The International Finance Corporation (IFC) estimates that in emerging markets, the MSME financing gap stands at more than $2 trillion. But recent developments like rapid adoption of smartphones, growth in online commerce platforms, the digitization of small business processes, and enabling regulatory environments are reducing the longstanding hurdles to close this gap. Driven by the vast and untapped market opportunities, pioneering lenders are leveraging these trends to identify, assess, and serve these long-underserved small business clients.
Informed by its investments in and work with fintech startups in the MSME finance space, Venture Lab, seed-stage investment initiative of financial inclusion leader Accion, released a report, Bridging the Small Business Credit Gap through Innovative Lending, that captures how tech-enabled lenders are using new financing models to effectively market to, acquire, underwrite, and capitalize small businesses. These lenders use niche marketing, digital, or mobile platforms, and enterprising partnerships – and often a combination of all three – to make capital available in ways that are cheaper, faster, and more convenient for MSMEs.
To date, Venture Lab has invested in a dozen innovative early-stage startups in the MSME finance space since it was established in 2012. The breadth of this work, alongside Venture Lab’s investment model – which pairs capital with extensive strategic and operational support – gives it a unique viewpoint to assess trends and opportunities in the field.
Acquisition, Underwriting, and Funding Innovations
Broadly, new lenders in the MSME finance field are making inroads in this market by innovating across three dimensions deemed to be critical to success in the lending business: acquiring new customers to ensure scale, tailoring loan underwriting to MSME characteristics and needs, and attracting affordable debt financing or investment to on-lend to MSME borrowers.
The examples above, along with a number other innovative lenders in Venture Lab’s portfolio, are making strides in providing the financing needed for more than 200 million underserved MSMEs across the world.
Much like the markets they serve, these lenders are themselves in need of wider and deeper support: advice and mentoring, well-targeted research, more conducive regulatory environments, and capital investment. Moreover, the majority of the innovations that we have seen are mostly in acquisition and underwriting, indicating that these innovative lenders are still reliant on traditional providers like banks as their funding source. Banks and other funding institutions can then play a key role in supporting innovative MSME lenders by providing them with access to onlending capital in the local currency at a reasonable cost. This is crucial in enabling these lenders to be able to serve more businesses, particularly during their early days of building their loan portfolio. Incumbents don’t have to engage startups in this space in a transactional or equity-based manner; instead, they could foster collaborative partnerships or develop a co-innovation relationship. Through partnerships, incumbent financial corporations can help smaller companies grow and expand their reach, learn more about emerging technologies, and create a robust ecosystem.
By combining forces of key actors in the space, the global MSME funding gap could be narrowed faster and in turn spur economies around the world.
Venture Lab developed this report with the support of the Mastercard Center for Inclusive Growth.
(Original post published on blogs.accion.org.)
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