Small-business lending is a sector in transition. What was once a lengthy, face-to-face, paper-intensive process can now be accomplished much more quickly with the help of technology. Customer expectations have evolved to require more personalised products and services. The COVID-19 pandemic has accelerated the transformation, generating a new competitive landscape, in which smaller, nimbler outfits are increasingly part of the picture and incumbents are adapting their strategies to leverage both technology and the human touch.
As the bedrock of many economies, small businesses will require lenders to up their game to fund a sustainable recovery. This Economist Impact report, conducted on behalf of Q2 and Salesforce, explores what the future holds for small-business lenders, and how the ecosystem of banks and fintechs can best collaborate for the benefit of small businesses’ growth.
As the bedrock of many economies, small businesses will require lenders to up their game to fund a sustainable recovery. This Economist Impact report, conducted on behalf of Q2 and Salesforce, explores what the future holds for small-business lenders, and how the ecosystem of banks and fintechs can best collaborate for the benefit of small businesses’ growth.
Key findings:
** Traditionally overlooked and underserved by lenders, small businesses have experienced increased issues in securing funding since the onset of the COVID-19 pandemic, just as they needed liquidity to stay afloat. Threatened by mass customer defaults, small-business lenders responding to an Economist Impact survey cite managing the economic fallout from the pandemic as their top challenge over the past 12-24 months.
** Spotting a business opportunity in these unmet needs, challenger banks and alternative lenders in the fintech space have started to gain market share. These new entrants are most active in the smaller loan space (under US$50,000) but are gaining traction in higher-value lending.
** Fintechs such as payment players, peer-to-peer lenders and crowdfunding platforms use sleek user interfaces and insights from predictive algorithms to attract customers with speedy, personalised and flexible lending solutions. Incumbent lenders are following suit: in our survey, supplementing static data sets with multi-sourced, real-time data flows was cited as the top innovation strategy by a plurality of lenders. Incumbents are also leveraging their branch presence to combine technology and the human touch into a “high-tech high-touch” customer experience.
** Using cutting-edge tools such as artificial intelligence (AI), cloud, automation and application programming interfaces (APIs) will help lenders to stay ahead of the game when it comes to implementing their innovation strategies. More than four in ten (43%) survey respondents worldwide identified new technologies as the most important trend for their sector over the next 12-24 months, with AI considered the most promising by nearly four in ten respondents worldwide and by 62% of respondents in Europe.
** Ecosystem thinking is an answer that many traditional and newer small-business lenders support. More than three-quarters (or 76%) of lenders worldwide agreed that ecosystem thinking based on partnerships between incumbents, fintechs and big-tech firms is “the way forward” for small-business lending. This has the potential to increase financial inclusion and help the small-business sector power the post-COVID economic recovery.
