Transforming SME lending: How technology is changing the game

Industry experts recently came together with Finastra in London to discuss strategies for unlocking growth in SME and bilateral lending. In the second of a two-part article series, we share insights from the event – focusing on the benefits to be gained through digitalizing the lending process and adopting AI in a way that helps expand access to lending while retaining the human touch.

The small and medium enterprise (SME) lending landscape is ripe for transformation, driven by technological innovation and changing customer expectations. The big banks now face competition from agile challengers that have rapidly entered the market, forcing established players to rethink their approach to serving small businesses. This shift represents not just a change in competitive dynamics, but a fundamental reimagining of how financial services can be delivered to this vital economic sector.

"SMEs are looking for speed, simplicity and personalization," noted Saad Malik, Director, Lending Commercialisation & Sustainability, Business & Commercial Banking at Lloyds Banking Group. This demand is reshaping expectations across the industry, with businesses increasingly seeking the same frictionless experiences they enjoy as retail banking customers. The days of accepting lengthy application processes and generic financial products are fading as SMEs become more digitally savvy and more aware of the importance of shopping around for better service.

Digitalization and personalization as crucial differentiators

Digital platforms are dramatically streamlining the lending process, enabling financial institutions to deliver decisions with unprecedented speed. As Philippa Pykett, Head of Growth Digital SME Lending, at Shawbrook Bank explained, "We use a lot of technology in our underwriting journey. But rather than asking for the customer to send everything to us, we look for data sources and pull that information in directly. This approach is quickening the journey, improving data accuracy and removing friction."

Personalization is also emerging as a crucial differentiator. Rather than offering standardized products, banks and fintechs increasingly recognize the importance of developing tailored lending options that align with the unique cash flow patterns, growth trajectories, and the operational needs of individual businesses.

The customer experience is being transformed through self-service portals and mobile banking. By adopting a single-entry approach, financial institutions enable SMEs to seamlessly access a full suite of services, from accounts and payments to lending and invoicing, within one unified digital ecosystem, streamlining operations and enhancing convenience.

Enhanced transparency and communication are crucial in reshaping bank-client relationships. Digital platforms provide clearer visibility into application status, approval criteria, and ongoing account management. This transparency builds trust and reduces the frustration traditionally associated with opaque lending processes, creating stronger, more productive partnerships between financial institutions and the SMEs they serve.

The AI surge in data analytics

Banks and fintechs are increasingly looking to artificial intelligence (AI) and advanced data analytics to further transform SME lending processes, however, there remain significant hurdles to overcome. Eric Li, Head of Global Banking Research at Coalition Greenwich identified a fundamental challenge: "The first thing lenders need to ask, is whether they have the structured data pool they need. Half of banks already fail at this stage." Without properly structured data, institutions will struggle to leverage AI effectively.

Using AI to analyse datasets from multiple sources and to power modern credit scoring models will enable lenders to evaluate businesses more holistically than traditional methods. Instead of relying solely on historical financial data and collateral, AI offers the potential to incorporate alternative data sources to assess creditworthiness.

Elena Sankova, Global Solution Consultant and Head of Transaction Banking at Finastra, emphasized the importance of lenders adopting “an ecosystem approach that integrates digital solutions and data flows, with core lending platforms at the center of an integrated technology architecture.”

Beyond lending decisions, AI can transform portfolio monitoring and enable earlier intervention by identifying SMEs that may be facing difficulties. Implementing automated portfolio monitoring with key performance indicators is crucial for proactive risk management of dynamic credit limits.

Document processing represents another promising application area for AI. Conrad Ford, Chief Product Officer, Allica Bank identified a specific pain point: "Huge amounts of time have been wasted on comparing PDFs, exchanging PDFs and looking for data in PDFs.” By automating document analysis, banks can redirect valuable human resources toward more complex decision-making tasks.

Collaboration, trust and the human element

Despite rapid digitalization, the human element remains crucial for building trust and ensuring fairness. Research conducted by the Lending Standards Board has revealed stark differences between automated and human interactions, with purely automated chatbots performing poorly for anything beyond basic queries. Interestingly, even when customers are aware they are interacting with AI, chatbots that demonstrate empathy tend to be rated more positively, as this creates a sense that the organization genuinely cares about the customer experience.

The integration of AI with human judgment represents a powerful combination in lending workflows. “Shawbrook Bank employs digital assisted decisioning,” explained Philippa Pykett, “because there's a lot of value in a human assessment application for a loan or a finance facility, and having that gut feeling about whether or not we should go ahead." This hybrid approach leverages technology's efficiency while preserving the value of human expertise.

Human intervention becomes particularly vital in sensitive scenarios such as collections. In these situations, direct conversations between staff and small business owners are essential for understanding the reasons behind financial difficulties. Such interactions not only support individual businesses but also provide valuable feedback that helps lenders refine their policies and better serve specific sectors.

Looking ahead, financial institutions must prepare for an increasingly sophisticated SME customer base. "SMEs are moving on to digital platforms. That's where banks will find their next generation of customers. The next generation are less loyal, they are more informed, they're more digitally savvy, and therefore they're more willing to shop around," warned Saad Malik. This shift demands that lenders continually evolve their digital capabilities while finding ways to maintain meaningful relationships.

For financial institutions seeking to harness AI for SME growth, the key lies in finding the optimal balance between automation and human expertise. Conrad Ford articulated this fundamental challenge: "Digitalization is essential, but at the same time the human element of banking really matters."

Successful lenders will be those who leverage technology to make relationship banking economically viable rather than replacing it entirely. The winning formula combines AI's efficiency and analytical power with the irreplaceable human qualities of empathy, judgment, and relationship-building that SMEs continue to value highly.