The South African presidency has espoused the need for a strong SME sector in the country, but many fledgling businesses and entrepreneurs cannot hope for an angel investor to come along and assist.
Instead Small to Medium Enterprises (SMEs) need to turn to traditional institutions to provide the necessary financing, but access to said financing is becoming an increasingly difficult hurdle to traverse.
It’s the reason why CredoLab’s sales director for Europe and Africa, Michel Massain, is calling for better credit scoring methods to be applied locally in order to improve the economy, especially in regions like South Africa where unemployment is at a worrying high.
“The principles of credit scoring were first developed in the 1950s when they triggered economic development. Today, traditional scoring needs to be supported by alternative methods to do the same. Many consumers with huge potential to create wealth and stimulate economic activity don’t yet have a credit history. To deny them access to finance blocks expansion of the SME sector that is vital to grow the economy,” he points out.
Turning the corner
Things are expected to change for SMEs in the new year, Massain adds, with CredoLab beginning to have conversations with local players.
“We have attracted the attention of many credit players in South Africa since our launch in the country and have we have now signed agreements with three different lenders. Discussions with prospective clients have shifted from what and why to when and how. We anticipate a very strong year 2020 for our solution in South Africa,” he enthuses.
Touting CredoLab’s capabilities, Massain notes the company’s range of banks, consumer finance companies, auto lenders, online and mobile partners across 16 different countries hold a distinct advantage for SMEs.
“These organisations have seen 20% higher new-to-bank customer approvals, a 15% reduction in non-performing loans and a 22% dip in fraud rate,” he says. “By integrating alternative credit scoring with standard approaches, they are successfully tapping into new markets of underserved borrowers,” Massain continues.
With 2020 around the corner, the sales director asks why we do not have a new technology primed to improve credit rating and lending?
“You need a credit score to participate in the economy, but how can someone with no credit history get a credit score? To start and grow a business, an entrepreneur needs access to credit. With massive retrenchments and jobs cuts in key sectors in South Africa, small and medium enterprises must become substantial employers if the country’s economy is going to recover,” he stresses.
Leaning on mobile
With few people in middle to low-income countries found on credit registries, but a vastly higher number having access to a mobile device and the internet, entrepreneurial fintech companies are combining finance and technology to draw on new types of digital data to make credit decisions for SMEs.
“With consumers increasingly using smartphones and spending more time online, it only makes sense to create unique scorecard models based on their digital footprints,” according to Massain.
“Forward-looking lending institutions such as top banks and retail lenders are not only capturing customers early on in the lending cycle, but also improving the quality, speed, and scale of their lending processes,” he adds.
As such there is much for SMEs and entrepreneurs to look forward to in coming years, especially with tech-enabled financing options on the way.
“Risk managers are realizing the benefits of smartphone metadata scoring as a complementary or alternative method,” Massain emphasises.
“Furthermore, as young millennials and other customers with thin credit histories increasingly try to access credit, digital scorecards can do a better job in providing predictive insights into borrower behaviour,” he concludes.