Bridging the Credit Gap: The Collaborative Potential of Banks and Fintech for MSMEs
The micro, small, and medium enterprises (MSME) sector has consistently played a critical role as a driving force in the global economy, responsible for generating 60% to 70% of employment opportunities worldwide. However, the sector has long grappled with the challenge of limited credit access due to inadequate submission of documents, personal data, credit history, and absence or lack of collaterals, impeding its full potential. Closing the credit gap for MSMEs is not just an economic necessity but also a way to foster inclusive and sustainable development.
Collaborations between banks and fintechs enable a higher adoption of traditional and alternative data sources by commercial lenders, leading to a more comprehensive representation of individual borrower credit situations
Collaboration between banks and fintech firms has the potential to transform the commercial lending landscape and overcome the traditional barriers that have limited MSMEs' access to credit. Fintech companies bring agility, advanced analytics, and digital platforms that streamline the lending process and build a strong digital lending ecosystem for entrepreneurs. On the other hand, banks bring regulatory knowledge, access to capital, credibility, and an established customer base. By synergizing these strengths, banks, and fintechs can enhance the assess- ment of MSMEs' creditworthiness and make more informed and accurate credit decisions, reduce risks, and improve efficiency.
Collaborations between banks and fintechs enable a higher adoption of traditional and alter- native data sources by commercial lenders, leading to a more comprehensive representation of individual borrower credit situations. For example, fintechs employ alternative credit scoring models that evaluate the creditworthiness of MSMEs based on their digital footprints and transaction history. This approach reduces reliance on traditional credit history and/or collateral requirements and empowers deserving MSMEs with access to timely and affordable credit. Additionally, collaboration with fintechs enables lenders to quickly leverage AI/ML and data analytics technologies to assess of relevant customer data, industry and payroll trends to gain a deeper understanding of their customers' financial and risk profiles and predict the probability of a loan default.
AI and ML can also be used to spot early warning signs of trouble and offer more accurate projections based on real-time data by looking at cash flow projections, sales and expenditure data, and other sources. This also facilitates banks to create customized financing solutions that cater to the cash flow needs of MSMEs, providing short-term and small-ticket size loans. As a result, banks can leverage new opportunities by integrating internal customer data with broader and more comprehensive information gathered from external and unconventional data sources to enhance credit inclusivity.
"Traditional banking procedures can be lengthy and cumbersome, deterring MSMEs from seeking formal credit"
Another key advantage of banks and fintech collaboration is the speed at which credit assess- ments can be conducted. Traditional banking procedures can be lengthy and cumbersome, deterring MSMEs from seeking formal credit. Fintech companies with their automated systems and digital platforms provide user-friendly interfaces and digital documentation, making it easier for MSMEs to apply for loans. Consequently, the collaboration with fintechs enables banks to automate and expedite various processes, including loan application processing, document authentication, and compliance. In addition, fintech companies through their digital infrastructure can also enable banks to offer loans to MSMEs who are in remote areas and beyond banks’ physical branch network.
Several technologies developed by leading fintechs, including OakNorth Credit Intelligence, is evidence of the collaborative potential of banks and fintech providers to help close this funding gap via the provision of a data-driven approach to banking.
We apply data analysis techniques to create unique models that provide a granular level of analysis for each borrower. By combining borrower-provided data with our vast repository of external data, we are able to add depth to point-in-time analysis and monitoring, allowing lenders to be smarter and faster in their decisions on loan approval and driving better outcomes during economic cycles.
Collaborative partnerships between banks and fintechs will result in a holistic financial ecosystem that is data-driven, forward-looking, and swift to offer loans to MSME borrowers. As the partnership between banks and fintech companies continues to evolve, it holds immense potential to unlock the full potential of MSMEs and contribute to a more inclusive economy.