The rapidly changing world of SME Finance

The rapidly changing world of SME Finance

SME Finance Forum Brings together financial institutions, technology companies and development finance institutions to share knowledge, spur innovation and promote growth of SMEs Initiated by the G20 and managed by IFC 2

Growing Global Member Network 135 members from 55 countries Association 12% DFI 13% Europe 20% Financial Institution 49% Asia and Pacific 39% Fintech 26% Americas 28% Africa 13% 3

Member Benefits LEARN LINK LEAD Online library* LinkedIn discussions* Monthly webinars Global/ regional and partner events Fintech expo/demo Ask the expert Publications* SME data* Communities of practice Networking Contacts brokering Study tours Marketplace Mobile app Connecting industry with policy-makers Voice in key policy bodies - G20, AFI, APEC/ ABAC, Basel institutions, OECD You learn a lot of things. You get to know what the rest of the world is doing. You share experiences. Most importantly, you get to find opportunities where you never thought they existed. Issac Awuondo, Group Managing Director, Commercial Bank of Africa 4

Formal SME Credit Gap remains large at $1+ trillion The MSME credit gap including informal MSME amounts to $ 2.1 2.6 trillion Number of SMEs (Mn) Total $Bn With deposits Value of SME credit gap With loans or overdraft % SMEs that need but have neither a loan nor a overdraft <20 20-39 40-59 >59 High-income OECD 11-14 11-14 5-6 $600-700 Bn Latin America 3.1-3.7 2.5-3.1 1.9-2.4 $212-259 Bn Total value of the gap in SME credit: $1,500-1,800 Bn 36-44 29-35 13-16 1.9-2.3 Middle East & North Africa 1.5-1.8 $ 265-324 Bn 3.5-4.3 0.8-1.0 Sub-Saharan Africa 3.1-3.7 1.0-1.2 $72-88 Bn Central Asia & Eastern Europe South Asia 2.1-2.6 1.5-1.8 $13-16 Bn 2.8-3.4 0.4-0.5 2.5-3.0 1.5-1.8 East Asia 11.2-13.7 $153-187 Bn 6.0-7.3 2.0-2.4 $151-184 Bn Total value of the gap in SME credit excluding high-income OECD: $900-1,100 Bn 25-30 17-21 8-9 SOURCE: IFC/McKinsey MSME database 2011 5

WHY NOT SERVE SMMES? Too expensive to acquire Too expensive to serve 6

OLD AND NEW APPROACHES and

Global Trends: Shifting the Financial Inclusion frontier forward INCREASING ROLE OF TECHNOLOGY PRODUCT DIVERSIFICATION INCREASING COMPETITION DIVERSITY OF INVESTORS INCREASING IMPORTANCE OF NATIONAL POLICY Mobile banking Branchless banking Use of nonfinancial retail outlets Expand credit information systems Create on-line movable asset registries Beyond-credit only approach Importance of cost-effective payments, savings, insurance Customer relationship management the key Commercialization of traditional NGO MFIs and move up-market Importance of other commercial players (telcoms, supply chains, distribution chains, etc) Proliferation and diversification of investors (e.g. private equity funds, peer-topeer) Importance of the regulatory environment for fostering innovation, sharing information, while ensuring stability/security, consumer protection 8

Big data: what s different today? More digital data, more diverse data, and more real-time data means more data can be predictive data, provided you can find it and use it New data sources, plummeting transaction costs

How much data and where? The digital universe is more than doubling every two years; emerging markets will surpass mature markets by 2017. only 1% of this data has been analyzed

Growing SMME finance from payments data Failure to commit to MSMEs and innovation makes banks vulnerable to a new breed of digital competitors all along the credit and payments value chains Online supply chain finance Invoice financing M-POS acceptance/value add Analytic firms aiming to revolutionize credit models, drive growth Mobile microlenders will graduate to SMEs

Alternative online lenders shaking up SMME credit They have convenience, cost, speed, and new data competitive advantages over bank lenders; they can out-fico FICO! P2B lenders Online direct lenders Best fit MSMElender matching

Fintech and banks 2017: more friend than foe? Advantage: banks Captive, large customer base/ positive selection in applicant mix Brand Distribution coverage Valuable, free internal data (but underutilized) Low cost, stable source of funds Regulatory certainty (mostly) Advantage: fintechs Customer service oriented Simple and often friction-free applications More credit data sources Enhanced risk models Underwriting costs Pricing for risk Less regulation in many markets (but the future is uncertain) 13

Partnerships -Licensing the platform to scale globally Licensing technology to lenders globally SME Solutions Platform Lending Partners Institutional Partners Turnkey platform, fully configurable Rapid global deployment Banks Network Acquirers Rapid processing and decision making can be fully automated Works across all channels Short online applications; automatically, painlessly link data sources Uses power of SME s own real-time, verified business data to get working capital 14

Big tech: picking up SME lending steam 2 million third party sellers globally. Makes short term working capital loans to sellers on invite only basis (US, Japan, India, China, Canada, France, Germany, UK, Italy, Spain; consumer installment loans at checkout in the UK 8 million Chinese sellers, aims to connect with more than 10 million sellers abroad. $62 billion in loans to 1.6 million SMEs since 2010. Partnered with Lending Club in US, Capify in Australia, iwoca and EZBOB in the UK, and ICICI Bank, Kotak Mahindra Bank, and Capital Float in India to finance domestic SME buyers (and in India, sellers) on its platform. Launched MYBank in 2015. 10 million merchants. As of November 2015, it had provided more than $1 billion in funding to more than 60,000 SMEs in the US, UK, and Australia. PayPal Credit, a reusable credit line available on purchases at thousands of stores (online and offline) that accept Paypal and on ebay surpassed $2 billion in volume in 4QTR 2015. 15

India case: e-commerce data fuels SME lending Online SBI e-smart SME e-commerce Online vehicle loans for Uber drivers 25 other bank and more traditional non-bank lending partners 16

Mobile data-based lending models 09.09.15 Mobile data-based lending models: instant small mobile loans credit scores based on mobile transactions, mobile e-money usage, mobile e-money linked savings history third-party mobile-based lenders are using data from apps running on smartphones KCB M-PESA LOAN

The Rise of the Digital SME Bank/Lender New banks/nbfis have built a banking-as-a-platform (BaaP) model. This allows for improved cooperation with alternative and third-party fintech models. Open APIs and support for integrating bank data with online accounting platforms are also strengthening the use of digital data to better enable banks to address SME lending. Success for those in SME lending who embrace a digital-first strategy.

Machines v People? 19