Assessing credit risk of SME’s and how credit scoring can transform SME’s
Paul Randall was recently at the Kafalah SME Financing Conference in Riyadh, Saudi Arabia, and he tackled these 2 questions during the panel discussion.
What are the specific challenges of assessing credit risk of SMEs as compared to larger firms and how can fintech can help lenders address those?
“There are 3 main areas of a difference and I could summarise this by talking about the “3 P’s”: Pertinent data, Profitability and Pride. The availability of formal data in regard to the pertinent data, the profitability the cost of gathering data and pride relates to the different skill set.
For Pertinent data we can consider for large corporates that balance sheets, profit and loss financial ratios cash-flow provide a huge amount of data. When it comes to small businesses this formal information is often not available. However in the future we will see the use of open banking data, mobile wallet data, credit bureau and invoice information data like for example, Amazon who through their invoice information, are likely to be one of the biggest global lenders to SME in the future.
When we look at the Profitability for small business lending historically, we see that it has been low because of the cost of data and the relatively low volumes compared to retail. When the information is a gathered automatically and decisions are made digitally then the cost reduces and a profitability increases.
The final point perhaps I was a little bit harsh using the word “Pride” with my “3 P’s”. What I mean here is that the skill set for underwriting corporate loans is very different to that of underwriting small businesses especially when an automated process is used, so it has been important to separate the departments of corporate lending and small business lending to really be effective in this area”.
What are some of the key innovations that are seen in credit reporting and credit scoring today that have the potential to transform the SME finance space and reduce the credit gap?
“The core concept that fintech credit bureaus are supporting is data fusion. This is the process of gathering data from multiple sources and bring it together.
So where does this new data come from for SME decisions? We have data from mobile wallets so the transaction data that is made in mobile wallets in different markets can be data from open banking sources – so transactional data in the banking environment. From there we can then identify data on the internet or from mobile scraping so to bring together the information on activity that the companies are undertaking such as making news articles and traffic on their websites. At Creditinfo for example, we are working with a number of lenders and use the mobile wallet data to support SME lending in Africa.
We have information from credit bureaus that describe many aspects of SMEs. Many credit bureaus will hold information on the payment histories also the credit activity of businesses furthermore they will hold information on any collateral or guarantors or information on the directors or owners”.