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Financial inclusion for small businesses in the digital economy

Anju Patwardhan,Standard Chartered’s global Chief Innovation Officer | May 3, 2016
Can digital plug the SME credit funding gap and support financial inclusion?

Many governments have introduced specific programmes to improve availability of finance to MSMEs by encouraging the alternative finance sector to flourish.

The US JOBS (Jumpstart Our Startups) Act of 2012 has had significant positive impact for meeting the credit needs of individuals and small businesses. The UK government has introduced challenger bank licences and created the British Business Bank, while proposing legislation to mandate banks to refer to other providers when they decline MSMEs for finance. China has also issued new banking licences to technology companies to promote financial inclusion and India's regulators have issued Small Finance Bank licenses.

However, while the efforts have shown some positive results, and momentum is building, a vast funding gap still remains.

Fintech as a game changer: big data, small credit

Changing market drivers are giving banks a good reason to rethink the traditional position that banking MSMEs requires a trade-off between financial and social returns.

A consumer financial services revolution is taking place around the globe, powered by mobile phones, technological innovation and changing consumer mindsets. Already, over 1.7 billion adults who are unknown to formal credit bureaus, are becoming 'digitally discoverable' through their mobile footprint.

The digital revolution is enabling new business models for servicing MSMEs profitably, and meeting their diverse financing needs using digital solutions, advanced analytics, a network of agents and correspondents, and partnerships with the development sector.

Several innovative fintech firms have begun to use predictive credit models, based on unconventional data sources and machine-learning algorithms, to assess the credit risk associated with MSMEs. These marketplace lending platforms are using technology to reach segments historically underserved by banks. They have a lower cost structure than banks, and lighter regulatory scrutiny. However, they  mainly offer unsecured term loans to consumers, and only a handful are targeting the specific business needs of SMEs, such as Kabbage and OnDeck in the US, Funding Circle in the UK, and Sino-Lending and Ant Micro Loans in China.

A study released in April 2016 by Cambridge University's Center for Alternative Finance highlights that between 2013 and 2015, online alternative finance platforms in the US facilitated nearly USD11 billion worth of growth, expansion, working and venture capital to over 260,000 SMEs.

The path ahead: Creative collaboration between policymakers, banks and technology firms

New technologies could become a game changer for MSMEs, as new solutions can be customised, effective and profitable at lower scale. This includes tailored products that are normally out of bounds for small business, such as working-capital lines, merchant and e-commerce finance, invoice discounting, supply-chain finance and trade finance.

Banks have a critical role to play in this digital future. They know the financial products, possess the required scale, capital and consumer trust, and have the key competitive advantage of risk management. Technology firms bring innovation, new customer segments and new distribution channels.


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