It's no accident that technology companies that have historically not operated in the financial services space are expanding into the small business lending arena. With more SMBs embracing digitization, the apps powering that shift have gained access to troves of valuable data about their small business customers that can shed light on a company's innerworkings, more so than a traditional bank account or credit profile can.
The opportunity is particularly large in Southeast Asia, where a diverse group of developed and developing economies, surging penetration of digital payments and a monumentally-sized micro-enterprise community have led companies like Grab — which is best-known for its multi-services platform that includes ride-hailing, food delivery and other services — to step into the SMB financing space.
In a recent conversation with PYMNTS' Karen Webster, Grab Financial Group’s Head of Lending Ankur Mehrotra highlighted the significance of Southeast Asia's SMB lending opportunity, in which McKinsey research has calculated a whopping $175 billion gap in available financing for micro and small businesses in the region.
Banks, relying on thin credit histories of small business borrowers, haven't been able to meet that need. But as Mehrotra explained, by wielding the data Grab culls from its network of delivery drivers, micro-merchants and payment services, GrabFinance is able to address a vastly diverse range of business borrower needs across the region in ways that many traditional financial institutions (FIs) cannot.
Understanding Borrower Diversity
While the Southeast Asia region tends to get lumped together, Mehrotra said each market is unique, with two main groups of developed and developing countries.
"We have a massive opportunity in the developing markets. Digital adoption is skyrocketing," he said, pointing to accelerating digital payments adoption in developing countries such as Indonesia, Malaysia and Vietnam. "Even in the developed economies, we see a massive opportunity for digital adoption of financial services. We constantly hear from the ecosystem of micro-merchants that they just aren't getting the kind of credit they require."
In a more developed market like Singapore, however, small businesses aren't just struggling with a lack of access to capital — they're also seeking faster financing avenues and higher levels of credit.
Beyond economic development, Mehrotra emphasized that micro-businesses across each Southeast Asia market are unique in their entrepreneurial motivation for starting a business. He pointed to research Grab conducted in partnership with Bloomberg, which found that Thai entrepreneurs are driven by a desire for success and recognition, while in Malaysia, they seek to make a positive impact on society. In Singapore, meanwhile, small business owners desire the freedom of a more favorable work-life balance, Mehrotra said.
"Aligning yourself to the mindset of the micro-business is very important in terms of building a product that makes sense for them," he noted.
At the same time, FinTechs in the region must also acknowledge the "massive regulatory differences" across each market. As Mehrotra noted, payments, lending and insurance can often be regulated by different bodies in a single country, creating a patchwork of regulatory principles that will dictate how FinTech lenders like GrabFinance expand in each market.
The Data Of Repayment Habits
Understanding the borrower means assessing the business' ability to repay a loan, a key component to the underwriting process. While traditional FIs have struggled with a lack of historical financial data on SMBs, Mehrotra pointed to Grab's trove of financial data through its payments services, which can augment GrabFinance's analysis of capital inflows of a particular driver or merchant.
While important, a company's ability to repay is only one component of addressing the SMB lending gap. Often just as critical — and perhaps even more so for Southeast Asia – is the ability to understand a business' willingness to repay a loan. It's a more behavioral metric that is even less accessible for traditional FIs, and one that Mehrotra said can also be assessed via Grab's database.
"There are many subtle behavioral insights that drive a company's willingness to repay," said Mehrotra, pointing to an example of a driver's inclination to accept a long-distance ride or how many hours a day they drive, as well as data surrounding how merchants behave when they accept a Grab food order.
From understanding an entrepreneur's motivation in deciding to drive for Grab to assessing nuances in a merchant's behavior when accepting a Grab order, understanding the uniqueness of each micro business is essential to addressing the SMB credit gap across Southeast Asia.
But a lender's data analytics opportunity doesn't stop after a loan is issued.
Post-loan, understanding a borrower's behavior beyond repayment can enable a company like Grab to continually reassess its risk appetite and strategy and understand macroeconomic trends.
That's critical today, especially in the context of external disruptors like the Coronavirus. Mehrotra described the virus as an "external shock factor" that, while having caused a temporary slowdown in Singapore, has not yet impaired Grab's overall roadmap for Southeast Asia, with continual data collection allowing the company to weather such disruptions while keeping financing affordable for micro-enterprises.
With Southeast Asia continuing to drive migration from cash to cashless, adoption of electronic payments will open up even more opportunities for technology firms like Grab to utilize high-quality data and develop value-added services for businesses and consumers.
While the market is diverse, Mehrotra acknowledged that small businesses in the region, and all around the world, share a commonality in their need for capital and other financial services: "Small businesses want products that are quick, easy to access and seamless in the way funds are disbursed and collected."