The answer to both questions is a negative – banks must reconsider their SMB strategies to tap into the significant potential of this segment. According to the World Bank, the global SMB sector’s financial needs amount to about USD 5.2 trillion a year, which is 1.5 times the loans that are currently available to them.3 Traditionally, banks have focussed their energies on large enterprises, leaving the financial needs of SMBs unmet. There are a couple of different reasons for this. First, SMBs working with limited resources, budgets, and liquidity challenges often present a higher credit risk for banks. There is also higher cost of service delivery associated with SMBs when compared with large enterprise customers. Second, traditional banks have lengthy and detailed criteria to be met before issuing loans such as credit history and FICO score. And most SMBs are unable to meet these requirements.
But over the last few years, non-traditional lenders such as fintechs and neo banks have emerged to fill in this lacuna. Unencumbered by the established loan criteria of traditional banks, these cloud-native players are considering non-traditional data such as rent, utility payments, and even social media reviews to gauge volume trends and sales and approve loans.4 The post pandemic global economy is still trying to make up for 2 years of disruption and is impacted by war and geopolitical tensions leading to high interest rates and evolving risk and regulatory landscapes. Amidst this disruption, banks are facing increased pressures on revenues and profitability and cannot afford to lose out on the SMB opportunity.
