Icons designed by Lemon Liu, Asier Bilbo, and Cagri Yurtbasi from the Noun Project, under Creative Commons (CC BY 3.0) license.
Conventional SME finance policies are designed to address conventional constraints to SMEs accessing the financial services which they need to manage risks, meet supply orders, and invest in new technologies and market opportunities. Yet technology and innovative approaches are transforming the business of SME finance, mitigating conventional challenges and risks and in some cases presenting new risks. Continuing with only conventional policy responses may be duplicative and waste resources, and may also fail to address emerging risks. This has important implications for the World Bank Group’s approach to SME Finance.
Information asymmetry raises the costs and risks of providing financial services, and therefore reduces access and leads to higher pricing of financial services for many SMEs. Yet data availability is rapidly expanding, and data brokers are increasingly able to address information asymmetry.
“Big Data” Analytics - the analysis of alternative data sets such as cell phone histories and transactional data, represent new ways for assessing the creditworthiness of enterprises currently without access to finance. For example, Experian MicroAnalytics (global) and Cignifi (Brazil, Ghana, Mexico, US) deliver credit scoring based on airtime usage. This type of approach could open up access to credit for mobile payments customers in the developing world. ZestFinance (US) combines data from thousands of potential credit variables, gleaned from alternative credit databases and web crawling to offer a ‘big data underwriting model’.
With increasing technology and internet access, the expansion of “digital footprints” allow for alternative ways to assess borrower creditworthiness and spot and prevent identity fraud. For example DemystData (Hong Kong, US) and Lenddo (Colombia, Mexico, Philippines) use online reputation and social media analytics.
The lack of financing sources available to many SMEs, linked to constraints in the use of collateral and the availability of information, is cited as a major concern in the World Bank’s Enterprise Surveys. Typical policy responses include secured transactions frameworks (collateral laws, movable assets registries), credit lines, state banks, partial credit guarantee schemes, and encouraging competition and diversification.
Fast moving developments in the availability, timeliness, and use of data in supply chains, related to the electronification of transactions (payments, invoices, contracts), are opening up viable access to financial services for SMEs, including to factoring. So providing electronic platforms to facilitate on-line factoring and contract financing can be an alternative or complement to refinancing credit lines or support to state banks. Public sector procurement can be shifted to such platforms to efficiently open up access for SMEs, as is the case with Chile Compra for example. Electronic security and signature laws, and market facilitation platforms, can facilitate supply chain and factoring transactions with SMEs.
Crowd funding platforms can also ease access to finance constraints for SMEs, by providing more direct and efficient ways of accessing funding. They can offer borrowers cheaper loans and investors access to a new asset class. Examples of peer to peer lending platforms include Cumplo (Chile), which is web-based, and Funding Circle (UK), which has lent over $391 million to businesses from over 72,000 individual lenders. Alibaba-backed PPDai was the first online platform (social lending site) for peer to peer small unsecured loans in China.
Improving SME financial skills and capability is traditionally seen as a matter of training and financial education, as well as the provision of clear and transparent information on financial products. As a complement to this, innovations in the provision of cheap (or free) and easy to access automated online financial advice can also be harnessed. A growing number of firms, such as Money On Toast (US), Vaamo (Germany), Your Wealth (UK), Yseop (France, UK, US) are using software to automate the production of financial advice. As online access improves in emerging markets, including through smartphones, this is an increasingly relevant tool globally.
Implications for SME Finance Policy Frameworks: Innovative approaches do not replace the need for policy responses, but do mean that SME finance policies and initiatives need to be rethought. The concepts of additionality and leverage will be critical, based on a regularly updated diagnosis of gaps and priority needs.
Emerging risks related to innovative approaches need to be addressed through SME finance policy frameworks. Regulatory frameworks may need to be updated to fit new providers and products, while supervisory capacity may need to be strengthened to effectively understand and monitor them. Credit reporting frameworks may need to be rethought, in terms of data accuracy and availability, new data brokers and providers to monitor, consumer protection, and how to apply or update data security and privacy standards.
The World Bank Group works with many governments and regulators to improve SME finance-related policies, regulations, initiatives, including through the Financial Inclusion Support Framework. The WBG is therefore well placed to assist regulators and policymakers in harnessing technology and innovative approaches, and managing risks. But to ensure our relevance and effectiveness, we need to also update our knowledge and advice, and how we apply WBG financing instruments, accordingly.
A G20 SME Conference will take place on 11-12 March 2014 in Riyadh, Saudi Arabia, organized by the Australian G20 Presidency and the Government of Saudi Arabia, at which I will present on this topic of harnessing technology and innovation in SME Finance Policy Frameworks. We will post the resulting recommendations for G20 actions following this event.
For further resources, please visit:
The World Bank’s Financial Inclusion & Infrastructure website
The SME Finance Forum