Small-business lending is a sector in transition. The Covid-19 pandemic has propelled the sector forward as small businesses struggle to navigate the challenges of rapidly changing markets. Recent tech advancements mean that automated small-business lending software is more widely available and increasingly sophisticated. Incumbent financial services firms, which have overlooked small businesses lending for too long, are recognising that they could do more.
In this article, we explore what the future holds for small business lending, from technological advancements in artificial intelligence, to the increasing interest in personalisation, ESG and ecosystems in lending software. We also take a look at some of the stats to come out of Q2’s and Salesforce’s recent global research study, What is shaping the ecosystem of small business lending?, conducted by Economist Impact.
Know the present to see the future
To see where small-business lending is headed, it’s important to understand today’s economic landscape. According to this report, the demand for capital has skyrocketed over the past 12-24 months, with 38% of lenders worldwide having seen their customers’ borrowing appetites increase during this period. However, one segment is faring better than the rest, and the results are telling. 47% of fintechs saw an increase in borrowing appetite during this period compared to just 28% of traditional lenders. Small businesses, fed up with the red-tape, archaic systems, and slow deployment of cash, are looking to nimbler lenders for capital.
Indeed, alternative lenders are capturing huge swathes of the market thanks to their sophisticated software that helps them better assess risk and allocate capital. Banks must find ways to serve this market or risk losing it forever. One way is to partner with fintechs.
“Traditional lenders are realising that collaboration with fintechs is accelerating the speed of innovation and driving a better user experience,” Will Furrer, Q2’s Chief Strategy Officer, says. “Fintechs are leveraging automation, artificial intelligence, cloud, and APIs to issue more small-business loans and banks need access to these technologies now.”
The report suggests that several other of today’s trends are also driving the future of small-business lending: the uncovering of new data sets to improve risk-assessment and advancements in predictive algorithms.
A tech transformation
Indeed, part of the reason fintechs are capturing market share from incumbents is because of their proprietary technologies. Using algorithms, data analytics, and artificial intelligence, fintechs can ensure they’re making better informed lending decisions and deliver a smoother lending experience for clients. Perhaps most important is this allows them to speed up the lending process so small businesses aren’t left waiting.
Partnerships between fintechs and incumbent banks are also helping to drive the sector forward, as seen at Rapid Cash, a fintech company that is part of NatWest. Rapid Cash recently had a breakthrough that makes it possible better judge a client’s ability to repay their loan by accessing real-time e-commerce data, which is vastly more attractive than using historical data that may not paint the full picture. The report found that 84% of lenders believe alternative data, such as e-commerce data, will become the norm in making credit decisions over the next five years.
The way these technologies will be deployed depends on the region. According to the report, more than nine in ten North American respondents cited personalisation as being “vital” to the future of small-business lending. In Europe, 68% of respondents said that artificial intelligence would play a major role in the lending sectors over the next 12-24 months. Also, 44% of European lenders named blockchain as being an important tech trend in the years to come.
All respondents agree that data holds the key to successful small-business lending. One future threat to established small-business players comes from Big Tech. According to the report, firms like Facebook and Google could pose an existential threat to existing players if they decide to dip their toe into lending. They have access to huge swathes of data that will help them reduce their exposure to risky lending. Few expect that to happen any time soon, with firms like Facebook and Google ranked in sixth (24%) position of alternative lenders that will see the biggest rise in market share over the next 12-24 months.
New lenses on lending – personalisation is key
While there are some discrepancies between the future of small-business lending between regions, all agree personalisation will play an important role in future. This means using customer data to create tailored experiences, whether that’s the visual presentation of software or, more importantly, when creating a bespoke loan agreement that suits the client’s needs.
ESG increasingly important
Another driving force is factoring in environmental, social and governance (ESG) issues on creditworthiness, driven primarily by concerns about financial inclusion, responsible lending and physical risks related to climate change. Q2’s survey found that nearly three-quarters (74%) lenders worldwide said they already take ESG into account.
Leveraging the wider financial ecosystem will become the norm
Finally, lenders agree that digital ecosystems will also play an important role in future. More than three-quarters (or 76%) of lenders worldwide agree that ecosystem thinking, based on partnerships between incumbents, fintechs, and big-tech firms, is “the way forward” for small-business lending. Financial ecosystems allow lenders to tap into a communal network of services, where lending may be their expertise and payments through another firm. Lending ecosystems have the potential to increase financial inclusion and can help the sector recover post-COVID.