Earlier articles in this series looked at how SMEs are digitalizing around the world and the challenges of delivering Financial Services to them. Now we ask how banks, fintechs, and others can serve SMEs, from payments through to digital lending and more.

The Players At The Table

Non-bank platforms are emerging from the traditional SME supplier base to serve their financial needs. These include international conglomerates such as Unilever under brands such as Compra in Brazil or Food Service Direct in the US, as well as smaller regional and national players such as Pakistan’s Tarseel or Saudi Arabia’s Retailo. In another twist, some merchant acquirers such as PagSeguro and Stone in Brazil are becoming banks to enable them to expand into credit, lending, and other products.

In plain language, that means banks face a fight to serve the burgeoning SME segment. In preparation for this fight, financial players are developing propositions which could be used to serve microbusinesses and SMEs directly, or through a marketplace platform. In the table below, we outline the various categories of financial companies engaged in this competition. Broadly, they can be separated into traditional banks, digital-first banks or so-called “neobanks”, fintechs which provide lending services, and e-wallet providers.

Serving SMEs Globally: Pros and Cons Of Various Financial Providers

                                                Source: KoreFusion analysis

While traditional banks typically enjoy established client relationships and a well-understood, broad range of products – not to mention strong access to capital – they tend to be as slow in new product development as they have been in digitalizing their services; what’s more, these institutions have shown less interest in serving the microbusinesses which typically constitute up to 90% of any emerging market economy. Digital banks, by contrast, are nimble, and able to deliver a wide range of products to market rapidly. However, they may lack the ability to scale their services – and to serve segments still in the early stages of the digitalization journey.

Fintechs focused on lending can share some of the challenges experienced by digital banks, in that they may also struggle to scale and may not enjoy strong client relationships. On the positive side, they are likely to have experience in lending to SMEs, are committed to innovating rapidly, and possess the digital processes and scoring models required for success. Finally, e-wallet providers, like fintechs, are increasingly likely to have established relationships with SMEs as payments clients and thus have scope to offer “bolt-on” services such as cards and lending – albeit in conjunction with specialist partners in the case of lending and credit products.

The success of e-wallet providers in branching out into other services underlines the centrality of managing payments to the provision of wider services. If a financial services firm manages an SME’s payments, they can establish records about the SME’s payment history and turnover which can help to inform credit and lending decisions. As we cover in our article on the challenges of serving SMEs, the absence of reliable payment and turnover data has been a serious blocker on the provision of credit services to microbusinesses and SMEs for decades. However, there are signs that this situation is changing fast.

New Models Emerging

Using payments information as a starting point, financial services players in emerging markets are creating new models for lending that are seeing millions of US dollars in new financing and loans extended to SMEs. These include a basic approach in which lenders assess creditworthiness based on an interview, the SME’s reputation, and other eligibility criteria. Companies such as Nigera’s Lapo Microfinance or Latin America’s Pro Mujer use this kind of approach.

Further up the scale, lenders use traditional credit scoring and decision-making processes favored by banks. These are based on an application process that includes information from credit bureaux, tax filings, and audited accounts, combining this information to produce a credit score on which loan and credit applications can be assessed. Habib Bank (Pakistan) and Mexico’s Banco Azteca currently use these methodologies to expand their lending portfolio to SMEs.

A third model leverages merchant payment and turnover data to develop projected future cash flows based on historical transaction data and cash flows. Part of this includes modeling the organizations previous behavior (on time/late payments, invoicing history) to assess their creditworthiness. For instance, Latin America’s Tienda Pago empowers microbusinesses and SMEs with credit to purchase goods from their suppliers based on their previous turnover and invoicing information. In Brazil, PagBanco has used card acceptance data at merchants’ POS to compliment such data analytics.

Where payment and/or credit history information simply doesn’t exist, lenders will combine information from credit bureaux with socio-demographic data, authenticated forms of ID and data from social networks to gain a picture of a business owner’s creditworthiness. This is an approach adopted by Mexico’s Konfio, which has built a digital platform offering microfinancing to SMEs based on these kinds of criteria.

As the process of SME digitalization continues apace in emerging markets, banks and fintechs have a crucial role to play not just in facilitating digital payments, but in financing growth and expansion through the provision of loans and credit facilities. Despite the obvious advantages conferred on them through established relationships, especially in payments, they are not the only players in this game. Looking ahead, their challenge will be to establish viable credit and lending scoring mechanisms while developing relationships with SMEs. They will also be challenged to develop and scale a full spectrum of services that can compete with compelling alternatives from SMEs’ existing supplier bases.

KoreFusion optimizes SMB payments strategy across 80 countries. We help banks, brands, and fintechs develop embedded payment and financial services for SMBs. For more information, please contact hello@korefusion.com and we’ll be glad to help.