McKinsey: Reimagining lending to SMEs

McKinseys recent report challenges banks to ‘reimagine lending to small and medium-size enterprises’. The challenges and opportunities they outline ring true with our personal experiences as risk and technology professionals at several successful lenders – both established incumbents and fintech challengers.

Below, we summarise the key passages that articulate what McKinsey believe are the key challenges, opportunities, and hallmarks of a new approach to SME lending – many of which we share and use to drive the work we do at Abel.

You can read the full report in its entirety here.

---

The market opportunity in reimaginging SME lending

In this new credit cycle, SME lending will be not only one of the most economically important but also one of the most profitable contributors to banking revenues. According to a World Bank report, the world’s micro, small, and medium-size enterprises have unmet finance needs of approximately $5.2 trillion a year, roughly 1.5 times the current lending market for such businesses.

The problems of old business models and approaches

Many still use old business models, rely on legacy processes, and even view SMEs as corporate entities.

New trends supporting the move to a new, reimagined approach

Several trends in the postpandemic market will influence how financial institutions can capitalize on SME-lending opportunities:

‍The use of forward-looking data sources and cutting-edge modeling techniques.
More banks across the globe are starting to leverage transaction data, online sales, or telco data to assess SME-lending risks and enhance the performance of credit models.

‍Technology is now a differentiator.
Banks are increasing their investments and integrating tech platforms to adopt a modular approach to SME lending. The most successful of these banks develop their sweet spot and integrate these investments with their existing systems.

‍Digital engagement is mandatory.
In the past, digital engagement was merely “good to have” in SME lending. Now it is mandatory. Increasing the level of digital engagement with customers and reducing the number of manual processes for approval will help retain customers and attract new ones.

‍A suite of services.
‍Fintech and big-tech companies previously led the disruption in SME lending, but now more banks want to provide a suite of services, including, for example, invoicing and payroll processing. This makes the lending bank a kind of community to help SMEs unlock other problems on their growth trajectory.

The use of advanced, forward-looking analytical techniques  

By taking a modular approach with legacy and new data sources, [banks] can unlock the true potential of the available data by using analytics for other cross-functions, such as sales, marketing, and pricing. Capturing real-time credit insights from transactions and sales will enable banks to enhance the performance of their credit models significantly. Banks can reimagine SME credit lending through dynamic, risk-adjusted pricing and limit setting. SME lending depends on bespoke offerings catering to unique customer needs and thus requires an advanced pricing engine to help relationship managers anchor negotiations at a suitable price range. A European bank, for example, put in place a modular design for model architecture, using forward-looking real-time data on merchants’ customer feedback to review and reassess the limit and pricing on a regular basis.

An example of a pure-digital SME Lending player

Consider the case of a large European bank that saw both challenges and opportunities in the lending market as a result of changing customer needs, the fintech disruption, and other competitive pressures. To capitalize on the new opportunities, the bank designed and built an entirely separate pure digital player in only nine months. Moving quickly to launch ensured speed to market and pre-empted competitors in the emerging business.

The fully digital SME-lending bank offered instant decisions—funding within 24 hours and loans of up to €250,000 in a wholly digital format. It enjoyed a customer growth rate two times faster than the segment as a whole and had a customer satisfaction score of more than 70. Sixty percent of the new customers came from competitors, and the digital bank was recognized as the most desired bank for SME lending in the bank’s home market. This seamless new customer experience offers a transparent view and a fully digital application process that takes only 15 minutes. From there, the customer can digitally sign the contract, receive the funds within 24 hours, and manage the entire loan online, just like a retail customer.

It’s these outcomes that Abel has been purpose built to support. Get in touch with our CEO, Paul or CRO, David to find out how Abel can be used to deliver the same performance for your SME lending franchise.

‍