Informal trader

Technology, data mining, and lines of credit.

Author: Kevin Abraham

Photo credit: Vaughan Deacon Photography

For those of us who live and work in developed economies, access to financial technology is so widespread that it borders on the mundane. As individuals, we hardly think about swiping a card at the supermarket, transferring money, paying bills, purchasing or selling goods or services, checking investments, and so on.

For SME’s in particular, fintech can be a critical element in managing and sustaining their livelihoods. There are hundreds of useful applications, from budgeting apps, to invoicing, to CRM and so on. They are often inexpensive, and access is as easy as tapping on a smartphone. It is lesser known though, that these systems also offer an opportunity for gathering and analyzing an ever growing body of data which can and is being used in support of SME and business in general. The big idea is about new ways of helping to access lines of credit, the lack of which, as we know, is a key limitation restricting SME ability to survive and thrive, especially at start up.

The problem is that financing agencies, especially, but not only banks, commonly rely on outdated methods and legacy technology that limit the ways in which credit applications are screened. The result is that many SMEs cannot get credit.

A fairly recent report by the World Bank indicates that a significant percentage of SMEs in middle and low income countries never seek credit from traditional financial institutions. One reason is the fear that their project would not be considered loan worthy. But the main reason is the belief that their credit applications would fail because they’d be unable to prove their creditworthiness. No surprise there.

Andrés Abumohor, writing for Nasdaq, observes that there is a growing willingness amongst traditional financial institutions to collaborate with more progressive fintech companies in order to identify ways to achieve greater credit access for a wider demographic.

For example, fintech companies who are able to widely gather and access data about similar businesses and extrapolate the results, can help banks to reliably evaluate creditworthiness in alternative, new ways. Another example is transactional data: Alibaba uses such data to support a highly stable predictive model for evaluating the credit risk of its customers. In India, where nearly 50 million SMEs do not have access to formal credit, the government has assigned several fintech companies to use information collected from public sources, such as social media and government data, in order to provide alternative ways to assess creditworthiness.

In order to provide controls that structure alternative financing systems, governments will look to new regulatory frameworks.  Mexico is one country moving very quickly to implement such frameworks, with the stated mission of creating partnerships between traditional institutions and fintech companies to provide accessible and affordable financial services to both individuals and businesses. [A good idea in a country where over 60% of the population does not have a bank account.]

Fintech is likely to grow ever more important in the management and sustaining of businesses across the board. In the finance and credit environment, change will be swift, and robust. No doubt, traditional institutions will need to adapt or lag behind in a more progressive environment. Same is true for any enterprise that evaluates lines of credit to a customer base. The good news is that banks are already coming to the party. Corporate entities are a little slow off the mark, but likely to do so, too.

As fintech companies develop their expertise in making use of an accelerating accumulation of data, collaboration will intensify. It could entirely change the way future credit is delivered. If the mission is to offer better access to finance and credit for those that need it, it is surely a good thing.

[Ref: A. Abumohor – The Benefits of Fintech Partnerships in Emerging Markets.  World Bank Group – Global Financial Development Report Wiki/Google]