Alternative Data Transforming SME Finance

Many traditional commercial banks consider small and medium enterprises (SMEs) to be high-risk clients, as well as high-cost clients to acquire, underwrite and serve. There is limited SME coverage by credit reporting service providers especially in emerging markets where SME informality is high.

While being able to analyze SME financial data was difficult in the past, digitized finance that makes use of transactional and alternative data is offering a new opportunity to address opaque credit and financial histories of SMEs. Every time SMEs and their customers use cloud-based services, conduct banking transactions, make or accept electronic payments, browse the Internet, use their mobile phones, engage in social media, get rated online, buy or sell electronically, ship packages, or manage their receivables, payables, and recordkeeping online, they create and deepen the digital footprints they leave behind. SMEs’ own, real-time, and verified data — unprecedented volume, variety, and velocity — also means more data can be used for credit decisions.

A rapidly growing group of technology-focused SME lenders are putting the use of alternative digital data, customer needs, and advanced analytics at the center of their business models, thereby setting forth new blueprints for changing the SME finance market. These new lenders are also often providing more transparent, faster, easier, and better-tailored financing solutions that today’s increasingly tech-savvy SMEs seek.

The report titled “Alternative Data Transforming SME Finance” looked at 800+ innovative digital SME lenders and digital commerce, payments and service providers in more than 60 countries. Here are some of the key findings:

  • Banks have valuable data, but are often not using it: Banks have a highly valuable repository of SME data, including SME owners’ customers’ daily transaction data that provides reliable real-time visibility into SME cash flows and credit capacity. However, most banks lack the ability to create innovative SME lending models from it. The data often resides in a patchwork of legacy systems and data silos that make it difficult and costly to access. This gap has created an opening for digital SME lenders to capture this market segment and/or partner with banks to take advantage of these new models.
  • Digital SME lenders are developing new relationships with SME customers and their data: In some cases, non-bank digital SME lenders insert themselves between banks and their SME customers, and forge fundamental changes in SME customer expectations. SMEs are embracing the digital world more and more every day. Increasingly, many SMEs are more tech-savvy, more sensitive to slower service and paper-intensive loan applications, and more willing to shop around for unmet and unserved financing needs.
  • New SME digital data streams are becoming more readily available and accessible: Digital SME lenders leverage vast and expanding stores of data, including from electronically verifiable, real-time sales, bank account money flows and balances, payments, social media, trading, logistics, business accounting, and credit reporting service providers, as well as a wide range of other private and public data sources used in the SME credit assessment process.
  • There are a wide range of digital SME originator lending business models: The new digital SME lending originator business models that take advantage of the expanding universe of SME digital data vary widely. This report highlights these business models, selected players, and the digital SME data they use. It includes marketplace lenders, tech, e-commerce, and payment giants which are extending SME lending into their non-banking digital ecosystems where they are already dominant. It also includes supply chain financing firms, mobile micro-lenders graduating to SME lending, and innovative banks.
  • Digital SME lending is becoming more of a global trend: That these innovators are sometimes simultaneously launching nearly identical products in developed and developing markets alike demonstrates just how profoundly alternative data and technology are leveling the playing field. As such, they are enabling new digital SME lenders in many parts in the world to leapfrog traditional bank SME financing barriers.
  • Digital SME lender-bank collaboration is also a growing part of the future of SME finance: Banks may have been blind to digital SME lenders at first, and digital SME lenders may have said they would replace banks. However, both parties now have come to a simple conclusion: there are limits to what each player can do on their own and there is strength in collaborating. Apart from partnerships with banks, some non-bank digital SME lenders are instead partnering with each other, tech giants, cloud-based SME service providers, or alternative lenders in other sectors. In other cases, they are securing their own banking licenses, suggesting some new non-bank digital SME lenders still plan to forge an alternate path, thereby bypassing traditional legacy banks altogether. A vital characteristic of these collaborations is a sharing of each partner’s SME digital data. This facilitates the development of new and innovative SME credit decision models and expanded access to credit.
  • Access to data is no longer the problem in SME lending: Digital SME lenders have dispelled the long-held notion that SME lending is not achievable in a scalable, efficient, and profitable manner. In an increasingly digital economy, these lenders are beginning to demonstrate that access to data is unlocking many of the earlier challenges to expanding SME lending. The digital economy has also given rise to an ever-evolving set of value-added cloud-based services to help SMEs with their finances, business planning, productivity, legal issues, data backup and security, file sharing, web conferencing, website builds, online marketing, business training, e-commerce, payments, loyalty programs, business intelligence, and more. To increase customer engagement and help their SME customers be more successful, banks and other SME lenders have started partnering with these platforms to offer SMEs these applications individually, together, or wrapped up with other core products and services.
  • However, access to data for SME lending brings new challenges: With the abundance of alternative data, there are new issues of what to use, how to use it, and how to do this responsibly — while also respecting privacy and other important rights of SMEs. These new entrants bring new complexities, risks, and ways of thinking about the SME financing value chains, as well as new agenda items for policymakers and regulators.

Business Intelligence vs. Automated Reporting?

Both automated reporting and business intelligence can help businesses perform better but in different ways.

With automated reporting, organizations can simply produce reports faster and with less effort from business data without further analysis.

Alternatively, using a BI solution can offer ease of use in exploring the data, as well as scalability in automating reports from those explorations seamlessly and rapidly.

Let’s start with the basics.

What is Automated Reporting?

Automated Reporting, is about bringing users relevant useful information in a timely way, without the users having to seek out the information for themselves. It tells you what has happened and how different areas of a business are performing. Automated reports can be generated at fixed intervals, such as every Friday for the weekly sales figures. They may also be triggered by certain events, like a shipping backlog that has now increased to a critical level that must be resolved.

Productivity Through Automated Reporting

When you and your teams know which standard information and alerts you need, day in and day out, automated reporting can be a simple, effective way of providing that information. Automation can also help to make sure reporting is spread out over the course of each day. This prevents peaks in demand that might otherwise lead to problems with system performance. Ready-made reports make it faster and easier to get business status and performance information out of a system.

So Then, What is Business Intelligence?

Business Intelligence, on the other hand, is about taking proactive decisions to pull together data to ask questions about why or how certain things are happening. For instance, you might gather information from different sources (sales, CRM, production, or others) to see how sales revenues of one product affect net profits for another, or why production slowdowns have been occurring the same time every quarter and how to prevent them. The goal of BI is to get meaningful insights, which then help you better understand and enhance your business performance.

Performance and Profitability Through BI

Your business intelligence already starts when you assess a report and decide how to act on the information it contains. Comparing, examining, and questioning are all part of the process of better understanding your data and discovering relationships, trends, and opportunities for performance and profitability. The right BI platform helps you apply these processes intuitively to make sense of practically any size and number of data sources. It also offers you interactive dashboards that update automatically as new data arrives, helping you turn your business into a data-driven enterprise.

BI and Automated Reporting Working Together

A business intelligence application with built-in automated reporting can bring you the advantages of both approaches. By using the BI application as a single data repository, everybody can analyze the same versions of the numbers and work from a single source of truth to get information and insights. Simple connection of multiple data sources and easy creation of reports and dashboards let your users get what they need and get on with their jobs, with little or no help needed from IT.

Reach out to us to know more on info@mypayg.com, your Partner Advocating Your Growth