Supporting Southeast-Asia’s growing SMB economy

Small and midsize businesses (SMBs) are the backbone of Southeast Asia’s growing economy.

Countries like Indonesia and the Philippines have more small businesses than most of their Southeast Asian counterparts, however, only 40% can access formal financial credit. Traditional banks have failed to close the SMB funding gap, leaving this segment seriously deprived.

Furthermore, the emergence of the COVID-19 pandemic is putting SMBs at risk of falling outside of the digital banking system. As businesses face liquidity issues for an unknown period of time and banks have limited their support, millions of SMBs could face coming out of the crisis unbanked.

However, a new wave of fintechs and digital-only banks are creating alternative financing models that can better serve SMBs in Southeast Asia and help them recover. But how can they help tackle these challenges?

Digital banks reinventing SMB lending solutions

Digital-only banks or neobanks are among those looking to dominate current SMB lending solutions. Known for challenging the current processes of the incumbents, digital banks are not bounded by legacy systems, or burdened by branch networks. As an example, new digital banks such as TONIK are being used in the Philippines. As they boast lower operating costs than the traditional banks, they are able to provide lower rates on business loans. 

But it is not enough to provide the digital channels to access financial services. Digital banks will need to find creative ways to assess businesses looking for a loan. For example, in other developing markets, NuBank in Brazil demonstrated that a community referral-based model can be successful for digital banks. NuBank analyses customer’s social network and considers the credibility of the people a customer is connected to. SMBs can use this model by analysing a business owner’s community of partners, suppliers and buyers to ascertain their ability to repay a loan. 

In addition to digital-only banks entering the Southeast Asian market, non-banks are also looking to reinvent themselves and acquire a digital banking license. For example, Gojek in Indonesia and Grab in Singapore originally operated as a ride-hailing service but recognised the new opportunity and are now repositioning themselves as a digital bank to start provisioning financial services to underserved businesses. Gojek already has large volumes of data on their customers and is using that knowledge to hugely boost lending to small businesses. Grab offers micro-insurance products, post-paid and instalment payment services to more than 9 million micro-entrepreneurs and 600,000 merchants, as well an online check-out payment method for online sellers. 

Understand the challenge before building the solution

For digital banks to successfully support SMBs, there needs to be an increased focus on utilising available information before scoring businesses. Similarly, new entrants looking to obtain digital banking licenses will need to ensure the data they provide is both accurate and a fair representation of the business. Knowledge of the local market that SMBs operate in is essential to lending appropriately. Consideration of both aforementioned factors will be necessary to assess the likelihood of loan recoverability. 

The way in which SMBs operate is vastly different to larger businesses. Traditional banks have generally utilised the same proven business model with SMBs as they have done with larger corporations. Digital lending services need to bear this in mind whilst considering a variety of data sources and models relevant to SMBs in Southeast Asia. Digital banks have made a promising start, but an understanding of the local market will ultimately define their success.

This article was contributed by Peter Theunis, SVP and MD APAC and Europe, BPC