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How to overcome the challenges of SME lending


Banks and financial institutions have understood the enormous potential of the SME sector. Special programmes are launched to exploit this potential within banks, on government or central bank levels. So why do most banks still struggle with managing SMEs properly?


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Author Tamás Erni,


managing partner, Loxon Solutions Lack of information


First of all, let’s admit: we don’t know SMEs. Not the sector itself, we know it very well. But what about one particular SME customer?


Well, looking at SMEs from the large corporate perspective all traditional information sources seem to be inefficient. Financial information doesn’t tell us too much about SMEs especially in case of brand new startups. The available credit bureau information is usually also very limited. We shouldn’t forget that a large portion of this segment is unbanked so they don’t even appear on the radar screen.


Difficult to target


The segment of SMEs is colourful, vibrant, diverse. SMEs vary in size, industry, geographical territory etc. This versatile structure asks for tailored services. The low ticket size on the other hand requires automated “mass production”. This contradiction is almost impossible to resolve by using traditional techniques.


Clear and complex requirements set by SMEs


Now that we understand what they look like, it’s time to understand what they want as a service. Well, SMEs – partially managed by Millennials and Gen Y – know exactly what they want.


First of all, they want flexibility. They refuse the “one size fits all” approach. Being confident about themselves they want a financial partner which responds precisely to their specific requests.


Gen Y and Millennials don’t understand paper-based administration. They find it old fashioned, slow and outdated. They want fast, seamless multi-channel and mainly digital service delivery: cutting edge, 21st century solutions and most importantly they want everything extremely fast.


All right, that’s enough! We all understand by now how challenging it is to lend to SMEs. It’s time to answer the real question: How to overcome this issue?


1. Credit scoring


Credit scoring is the fundament of SME credit decision and a prerequisite of profitable SME lending. The particular question of SME scoring is, “How to provide strong scoring without having proper data?” Well in fact, we have to ask a better question: Is it really true that we don’t have information?


The reality is that we have an endless ocean of information. The digital footprint of SME customers contains more information than is required. What we need is a proper approach to use this source wisely:


www.ibsintelligence.com


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