Data, data everywhere

Thursday, November 9, 2017

Data. More of it is being pumped into the ether every day as technology evolves and becomes an intrinsic part of our lives.

Datacenters and company servers are bulging with the stuff – and that is providing opportunities for both traditional financial institutions and new entrants to tap underserved markets, among them small businesses.

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"A market that was effectively unaffordable to bankers is potentially becoming affordable," Matt Gamser, CEO of the IFC's SME Finance Forum, told BNamericas. "We know this because the alternative lenders have jumped in with both feet and shown us that you can make money. Bankers are slower because they are slower in general. They are regulated, they have to be careful."

In Latin America and the Caribbean, alternative finance markets grew 209% to US$342mn in 2016, according to a report based on a joint study conducted by the universities of Cambridge and Chicago. Marketplace/P2P business lending remained the largest alternative finance market segment with US$189mn recorded last year.

The growing trove of data permits lenders to assess potential clients without having to send out executives to see first-hand how healthy and sustainable a business is – something which banks have traditionally had to do.

Gamser said: "It's been very difficult for bankers to find cost-effective ways to understand SMEs enough so they can have a reasonable cost to acquire [take on] the business and a reasonable cost to serve the business. You not only need to understand them one-off but also along the lifecycle of your relationship with them.

"The good news is that today more and more businesses are doing business electronically. Entrepreneurs are doing related transactions electronically, whether that's paying bills or being on social media or other things that create an electronic footprint. You can have really valuable information and you can have it in an even more timelier manner."

Gamser said banks should develop their understanding of data available and what SMEs require and introduce systems that reduce friction, automate processes and proactively analyze the situation of customers and suggest suitable products.

In developing countries, 65mn or 40% of formal micro, small and medium enterprises (MSME) have unmet financing needs, according to data from the SME Finance Forum, which works to expand access to financing for SMEs.

The global finance gap in the segment is estimated at US$5.2tn, 1.4 times the current level of MSME lending. Latin America and the Caribbean accounts for about a quarter of the total, or US$1.21tn.

Creating opportunities for small business is seen as a key way to reduce poverty and advance economic development and, crucially, help create the estimated 600mn new jobs the World Bank says will be required worldwide by 2030.  

It is not just traditional banks and fintechs who have the sector in their crosshairs. Major online retailers and tech firms such as Amazon and China's Alibaba – which have mountains of customer data – are licking their lips.

"If anything, they are more interested in SMEs than consumers. They have a lot of merchants on their platforms and they're figuring out how to lend to those merchants," Gamser said. "It's very clever. It's probably a much bigger threat to banks' market share in the long run than the alternative lenders that aren't internet giants."

Alternative lenders sometimes join forces with established banks. But the major online retailers and tech firms tend to go it alone: Alibaba and PayPal, for example, have obtained their own banking licenses. Facebook, meanwhile, is launching an incursion into India's payment market – often the first step on the path to providing financial products such as consumer and business loans.

Pictured: Artisanal fishermen in Peru.