iwoca apart. The first is its use of deep machine learning models to assess businesses based on data taken directly from online marketplaces, accounting platforms, bank accounts and other online and offline platforms.
The second is the way iwoca is utilising Open Banking to provide finance, allowing customers to securely link their Lloyds Bank account in order to submit upto five years of transaction history in a few clicks. As a result, applicants can submit a loan application in less than 60 seconds. The learning here is that banks should be using the right data – which they already have – to quickly fulfill lending, especially at a time when cashflow is the difference between small businesses surviving or going under.
- Make it personal
These days, every business from Tesco to Netflix talks up the importance of personalisation – but nowhere is it more critical than in the context of a company or sole trader’s financing needs.
Clearly, data sources go some way towards addressing personalisation – but it’s only part of the story. One of the most
successful of the new fintech firms, OakNorth, uses human-credit committees as part of its decision-making process. OakNorth’s digital/human hybrid model may seem counter intuitive in this era of AI and machine learning, but it is actually a valuable tool for achieving true personalisation in SME lending. The irony is that this is where big banks historically used to excel.
Another company that takes a hybrid “part high tech, part human” approach to lending is OnDeck. The tech part of OnDeck’s model comes from the proprietary software used to aggregate data about a business’ operations, which is then processed by algorithms to determine loan eligibility. The human part comprises a dedicated loan expert to discuss lending tailored to the business. OnDeck’s proximity to the customer means it can also support them beyond the core product. For example, it reports payments to bureaus so that on-time payments can help build business credit. In other words, it isn’t just lending money, it is helping the business to establish a robust creditworthy profile. The key learning here for banks and traditional lenders is that sustainable SME lending relies on a careful balance between tech and human inputs.
- Timing is key
As the current crisis demonstrates, lenders need to be relevant at the right time, which is all about providing customers with just-in-time services or features, for example offering a loan when a business is experiencing an urgent cash flow issue. US-based fintech Fundbox offers SMEs access to invoice financing and lines of credit based on outstanding invoices. To become a customer, businesses connect Fundbox to their bank account or accounting software and answer some basic information about the business. If approved, the funding can be available as soon as the next business day. Businesses then repay Fundbox in equal instalments over the course of the 12 or 24-week plan. This approach means the business is getting the right amount of potential credit at the right time. It also addresses a major bugbear of SMEs, which is the amount of time it takes from the point of application to the money hitting their account. Often, a delay of just a couple of days can make all the difference in a company’s ability to survive.
- Partner proactively
Banks and traditional lenders have been guilty of focusing too much on the initial loan and the repayment plan. They haven’t made any meaningful attempt to view their relationship with SMEs as a partnership that requires ongoing dialogue. The emergence of digital tech and open banking means there is no excuse for not trying to build elements of responsiveness into the SME’s customer experience. Bank of America’s virtual assistant Erica for example, alerts customers when a recurring charge is higher than usual or when their spending has the potential to take them below £0 within the next week.
Another good example of how to partner proactively comes from Swedish firm Klarna, a savvy fintech that has been growing its merchant customer base rapidly across Europe. Recently Klarna purchased Italian firm Moneymour, which enables customers to split their purchases into monthly instalments based on an instant credit assessment that uses balance and transaction data from Open Banking feeds in the credit scoring algorithm. This approach could potentially be adapted for a B2B context: for example where an SME is suddenly faced with a large unplanned purchase, instalment payments could help spread the cost.
- Facilitate future proofing
All too often, banks and traditional lenders are stuck in the here and now, while SMEs need more long term visibility. That’s not easy when cash flow can suddenly be affected by a global pandemic, a disruptive technology, a bankrupt partner or a change in regulation (to name a few potential scenarios). One way banks and traditional lenders can help is by using AI to contextualise business spending. If there is a week with less expenses and greater income, they can suggest that the business puts extra cash towards paying down an outstanding loan.
This approach mimics the way in which personalised savings apps such as Chip, Oval Money, and Acorns have revolutionised the consumer savings space, facilitating micro-savings with minimal customer input. Each uses a variety of tactics, from round-ups to clever algorithms that calculate how much a user can save each week based on spend. It also helps the lender head off the possibility of loan defaults being triggered. In the longer term, this model will potentially help lenders achieve a greater lifetime customer value.
Things start to get even more interesting when you consider AI’s ability to predict a company’s future prospects. An interesting pointer into the future is CircleUp’s Helio solution – a machine learning platform that identifies, classifies and evaluates early-stage consumer and retail companies with the potential to become breakout brands. By incorporating this modeling to understand future performance of clients, lenders can start to forecast potential lending needs, whether the company is predicted to breakout, or face a rough few months.
The SME lending space is filled with innovators who have revolutionised the types of finance available and the criteria by which SMEs can access credit. They have used digital technology, data and open banking to deliver a customer experience that gives them a competitive edge over big banks.
Covid-19 gives a stark new urgency to the need for banks and traditional lenders to catch up quickly with their more agile Fintech competitors: their willingness to speed up lending to SMEs is key to the sector’s survival and they can do so by providing simple, relevant and personalised experiences. The ones that are then able to integrate responsive and predictive capabilities into their products and services stand to recapture the loyalty and gratitude of individual SMEs and play a central role in re-stimulating much needed recovery post Covid-19.