Unlocking the dynamic power of data
How issuers can better support SMBs while growing market share
Targeting SMBs represents a largely untapped growth opportunity.
This dynamic actually creates a profitable business opening for banks. For financial institutions looking to expand their reach in the business-to-business (B2B) space, targeting SMBs represents a largely untapped growth opportunity.
According to a World Economic Forum report, SMBs account for 90 percent of global businesses and more than 70 percent of the global GDP.¹ To maximize their growth opportunities, many SMBs are evolving their business models to reach new international markets and clients. However, gaining access to capital has proven to be one of the largest barriers to small business growth. A U.S.-based 2024 Goldman Sachs 10,000 Small Businesses Voices survey found that “77 percent of small businesses were concerned about their ability to access capital.”²
One of the keys to mitigating this challenge is for issuers to leverage data and data analysis tools to better serve SMBs, including those within under-represented communities. This presents a win/win scenario for issuers, who can expand their business, while SMBs gain much needed access to credit.
Securing capital is an uphill battle
Small businesses are often strapped for cash. A recent report found 70 percent of small businesses in the U.S. had less than four months of operating cash on hand.³ Additionally, a second U.S.-based report revealed that in 2023, 53 percent of small business owners used their own personal funds in response to financial challenges, while 51 percent used cash reserves.⁴
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Unlocking the dynamic power of data
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Many minority-owned businesses have an especially difficult time obtaining the financing they need. In 2023, a U.S Federal Reserve Small Business study found “Black (32%), Asian (34%), and Hispanic (32%) business owners were less likely to receive all the financing they applied for than their white counterparts (56%).”⁴ Globally, SMBs remain often underserved by FIs generally. The International Finance Corporation (IFC) estimates that 65 million firms, which represents 40% of micro, small and medium enterprises (MSMEs) in developing countries, have unfulfilled financing needs of $5.2 trillion yearly.⁵ The same IFC report states that East Asia and Pacific nations account for 46% of the total global finance gap, followed by Latin America and the Caribbean at 23%, and Europe and Central Asia at 15%.⁵
Without adequate credit, SMBs face an uphill challenge in meeting critical business needs.
Opportunities for data utilization amongst issuers today
Evaluating SMBs as credit applicants can be difficult for issuers in part because business owners may not have deep working capital resources, an extensive business credit history, or are located in geographies where access to data is complex. The traditional considerations – capacity, capital, collateral and conditions – may not sufficiently determine the true creditworthiness of these potential borrowers.
To better support SMBs who may be overlooked in the credit evaluation process, issuers have an opportunity to include alternative data sources when making critical credit decisions. For instance, micro and macroeconomic data, such as cashflow and supplier payments, can be used to help be more inclusive in determining credit-worthiness.
Expanding the data universe for improved credit decisioning
The rise of all-in-one data solution providers and flexible data models are expanding the potential for a broader use of data to achieve better informed credit decisioning. These innovative data solutions are also helping issuers move away from manual data interpretation, bringing greater automation and efficiency to the process.
By expanding the use of alternative sources of data, issuers can also reduce the number of declines with SMBs. With fewer declines, banks face less compliance scrutiny from new transparency regulations.
To attract and retain Millennial and Gen-Z SMB borrowers, banks need to offer a digital-first approach.
Lending innovations offer issuers growth opportunities with SMBs
The increasing use of data is also leading to improvements in lending processes. Embedded lending solutions can offer SMBs a means of managing cash flow issues around acquiring inventory and raw materials in order to better manage costs, improve cash flow management and gain a competitive edge in today’s increasingly global marketplace.
Another area of innovation is the use of artificial intelligence (AI) and machine learning (ML) systems that are improving online application processes, automating data analysis for better credit decisioning, reducing human error and speeding up the entire process. Issuers may choose to leverage such digital capabilities in order to more effectively compete with neobanks that are actively targeting SMBs
Data innovation can also impact the way that data is provided and captured by banks. A Datos Insights report reported that generational factors are also driving SMB borrowers “To attract and retain Millennial and Gen-Z SMB borrowers, banks need to offer a digital-first approach that includes easy online application processes, fast decision times, and personalized offerings based on data analysis."⁵
Leveraging data to tap into the SMB marketplace
In addition to enabling issuers to extend credit to SMBs, the expanded use of data can open the door to additional portfolio opportunities. By presenting company performance data back to SMBs, showing them how their business is performing and how payments are being transacted, and providing richer details on cash flows, banks can become a greater valued-added partner. This becomes a virtuous cycle, underscoring the importance of effective data usage in optimizing business for issuers and enabling them to better serve their SMB customers.
By increasing the types of data being used to determine access to credit for SMBs, issuers can increase lending, particularly with under-represented communities such as minority-owned and women-owned businesses. Today’s digital revolution has made it easier than ever to analyze data, and use those insights for better decisioning that benefit issuers, as well as SMBs around the world. This presents a winning growth formula that will be welcomed by both issuers and SMBs.
Sources:
1. Small and Medium Enterprises (SMEs) Finance, World Bank Group, 2019
5. Attracting Millennial- and Gen Z-Run SMB Borrowers, Datos Insights, 2023“Tax revenue (% of GDP),” The World Bank, 2022
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