MSMEs remain important for banks in emerging markets, although a lack of relevant information for that market creates a gap between banks and these businesses. Is fintech the answer to that problem?
Two issues have recurred repeatedly in emerging markets: first, the micro, small and medium enterprises (MSMEs) segment becomes the most important non-retail market for banks’ lending products; and second, financial information regarding potential borrowers in that market remain lacking. Considering the significance of MSMEs to economic growth and bank profitability, it becomes imperative for any bank that wants to be a significant national player to weather these challenges and engage in the MSME market.
The good news is, banks are by no means out of moves. They can implement several strategies to address this segment of the market. For one, banks could focus on middle-market companies that provide financial statements, albeit often of unreliable quality. Fully collateralised loans and interview-type assessment processes are also feasible options.
This is where fintech comes into play. It is something that could address the MSME market without the drawbacks of subjective interviews and the constraints of secured lending. Utilised correctly, fintech can provide banks the right data on borrowers and segments that they need to make rational lending decisions.
Establishing a link with MSMEs through fintech
Fintech has already spread through banks in most parts of the world. Even Africa, which some regard as a technological backwater, has had innovations in financial services. In a report by the GSM Association — an industry organisation representing the interest of mobile network operators around the world — it had been noted that over 57% of the world’s mobile money accounts are located in sub-Saharan Africa. The same report also projected the continent’s fintech market to grow from about $200 million in value in 2018 to nearly $3 billion by 2020.
Fintech has the capability to establish a connection with the MSME market and bridge a gap that banks need to address. Whilst many or most MSMEs do not prepare or supply formal operating and financial information, it is likely that most MSME proprietors maintain their own systems of generating information that guide them on how their business is running. Banks can harness fintech to obtain that information.
Additionally, by default, businesses generate significant amounts of data, regardless if they work with credit cards or run cash-based operations. These data can also be used to create some form of informal operating and financial information.
With appropriate analysis systems, it is possible to convert these records into a simple balance sheet, profit and loss and cash flow statement on a monthly basis. These statements could be made available to borrowers and applicants, enhancing their capacity to manage their businesses more effectively, and to their lenders, allowing them to monitor borrowers’ businesses.
Banks can readily establish this process for their MSME clients by accessing their income and expenditure records remotely and applying the same sort of analytical techniques.
Alternatively, individual banks can implement this form of analytical and reporting system as a service to the clients and as an invaluable means of building up sector-specific performance indicator databases. A group of banks and other credit providers can also combine their efforts and introduce a joint analysis system to ensure that the data is anonymised, thus facilitating the development of the same sector-specific performance indicators.
Existing banks have a chance to fight back in this arena, too. Whilst old systems may not be as adaptable as those that new fintech lenders use, the “old” banks do have a lot of existing data which could be incorporated into a new fintech-based reporting and analysis system without too much difficulty. It’s all a matter of how banks harness information and fintech.