SME finance in 2030 will be cheaper, faster and fundamentally more inclusive

We expect the world of SME finance to have fundamentally changed by 2030. A significant and transformational shift has already taken place over the last 10 years in which innovative FinTech companies, challenger banks, specialist digital SME lenders, E-commerce players and aggregators like Facebook and Google have entered the $8.1 trillion SME credit market and already offer a range of solutions to meet the diverse financing needs of SMEs of all sizes.

By 2030 we expect much bigger shifts to have taken place including: the continued adoption of digitisation, open banking and a move to open tax which will allow for data to be effectively mined as part of the credit underwriting process and substantially reduce the time and cost to serve SME borrowers, the introduction of digital and AI-backed underwriting for larger more complex business loans that today are done manually in most countries; the utilisation of blockchain and smart contracts that drive efficiency in the area of securitisation; to the introduction of crypto currencies as a currency for lending loan repayment allowing for a better alignment of business loan products with SME business cycles and the volatility in their cash flows, to a streamlining of the SME credit ecosystem in which non-financial institutions take over the provision of many of the products and services that traditionally were the exclusive domain of financial institutions.

The Reinvention of the Ecosystem for SME Credit

After the financial crisis of 2007-2008, most traditional lenders have been increasingly less willing to shoulder the compliance burdens of lending to SMEs. With the introduction of the Basel III norms, the costs of lending to SMEs also increased since regulated capital requirements for SME lending are disproportionately high compared to the size of loans. We expect that Banks will continue to be subject to strict regulatory norms and will, therefore, continue to move away from direct lending into the smaller end of the SME credit market, while at the same time becoming more aggressive about outsourcing their SME lending activities by providing loans to downstream partner lenders that specialise in this segment like NBFCs in India, NBFIs in Africa and alternative lenders in developed economies that are better equipped to distribute to SMEs.

The medium-sized loan segment in 2030 within SME lending will be dominated by bi-lateral bank-fintech partnerships and multi-lateral managed marketplaces like the one run by CreditEnable, where fintech intermediaries unencumbered by legacy technology systems are able to use AI, sophisticated analytics and automated underwriting processes to improve the customer experience for borrowers, and reduce both the risk involved with lending into this segment and the cost to serve for lenders.

Examples of this shift to partnerships in the medium loan segment are already in play. Retail behemoth Amazon, for example, is already paving the way for such collaborations. Earlier this year, at the beginning of the global pandemic, Amazon announced a partnership with Goldman Sachs to enable credit lines of up to $1 million to all merchants using its platform. Amazon already issues term loans to its partners using a tie-up it has with Bank of America. CreditEnable manages an SME credit marketplace facilitating the rapid distribution of loans to SMEs from lenders that collectively manage a loan portfolio of $170 billion.

E-commerce players like Amazon and Alibaba that have a rapacious appetite to grow their supplier bases, and the ability to underwrite riskier loans because of their immense access to real-time sales data and the lower compliance requirements they face as non-financial institutions will become the dominant providers of loans to smaller SMEs by 2030.

At the micro-end, non-traditional actors will continue to innovate. In late 2019, ride-hailing giant, Uber, forayed into financial services with the announcement of Uber Money, that would give its drivers access to a bank account and digital wallet, complete with access to credit.

Technology has already revolutionised financial access for SMEs. Further digitization is going to increase the geographical penetration of credit. Already taking full advantage of these trends, Google and Facebook are now entering the SME loan market. WhatsApp, with an active user base of 400 million people in India, is the latest entrant looking to finance SME loans. With access to millions of data points on SMEs, these tech behemoths will find it easier and faster to underwrite small ticket loans than banks.

And innovative products built off the rails of digital networks will continue to be developed and proliferate globally. Nascent examples of what to come have already launched in India, where digital payments player InstaMojo introduced “sachet loans” as a means to ease the COVID-19 cash shortage for SMEs. These bite-sized loans, with a tenure up to 14 days, are sanctioned over messages on WhatsApp for SMEs to meet their working capital requirements.

Shopify, and PayPal, among others, are also embracing small-ticket business loans to SMEs as a natural part of their business evolution.

Artificial Intelligence will be the Real Game Changer

Artificial intelligence, however, will be the real disrupting element in SME lending. Predictive AI which can model for the future, for black swan events like COVID, and identify patterns of opportunity and risk, will be embedded in most fintech offerings and banks will have identified the right use cases and invested heavily in AI.

The mass introduction of AI into SME lending holds the greatest chance of democratizing access to credit. Not only does it hold the promise of eliminating inherent biases around gender, minorities, socio-economic classes and geography, AI and machine learning will cut the cost of capital for SMEs even while reducing default risk for lenders, effectively democratizing credit.

Technology will drive organic growth opportunities for this underserviced sector as more SMEs will gravitate towards formal sources of credit, given the increasing choices for borrowing, affordable rates and ease of access to funds.

The outlook in 2030 certainly will look very different from today, but the future is certainly going to be a brighter one in SME finance.

This article was published in the SME Finance Forum’s Interactive ePublication “Call for Insights E-publication: Crowdsourcing the Future of SME Financing” special publication.