Disrupting the Lending Space: How Fintechs are demystifying SME financing
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Access to credit is essential for economic development and growth. When businesses and individuals have access to credit, they can do today what would have been deferred to a future date. The lending gap is an age long problem in Nigeria and by extension the world. The SME Finance Forum estimates that the gaps exceeds $4.5 trillion. Fintechs are radically changing the way financial services, especially lending, are offered, in a faster, more convenient and simpler ways.
Ask any entrepreneur or a small business owner what their experiences were when they tried getting a loan from a Nigerian Bank. They will likely tell you it is worse that a camel passing through the eye of a needle. The stringent hurdles you have to cross to access credit forced a number of SMEs to seeking unpleasant alternatives which include the using services of money lenders, funding major capital projects with operational cash flow and finding other unconventional methods. Opportunities have been missed, businesses have collapsed while many have become less efficient and unproductive.
Over the years, banks in Nigeria have relied on other means of making money aside from their traditional role of intermediation. A large portion of their earnings come from investments in treasury bills, transaction fees and FX trading. They have long abandoned the role of providing credit to people and businesses that need it. Traditional Banks are averse to risk when it comes to lending to SMEs. To them, SMEs are high risk.
The Disruptors are here
There is a shift in the credit market, causing a fierce battle between the banks and the financial technology firms (fintechs) entering the lending space. The digitization of payment systems in Nigeria has opened up a new opportunity for Fintechs to provide alternatives to what, for ages, have been the norm. The fintechs are beginning to challenge the status quo. They are eliminating the inflexible conditions precedent to borrowing in Nigeria. Leveraging on data analytics, existence of credit bureaus and flexible regulatory oversight, fintechs are able to lend to those who need them, with little need for extreme documentation processes.
For a number of these new firms, there is no need for physical contacts, forms, collateral or any other barriers that have long prevented SMEs from accessing credit. All transactions are initiated and concluded online. Fintechs provide apps for would-be borrowers to register, apply for loan, provide necessary information and accept terms. Loans are disbursed directly into applicant’s bank account; all of these done 100 percent online. Lydia, a leading online platform for SME lending, for example, employs the use of credit scoring algorithms to provide loans to their customers. The company, using about 100 data points to determine eligibility of a business, provides invoice based financing to SMEs. Loans are disbursed within 24 hours. The company has since financed 6431 companies. Another company, Kiakia, provides personal and small business loans to Nigerians, employing technology to facilitate fast and convenient access to credit.
The Banks’ Reaction
The banks are, of course, forced to rethink their strategies and are becoming more flexible to lending now. It is no longer hard to find banks lending to people and businesses they have long neglected. Today, you see billboards with banks advertising quick loans using USSD. It is not hard to hear fashion credit, school advance, Pharmacist advance and many others. The banks are finding ways to reinvent themselves by also adopting the use of technology, not only to compete but to also realign their processes to service their customers better. Specta, an online lending platform by Sterling Bank, provides loans in five minutes to both customers and non- customers. The bank claimed, earlier this year, that it is yet to record any non performing loans (NPL) and had so far disbursed N10 billion. Others banks have also come up with various products, using technology to facilitate the process. Guaranty Trust Bank (Gtbank) for example, gives out loans to its customers using its popular USSD platform, 737.
Will Fintechs Overrun Banks?
The Central Bank Governor, Godwin Emefiele, once mentioned that the proliferation of fintech firms is a threat to Nigeria Banks. Foremost global consultancy firm, Accenture identified digital banks, big tech firms and non-payments institutions as a threat to traditional banking. New Entrants in the financial space now command one-third of new revenues in Europe. In china, Alipay and Wechat have more than 1.3 billion mobile payment users, accounting for 93 percent of the market. In Kenya, 1.7 billion transactions were processed between July 2016 and July 2017 using M-Pesa, a mobile money and financing platform.
The threat, therefore is real. Banks streams of revenue are getting eroded. It is no longer business as usual. Any bank, who by now does not have a digital strategy to combat this erosion will soon go into extinction. Having mention that, Banks still have better chances to win or at least stay relevant, if they are flexible enough to adapt, change and constantly innovate. They have the customers, they have the money. Also, they can also look at collaborating with these digital companies. Fintechs are usually small in nature, with limited reach and pocket. Banks can use this as an advantage; partnerships, outright acquisition are options banks can pursue.
Who wins this battle?
Fintechs are here. The banks are reacting. The competition is stiffer. At some point, it will no longer be who can provide the quickest service, as banks and fintechs alike will be able to offer this. Interest rates, tenors and how much risk players are willing to take will eventually define the lending space in Nigeria. Ultimately, customers will be the winners. They will have more options, they will have quicker access to loans. They will be able to switch from one provider to another with little or no implication for making such decision. The revolution is here; some banks will become irrelevant, some fintechs will stand out. Customers will once again be queens.
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