SME lending in the real world
The recent pandemic has clearly been an enormous challenge for SMEs, with many either shuttered or struggling, yet the swift and substantial stimulus measures have provided some buoyancy. For banks, while there has been a hard pivot in response to the changes brought about by schemes such as PPP, what’s mostly happened last year in relation to SME lending is an acceleration of change that was already in the pipeline. Specifically, we've seen a speeding up of digitization, with accompanying investment in technologies and platforms that enable the efficiency, customer engagement and digital exchange of information that will make it possible for banks to get back in front of SME customers as efficiently as possible.
One important challenge for SME lending in this crisis has been segmentation. Typically, in crises, specific sectors take a hit. With COVID-19, macro sectors such as hospitality and aviation have indeed suffered. However, its impact has also been highly “micro-targeted”. For example, in a normal downturn, most businesses in a strip mall would feel the pain. However, during the pandemic, the take-out restaurant will likely be doing much better than the brewpub. And with traditional default signals muted by the stimulus, really granular segmentation is needed to get a better read on an SME’s prospects.
The pandemic has also accelerated the need for end-to-end lending. With limited ability to interact in person, banks need better ways to go from application through underwriting and approval to easy onboarding onto a loan platform, so the loan can be closed and serviced through its life. After Covid, banks will have learned how much they have been able to join together to create an end-to-end process that minimizes the back and forth and face-to-face contact needed to deliver a credit product.
We’re also seeing a valuable consolidation within lenders, away from silos such as small business, middle-market and corporate (which is not how SMEs see themselves) and towards channels. One channel could be 100% STP, automated and digital; another may be semi-automated, with high levels of standardization; while a third channel would be high-touch, white-glove business. This is valuable because it's an opportunity to consolidate across lines of business and take advantage of similarities. And what’s particularly notable is that technology is no longer the limiting factor: today, it’s the enabler. Modern-day platforms help make consolidation and automation a reality. What’s holding banks back today are the three ‘Ps’: process, policy and politics. Address these, and there’s value to be unlocked.
Consolidation is also an efficiency boost, as it leads to fewer regulatory changes when all loans are on a single platform, and everything from training to process consistency and data models can be more easily standardized. Finastra is seeing this consolidation across its lending customer base.
Another interesting trend we’re seeing is that expenditure on digital customer experience is moving from a discretionary to a mandatory item. Today, investing in this area is no longer an option: without good digital engagement – and with competitors just a click away – you’re losing business. In response to PPP, we’ve already seen banks put in place technologies in weeks that might otherwise have taken years. COVID-19 has been the change agent that may have left banking in a better place.
Banks can seize the moment and take advantage of this crisis as an opportunity to change the way they do business and stay ahead of competitors. Three important steps are to: 1) gather and segment data; 2) improve digital engagement; and 3) automate for efficiency. Micro-segmentation in particular will provide valuable clarity into SME customers.