How Fintech is Transforming Access to Finance – BRINK – Global Business Conversations and Perspectives
The sales and profit margins of many micro, small and medium enterprises (MSMEs) are highly vulnerable to seasonality, input and labor costs, late payments, natural disasters, unforeseen expenses and to a myriad of other factors that result in a lump sum cash flow. flows. Without sufficient collateral or credit information, banks are often reluctant to lend them money, so these MSMEs face the additional risk of having non-performing assets.
Thanks to new technologies, the mindset of financial institutions is changing to enable MSMEs to access loans. There is a growing trend towards cash flow based financing backed by current and expected future cash flows.
These loans are totally different from traditional asset-backed loans, where the assessment of collateral offered to the lender decides the amount and duration of the loan. The reluctance of conventional banks to lend to MSMEs is based on the fact that they do not have fixed assets as collateral.
Emerging FinTech players around the world are redefining how MSMEs can access working capital and cash flow finance. Recognizing that MSMEs do not have the capacity to produce financial reports to enable financial institutions to assess their repayment capacity and default risk, they are deploying nimble and agile technologies to gain an accurate understanding of their credit cycle. conversion to cash.
The cash conversion cycle is the time it takes for MSMEs to convert investments in inventory and cash resources through the sale of goods and services that can help set the conditions for cash generation of the business. and thus help determine their repayment capacity and improve price transparency. After all, cash is the only factor in paying off a loan; collateral is only the second way out if the money cannot be generated.
A good example is the Kenyan Grow Merchant Cash Advance service, which helps MSMEs access capital by taking into account their cash flow cycles while simultaneously encouraging them to abandon cash and cash accounts. electronic payment via the Kopo Kopo trading platform.
A percentage of the digital transactions that merchants receive are set aside to repay their advances. This arrangement keeps repayments smooth, bite-sized, and in line with cash flow.
In India, Capital float, a non-bank finance company, provides instant decisions on unsecured loans for small entrepreneurs. A risk profile assessment is performed in real time by analyzing MSME cash flows using data from Paytm, an online payment system and digital holding company, mobile financial services company Payworld and smartphones.
Capital Float clients electronically authenticate the client, receive the loan offer, confirm acceptance, and sign the loan agreement on a mobile app. The loan amount is credited to his account the same day without any paperwork.
Cash loans help MSMEs seize opportunities when they arise and are a prime example of focused niche innovation that allows fintech to compete with larger, but slower, traditional banks. They are well suited for companies that maintain very high margins, but lack enough durable assets to offer as collateral.
These loans are typically aimed at retail and marketing MSMEs, where managing and generating better cash flow is critical given their higher cost of debt and lower return on capital than large companies.
Rural lending is also moving towards cash flow based lending, which would reduce costs and attract big banks and financial institutions. Fintech solution providers, like India CropIn technology, bring data, artificial intelligence and machine learning to banks to help them better assess credit risk.
Support MSMEs and mitigate risks
Farmer data on KYC, geographic coordinates of farms, history of crops they have sown, crop size, yield and potential income factor in partner bank’s digital platform. This information is brought together with remote sensing data to predict a farmer’s productivity, yield estimates and the selling price.
The last step is to plot the risk scores for the farmers using a machine learning algorithm. By assessing the cost of inputs / outputs, positive cash flow and profitability, instant credit disbursement can be made in rural areas.
Once the loan is granted, satellite imagery helps the bank to perform remote monitoring and evaluation by providing periodic data indicating whether the farmer has used the disbursed loan for its intended purpose. When the crop approaches the harvest stage, the bank is alerted to contact the farmer to initiate the reimbursement process.
Insurance companies looking to provide crop protection for smallholder farmers can also take advantage of this technology for underwriting and claims administration. In the dairy sector, insurance companies are now able to finance cash flow by determining the amount of compensation payable to a farmer based on both the quantity and quality of the milk produced.
More frequent repayments correspond to the nature of cash loans and the risk policies of fintech lenders. It involves underwriting and real-time monitoring of cash flow from highly leveraged balance sheets, using data from current accounts and merchant settlements on large volumes of small payments. The loan amount and pricing is based on the level and stability of cash flow.
Since MSMEs typically have a single bank account, the use of highly automated pricing and decision engines provides a clear electronic fingerprint for tracking cash flow history. By analyzing net cash flow, an accurate and real-time risk assessment of MSMEs’ short-term financial health can be made on their repayment capacity and liquidity position.
Access to real-time information helps manage risk, as it allows the lender to quickly identify the failing MSME and contain cash flow or suspend payments before late fees accumulate. This leaves no room for manipulation of funds, a fundamental problem with asset-backed lending strategies that experience cash flow embezzlement through multiple bank accounts.
With the emergence of a new generation of digitally savvy MSME owners in developing countries in Asia, traditional players may soon find themselves playing the supporting role behind fintech. The only way to survive is to innovate in the financial space of MSMEs and accelerate investments in technology to sustain their platforms and retain and develop their non-traditional customers.
This piece first appearance on the Asian Development Blog.