Not Knowing How to Measure Data’s Effectiveness Holds Small Business Lenders Back

Small- to medium-sized businesses are tough.

“It’s a resilient sector made up of business segments that are seeing strong growth,” Hicham Oudghiri, co-founder and CEO of Enigma Technologies, told Karen Webster.

That’s not to say there isn’t a raft of challenges confronting SMBs and the banks and FinTechs servicing them, as Oudghiri detailed in a conversation on the “one thing” that’s top of mind for Enigma’s clients.

The company’s business and data intelligence platform aggregates and tracks the financial health of private businesses, offering a broad range of insight that is needed to extend loans or offer merchant services to these firms that are the backbone of the economy.

SMBs are contending with the vagaries of inflation rates, supply chains and, depending on where one looks, a pullback in some areas of financing. But there has been nothing like the massive drop-off seen in other areas of the economy, such as in mortgage lending, facing a severe crunch due to the highest rates on those loans in 20 years. Since interest rates on SMB loans were already high, the fact that rates have gone incrementally higher has not done all that much to deter SMB owners/operators from seeking financing.

The Shift That Is Underway

What’s changing is where they’re seeking capital.

“More SMBs are moving towards FinTechs and online lenders and away from traditional financial institutions,” said Oudghiri, who added that “traditional FIs have made lending a little harder, and the community banking ecosystem has been rocked by what we’ve seen over the last few months” with the collapse of Silicon Valley Bank and the bank runs that are only a few months in the rearview mirror.

That means that there’s room for these tech-savvy upstarts to gain market share — and for forward-thinking, digitally-oriented traditional FIs to cement lending relationships. There’s also room for processors to boost their SMB customer rosters.

“As these organizations become more data savvy, they’re looking to unlock new sectors,” Oudghiri said.

That means looking at new information to help craft go-to-market strategies. Take eCommerce, for example. SMBs’ business profiles and probability of success can no longer be determined solely by the look and feel of their online sites, but by the payment systems they are using — or are not using.

And that granularity of analysis leads to the one thing that’s top of mind right now: know your customer.

That means being able to ascertain that a would-be SMB client is who they say they are, that the information they’re presenting to be considered for a loan, for example, is trustworthy. The same data that crosses the platform offered by the likes of Enigma can be harnessed to make speedier decisions about who represents an acceptable or attractive credit risk as these providers focus on specific SMB segments of the economy.

Oudghiri said his firm has been working with clients to ensure that these lenders and merchant providers have designed the right frameworks to measure and predict success in a relationship with a given SMB.

“This all falls under the bucket of knowing your customer, or potential customer really well,” said Oudghiri, who added that data points that are needed for that holistic view to extend well beyond simply getting a glimpse of revenues.

Without those data points, he said, “historically this has all been a game of guesstimation.”

The wealth of data from the company itself and third-party sources — forming a coherent, cohesive view of sales and financial health — can help providers and lenders fine-tune their marketing efforts to see an improvement of hundreds of basis points as they target SMBs with new products and solutions, he said.

“The good news about being in the data business is that the proof is in the pudding,” Oudghiri told Webster.

For the SMBs onboarding with these providers, and with faster decisioning in the mix (and permissioned data through open banking), “the user experience is more like what they’re used to on the consumer side” of financial services, he said.

As 2023 gives way to 2024, SMBs have proven that they are nimble and can respond with aplomb to the challenges of the economy.

“These are profit-generating institutions, and they are the passions of the owner,” Oudghiri said.

For the providers and lenders — the FinTechs and the FIs — “the prospecting budget and marketing budgets can be leveraged with the right data,” he said, “and so there’s a way to spend less money and have more commercial success and impact for their clients.”