MasterCard To Offer Developing Market SMB Lending Tool
By Pete Rizzo (@pete_rizzo_)
MasterCard and Entrepreneurial Finance Labs (EFL), a leader in the alternative credit space, are joining forces to promote small business (SMB) growth in developing nations as part of a new agreement that will be announced today at the SIBOS Conference in Dubai.
The new partnership will focus on providing issuers in developing markets with new tools that seek to better small business credit underwriting. By improving screen and risk evaluation, the companies say they are aiming to increase SMB access to capital, unlock entrepreneurial potential and drive global economic growth.
"In developing economies, SMBs are often shut out of the financial system due to a lack of reliable credit bureau and bank performance information being available to financial institutions," Ed Glassman, MasterCard's group executive of global commercial products, said in an interview with PYMNTS.com.
The companies are focused on providing issuers in developing markets access to EFL's psychometric risk-scoring model, which rates businesses on a host on non-traditional factors. EFL's psychometric scoring model evaluates businesses intelligence, honesty and integrity, and has enabled SMBs in emerging markets to receive $200 million in loans since 2010.
However, evaluating honesty and integrity are easier said than done. How does EFL's psychometric risk-scoring model work, how can the solution be adapted to developed markets and what results do the companies hope to achieve?
For these answers, PYMNTS.com spoke with Glassman in an exclusive Q&A that revealed new details about the partnership and MasetrCard's role in the developing world.
PYMNTS.com: You made news today by announcing an exclusive partnership with EFL. We understand that the goal of this union is to drive small business growth in developing economies by facilitating loan approvals. Could you please explain what are some of the main barriers SMBs have today to obtain working capital and how will MasterCard and EFL help address these challenges?
Ed Glassman: Around the world, SMBs lack access to low-cost financing, and banks are handcuffed from lending by lack of available prospect data on SMBs. In developing countries, roughly 20 percent of SMBs have a positive bank performance history on SMB prospects while only another 20 percent have credit bureau references that can be utilized for approval decisions. In the absence of reliable SMB prospect data, banks are less likely to lend and this remains a major barrier to SMB business growth globally. Through the MasterCard partnership with EFL, we are working to address this challenge by providing international issuers in developing markets with new tools to improve credit underwriting for these unbanked SMBs. The cost-effective approach to screening and risk evaluation increases SMBs access to capital, unlocking entrepreneurial potential and driving economic growth around the globe.
Could you please explain in a little more detail the benefits of the use of psychometric scoring as an alternative to traditional credit scoring?
The EFL psychometric risk-scoring model narrows the financing gap for high-potential, growth-generating SMBs by providing a unique vetting process that evaluates business intelligence, honesty and integrity. In developing economies, SMBs are often shut out of the financial system due to a lack of reliable credit bureau and bank performance information being available to financial institutions. Through the partnership with EFL, MasterCard is extending its strategic mission of financial inclusion across all customer segments and regions.
The release mentioned that around the world SMBs lack access to low-cost financing, and that in developing countries only 20 percent of SMBs have a positive banking experience. In the U.S., according to the Federal Reserve Bank of Cleveland, small businesses aren't borrowing money as much as they did before the recession because lending standards have tightened and there are fewer banks to lend money. Can the EFL psychometric risk-scoring model help bridge the financing gap in both the developing and industrialized nations?
SMBs access to working capital to grow their business is a challenge experienced around the world, and MasterCard is working with a unique set of partners to help small businesses. Although the EFL partnership is focused on providing our issuers in developing markets with tools to evaluate underwriting risk, it's not a solution intended for developed markets with an abundance of traditional credit scoring sources.
As markets become more developed and issuers have access to reliable SMB prospect data, the EFL solution becomes more complementary towards their issuer underwriting efforts. Additionally, in more developed markets we are working with other alternative credit scoring companies like Kabbage, to develop solutions for issuers to complement their existing underwriting process.
Who are some of the first banks benefiting from this partnership?
MasterCard and EFL are working globally across Latin America, Southeast Asia, the Middle East and Africa to promote the use of psychometric scoring as an alternative to traditional credit scoring where SMB credit underwriting challenges exist. Among the first banks to benefit from the partnership is Banco BHD of the Dominican Republic, which will utilize the EFL model to credit score MasterCard small and medium-size business credit cards in addition to its traditional SMB term loan businesses.
What is the outlook for small businesses in the near feature? Should they expect Bank loan approvals to go up, and by how much?
The outlook for SMBs in developing markets with less availability to reliable prospect data is improved due to partnerships like this between EFL and MasterCard. Through increased access to capital from their local issuers, SMBs will be financially included in their local economies. It’s still early days yet in the partnership, but we expect that our issuers will be able to provide a significant increase in their bank approvals for card and term loans through the use of EFL as part of their underwriting process.