Filling the SME lending gap – An opportunity for Vietnam banks

Lack of transaction history data prevents many financial institutions from lending to startups, narrowing growth opportunities for SMEs and banks.??

SMEs lack transaction history, difficult to access credit capital?

According to the Vietnam Association of Small and Medium Enterprises, small and medium-sized enterprises (SMEs) account for over 97%; however, according to the Department of Business Development (Ministry of Planning and Investment), only 25% of SMEs have access to banks’ financial resources. Most SMEs will seek loans from friends, family and sources outside of credit institutions. Specifically, according to a survey in 2022 by Mambu - the cloud banking platform, nearly half (48%) of surveyed SMEs in Southeast Asia rely on friends and family for loans.?

Generally, banks’ criteria used to appraise and approve SMEs’ credit loans are usually based on the size of capital, the size of the company’s human resources, and financial transactions history, etc.?

However, SMEs may need to find a way to fit into such rigid evaluation criteria. For example, a small business in the field of information technology outsourcing has about 50 employees but can bring in revenue of VND 100 billion. ????????????

Or nowadays, up to 30% of millennials globally report owning a small business or a side job. So if you're fresh out of college and starting a business, how do you get a loan if you don't have a business credit history and have never had a personal credit card???

The lack of transaction history data prevents many financial institutions from lending to startups, narrowing growth opportunities for both SMEs and banks.?

Hence, SMEs are rather looking towards fintech with the advantages of modern technology, fast approval and disbursement procedures, small loans, and short repayment period... A global SME survey by Ernst & Young (EY) shows that banks are still the most trusted financial institutions for SMEs compared to technology companies. However, more than a third (34%) of SMEs said they were willing to change credit providers – indicating dissatisfaction with their current banking experience.?

Resolving the issues?

The two biggest concerns of banks when offering loans to SMEs are cost and risk. In the past, the high costs of servicing SMEs have led to low profitability, making them less attractive to banks. Hence, banks did not prioritize SMEs as a viable target segment. Nonetheless, they could have focused more on ways to optimize or reduce the costs related to serving SMEs.?

?In terms of costs, automation and data technology can now help banks cut most of it. For example, the cost of SME lending services is reduced sharply due to the decreasing of a series of expenses such as the cost of aiming at target groups (Orientation), the cost of onboarding customers, the Risk scoring cost, loan procedures/administration, customer service related and more. These decreases are due to the application of data technology, automation.??

According to EY and Mambu, the cost of lending to an SME of a traditional lender is from 100-300 USD, and it only costs a digital lender 5-35 USD to lend to an SME, dropping around 85-95%.

In terms of risk management, understanding the risks of SME loans is critical to accurately pricing loan products. Banks still use traditional risk assessment models based on key factors such as transaction history, revenue, profit, credit history, etc. This is a feasibility assessment for qualified SMEs. But for SMEs that are newly established, or do not yet meet the assessment criteria, banks need a newer risk assessment function to create viable models for industries that have high demand for loans but are not yet accessible to evaluate. ?

Alternatively, for SMEs that still need to be considered viable customers, lenders can help them build data points such as credit scores or forecast cash flows to enable them to borrow in the future. ?

In short, data accessibility is crucial to approving more loans with less risk. Modern technology makes it possible for many banks to participate in this growing and vibrant market.?

Traditional banking technology requires a high level of maintenance and is frequently updated and changed, incurring additional costs, taking more time to generate new products for the market, and impeding the flexibility of existing products. That makes it difficult for banks to compete in the new technology-driven financial services world, where the customer is centered, and the experience is enhanced.?

When applying new technology to develop banking services, some general principles will lead to the best results. These are also the principles that the cloud banking platform Mambu’s built solutions offer to customers:?

? Banks need to adopt Composable Banking: this architecture enables components in the entire technology solution component to be freely interchangeable without being dependent on any particular supplier.?

? The bank's infrastructure needs to be built on cloud technology, allowing the bank to quickly deploy and provide solutions with the highest level of data security.?

? Banks need to be data-centric, by creating an aggregated data set that enables real-time decision-making, and is capable of providing dynamic products for the niche.?

? Build and manage an ecosystem using application programming interfaces (APIs), allowing banks to seamlessly integrate with third-party applications and solutions.?

? Use low code core platforms to enable rapid product deployment and update and create bespoke services for specific customer segments.?

? Leverage software as a service (SaaS) solution to enable fast scale growth, and optimize costs through service provider management (e.g., upgrades, maintenance) and allows focus on value-adding activities, e.g., product innovation and customer acquisition.?

Currently, Mambu and its partners are developing a digital environment for Vietnam SMEs in which banks can use this information to assess and score SMEs’ credit health, thereby processing their loan applications quickly. ?