Historically, many SMEs have struggled to raise business financing because traditional lending is premised upon historical balance sheet information, but SMEs commonly lack sufficient balance sheet strength.
Alternative trade lending approaches address this problem by using current trading data, rather than historical balance sheet data when assessing lending risk. Furthermore, it may incorporate funding resources in addition to, or instead of, bank lending, such as crowdfunding.
These resources may have different lending criteria from a bank and thus may be able to provide funding where a bank cannot. Overall, this makes alternative lending an increasingly important funding resource for SMEs.
Platform partnerships can complement this by aggregating multiple financial providers in a single platform and providing efficient digital access to them. This can dramatically improve efficiency for corporates and SMEs alike, by dispensing with the need to manage each bank relationship separately and radically de-duplicating (often paper-based) administration, thus reducing cost and increasing productivity.
Furthermore, some platforms may also provide near real-time data on SMEs’ trading activity, which can be fed back to potential lending sources to support credit decisions. As a result, alternative lending and platform partnerships can be combined into a single effective solution for SME financing.
Delivering in practice: digital capabilities and immediate benefits
Although alternative lending and platform partnerships – both individually and in combination – can deliver exceptional benefits, very few banks have the necessary capabilities to deliver on this potential opportunity.
One of the most important criteria for banks in this space is digital capability throughout the entire organisation, both client and employee journey.
Partial digitalisation is insufficient. This is critical because the bank must have the ability to receive, process and transmit data digitally internally and externally extremely quickly. DBS has been making major multi-year investment in order to achieve this.
As a result, it can connect to multiple partner platforms via APIs, and through those connections:
- Receive detailed data on trading activity on a near real-time basis
- Process that information immediately to determine potential lending availability to individual SMEs on a transactional/trade basis
- The relevant financing offers can be accepted by SMEs through a few mouse clicks
- Receive those acceptances and automatically process them for disbursement
- Longer-term benefits and the client journey
In addition to the immediate benefits of these capabilities, the aggregation of large volumes of digital SME trading/flow data through this approach also enables DBS to run continuously refined and innovative credit modelling.
For instance, more granular and evolving models can be created that are specific to various categories of SME, based on factors such as trading volumes, trading partners, size, location etc. The practical advantage of this is potentially greater funding of SMEs at lower risk.
It also makes the concept of a ‘customer journey’ a reality. For example, an SME might initially only be eligible for funding from an alternative lending partner, but over time as positive flow data on that SME accumulates, it may be possible for it to transition to a direct lending relationship with the bank. This journey is now commonplace for DBS’ SME clients and includes the facility to make automated recommendations for relevant new solutions that a client may be unaware of.
Enterprise-wide digitalisation also makes these efficiencies quickly replicable across multiple partners and platforms. In addition, the extensive use of APIs means that the time between initial discussions and go live has been significantly compressed, and the barriers to additional partnerships lowered. As a result, DBS already has approximately 15 alternative lending and platform partnerships – including with industry leaders such as Cainiao and JD Logistics – that connect it with thousands of Asian SMEs.
Conclusion
DBS’ willingness to invest and innovate has enabled it to deliver a new highly-effective approach to SME funding and a more efficient way to interact with clients of all sizes. A combination of digitalisation and cloud gives the bank the flexibility and scalability to expand rapidly on both fronts because it has a far richer picture of each client’s activities and needs. This facilitates the optimal client journey in terms of satisfying immediate funding needs as well as future solution requirements.
This article was first published by Global Trade Review in January 2023.
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