Micro, small and medium-sized enterprises (MSMEs) are key contributors to economic activity as they provide employment opportunities, add to economic growth, and enhance innovation. Despite their role in developed and developing countries, MSMEs are treated unairly in terms of financing as they receive a disproportionately small share of credit from the financial system.
However, now is the best time for banks and MSME lenders to step up their efforts to serve MSMEs. According to McKinsey, emerging markets that are saturated with MSMEs have a huge potential to increase global banking revenue over the next decade. Banks and MSME lenders are faced with challenges when serving the MSME segment, and innovations in technology and risk management can disrupt these challenges.
Worldwide banks with a diverse portfolio can also learn from MSME lenders in their adoption of innovation and a full revamp of their traditional banking model. Modern markets require innovative digital solutions in the MSME industry, and maintaining the same business model will cause banks to lose potential customers, due to the high financial inclusion standards created by FinTechs.
Therefore, banks should embrace new technologies and revisit their business model to enter the digital age. Here are 5 ways how digital lending solutions can improve your MSME lending in a modern-day market.
Customer Centricity
Throughout the course of banking history, lenders have adopted an institution-centered approach, where the main focus was to increase the revenues and profits of the business, while leaving the needs of the customer outside the loop.
With the emergence of the technology and digital financial services industry, lenders began to adopt a customer-centric approach. Customer centricity is focused on providing value across the various stages of the customer journey, from onboarding to credit disbursement and collection. This enables MSME lenders to increase their profits and gain competitive advantage. Creating customer centricity begins with listening to the customers’ needs to provide tailored products. Digital lending solutions can help MSME lenders’ portfolio:
- Group the financial needs of customers by segments, such ash gender, age group, and economic status
- Increase customer loyalty and retain customers by generating long-lasting business value through a deep understanding of customer needs, preferences and behaviors
- Translate customer insights to customized products to help customers meet their goals
The absence of a customer-centric approach will hinder the provision of financial inclusion and decrease the usage of the offered financial services, since products are non-customizable.
Risk Management
The traditional risk assessment method in high-revenue-per-client segments, such as corporate banking, with a personal judgement intensive approach is becoming too costly for lenders and unsuitable for MSME lending. Therefore, MSME lenders should innovate their risk management methods and introduce new methods of assessing credit risk.
However, some leders are designing new and creative methods in assessing the risk of their MSME clients. Risk management innovation includes the introduction of credit scorecards, psychometric testing, financial statement analysis, and qualitative credit assessment. Digital lending platforms enable the automation of risk assessment and streamline all associated credit processes.
Innovation in credit risk assessment is also essential for MSMEs lenders since MSMEs are rarely equipped with the required information for a traditional credit scoring model, such as a credit rating, financial statements or collateral.
Commonly MSMEs use a credit scoring model though the tools are based primarily on traditional information sources such as documented evidence of cash flows, collateral, and a credit bureau score.
Digital Onboarding
Financial and lending literacy is increasing from the consumer’s side and customers are demanding new and innovative services that should be delivered rapidly. Due to the pandemic that caused to diminish human contact, MSME lenders should adopt ways to pursue operations while abiding by the safety regulations.
Digital onboarding refers to applying for a loan entirely online, without interacting with the lenders’ staff.
A well-designed customer onboarding process can become a key competitive advantage as it increases conversion of potential MSME prospects into customers. Increasingly, MSMEs expect onboarding to be digital, fast, and seamlessly integrate banking services with their mobile devices.
There are several benefits of quick MSME customer onboarding such as speeding up the process and capturing clients who want to engage digitally.
Digital banking solutions can quickly provide means for MSMEs to access funding from banks and financial institutions without submitting hard copies of their documents and directly interacting in person with employees.
Digital onboarding allows lenders to accept paperless documentation to support the loan application process. It also resolves the challenge of geographic barriers and allows to cost-effectively scale operations while reaching consumers in diverse locations.
Operations
Throughout the decade, banks have been leveraging technology to disrupt the traditional ways of providing financial services to MSMEs to deal with new entrants to the market.
With the modernization of technology in financial services, banks should either adopt digital solutions in MSME lending or accept the harsh realities of staying behind.
Digital transformation includes introducing new products, digitizing existing products, and changing the way operations are being done on their own or through digital platform providers.
To foster sustainable financial inclusion, MSME lenders are reconsidering their business models. Digital transformation is an opportunity to leverage license, customer base, and outreach to rural areas and low-income clients.
Through digital lending platforms, it is possible to collect and analyze customer data to determine risk profiles and optimize credit portfolios.
Data management can also be made simpler as data can be gathered, stored, retrieved, structured, analyzed, and cleaned in a highly efficient manner, unlike traditional means of managing data in banks.
Digital lending platforms enable MSME lenders to decrease costs effectively, build customer-centricity, reduce fraud, identify cross-selling opportunities and expand the customer base.
Embrace Technology and Digital Lending
Digital solutions play a crucial role in core business processes, including back-office operations, organizing and automating workflows, accessing funding, and thus positively impacting your MSME lending strategic direction and market positioning. Technology allows MSME lenders to become more transparent and accessible to MSMEs. Technology is constantly evolving and new innovations emerge to the lending industry frequently. Therefore, digital lending platforms will keep on enabling MSME lenders to secure funds, protect customer data, and comply with regulations.