In this month’s global roundup, we asked our sales teams across each of our regions to share their knowledge of the challenges SME lenders are working to overcome. While some issues are global, there are some great insights into regional problems!
What are the biggest pain points SME Lenders face?
Patrick Tan, Regional Sales Director – Singapore
SME lending is still somewhat behind the curve in terms of accessibility and businesses are underserved compared to consumer lending products. With complex legacy systems, the traditional banks are unable to support the demands of the SME, not just in credit assessment processes but also in the speed to approval and draw-down of funds. There’s still a heavy reliance on manual underwriting which is leading small businesses to look at alternative funding options in the region – online lenders, P2P platforms and market-place providers are beginning to open up competition in the SME lending space. That said, traditional banks are beginning to look at ways to improve the lending experience for business borrowers, through digital transformation and partnering with new fintechs.
Tim Kerslake, Account Director – Australia and New Zealand
In the year since the Banking Royal Commission, there still appears to be a lack of clarity as to what ‘responsible lending rules’ are and how SME lenders are to interpret and use newer guidelines from APRA.
The Big 4 banks are reporting higher levels of costs associated with compliance to guidelines and there are delays in implementing the required changes. Although they have the lowest cost of capital and so often may be able to offer the most competitive rates, they also tend to have the strictest lending criteria and often require more security. Mid-tier lenders are also contending with improving significant legacy processes and systems to compete with some of the new, more agile fintech lenders. Technology remains the largest pain point for all lenders, to ensure SMEs are served quickly, effectively and in line with new regulations. If application and approval processes are lengthy then the rate of abandonment is high.
Gaston Peralta, Director of Business Development – Latin America
SME Lenders in LATAM face a number of key challenges, including:
– Data challenges:
- Regulatory Compliance. Including the regulation imposed on the use of data.
- Developing the right risk models and algorithms to support the mitigation of losses due to sub-par credit conditions and risks.
– Technology challenges:
- Cost of Infrastructure.
- Access to the latest technology on risk decisioning and back-office operations.
- Rapid response to market needs and the agility to change their processes to keep up with new data models and data from other non-traditional sources.
- Effective understanding of Big Data.
– Market challenges:
- Need to identify Regional needs and understand their position in the ecosystem. This is fundamental for understanding the inherent market credit risk factors.
- Understanding their value proposition to different market-niche needs created by; among others, low credit-to-GDP ratios, high service fees, heavy reliance on nontraditional finance sources, ineffective credit and money flows affecting internal and cross-border payments and large unbanked shares of the population.
Julie Mannella, Director of Sales – Canada
Canadian SME lenders are faced with two major challenges:
- Fragmented sources of data needed to assess the risk and health of small businesses, including but not limited to business credit history, business owner credit history, cash flow of the business, and receivables. Often, the process to access this data is manual for the lender, resulting in a long and often painful process for the small business owner seeking funding for much needed capital required to grow the business
- Automating the decisioning process, from onboarding through to funding due to the disparate, manual nature of gathering these data sources
Brendan Deakin, Sales Executive – Northeast US Region
The biggest pain point in SME lending: Digitizing the entire acquisition and onboarding process so that lending to this sector can be a profitable exercise for lenders, and businesses can quickly gain access to the credit they need to grow.
Historically, SME lenders required documents, AR data, and access to multiple third-party credit/fraud/AML data sources in order to make loan decisions on its small business applicants. These applications often took hours, if not days to adjudicate, were very expensive, and forced many of the big banks out of the SME lending business entirely after the 2008-2009 credit crisis. It was hard for these banks to make a profit from this segment of the market while SMEs struggled to get access to capital.
Chris Kneen, Regional Sales Manager – United Kingdom
The biggest challenge SME lenders face in the UK is improving their cost-to-serve margin. Unlike personal lending, lending to small businesses requires complex decisioning, assessing detailed business MI and individual creditworthiness. Traditionally, navigating the application process to ensure an accurate assessment has been conducted, takes time, often involving manual credit panels and several stages of underwriting, dependent on the type of business finance sought e.g. unsecured, secured, factoring, bridging, asset-based. This was a huge time and labour-intensive process that made borrowing expensive.
In recent years, as the mainstream banks tightened their lending criteria, options for SME finance became limited. Consequently, a gap in the market appeared for new lenders and challenger banks to offer faster loans to small businesses as an alternative to high street banks. Speed of delivery and accessibility of products remains a big pain point for lenders – and is heavily reliant on the end-to-end technology that they deploy. However, the challenger banks have fewer constraints on lending criteria and therefore can be more flexible on the types of organisations they will lend to – including size, age of business and sector. and
Patrick Radise, Senior Sales Executive – Nordics and Baltics
Manual processing remains the biggest pain point for SME lenders in the Nordics and Baltics. The road to full automation and digitization is very complex and costly for incumbent lenders with legacy technology and systems. Often, SME business loan applications must be manually processed and underwritten by a small team, which can mean decisioning can take weeks. Many finance providers are reluctant to enter the SME lending space due to low levels of profitability.
Marcus von Rahden, Regional Manager – Central and Eastern Europe
Across the DACH region, it remains broadly difficult for smaller SMEs (<10m euros turnover) to access business finance. Although there are now improved acceptance levels for invoice/factoring finance, unsecured and secured bank loans are still the biggest source of business funding through banks. Yet, with interest levels remaining low, the banks generally have a strict lending criterion to mitigate the risk of investment.
There’s a continued focus on reducing operational costs to maintain a healthy cost-to-serve margin. This challenge, like other regions in Europe and across the globe, remains a high priority if banks are to be able to support more SMEs. Automating the application, decisioning and underwriting processes through the adoption of new technology is a big focus for the larger banks and new entrant lenders, to improve operational efficiencies, increase volume and deliver faster loans – whilst improving the SME application experience.
Inigo Rodriguez Navarro, Regional Sales Manager – Iberia
Many of the incumbent banks remain the primary funding stream for growing SMEs in the region. Applications are often a very manual process and delivered through legacy systems. Many also have limited automated access to external data sources, meaning lending decisions can still take longer than required for SMEs that are looking for fast funding, often to assist with cash-flow and enable growth.