Small and medium enterprises (SMEs) are integral to the economic development of Southeast Asia. There are at least 71 million SMEs in Southeast Asia and employ 67% of the working population in this region. Despite its importance to Southeast Asia, SMEs face the biggest challenge which is the funding gap. The funding gap is the gap between the amount of money a business needs to start or expand and the amount of money that is actually available.
The funding gap is a significant obstacle for many SMEs, especially those that are just starting out. Entrepreneurs must not only come up with a great business idea but also find the resources to start their business. According to the Asian Development Bank survey, 60% of SMEs requiring financing in Southeast Asia face difficulty to obtain loans from traditional financial institutions. This is where business financing comes in to help bridge the funding gap and provide the necessary resources for small businesses to start and grow.
SMEs are underserved by traditional banks
The SME segment is still largely underserved by traditional banks in Southeast Asia. There are a number of contributing factors to why banks are more reluctant to serve SMEs. Firstly, SME lending margins are much smaller than retail and large corporate customers due to the small loan amounts and tougher competition in the market. In addition to a smaller margin, onboarding SMEs is a time and labour-intensive process. SMEs have very little documentation and thus due diligence process becomes a bigger challenge compared to the bank’s more established clients.
For banks that serve SMEs there is often a lack of personalisation of the loans, offering one size fit all solutions for SMEs. These solutions usually fail to address the real need of SMEs such as quick cash availability and assistance in related areas, such as accounting and bookkeeping. As a result, many SMEs have looked outside the traditional bank ecosystem. Fintech companies are coming into the space with promises to serve SME needs better, primarily operating through digital channels.
SMEs in the digital world
SMEs are already fast adopting online sales and digital payments, activities which financial institutions should be looking to take advantage to support as they too are working through the digital transformation of their services offered. For example, In Indonesia, the e-commerce market is worth US$13.6 billion and is expected to grow 35%, according to JP Morgan estimates. Looking across the wider Southeast Asia region, SMEs contribute over 40 per cent of regional GDP, yet the current funding gap (globally) for these enterprises can be in the range of US$5.4 trillion annually. There is still a huge gap in the market but SMEs are ready for it in digital channels. Thus, Fintech companies like Fazz are racing to serve the SME market and provide tailored solutions for them.
Fazz providing access to funding with AI & ML
The biggest challenge for banks to address the needs of SME loans is the high operating cost to serve the smaller amount of loans with limited data points to assess their creditworthiness. Fintech like Fazz is leveraging Artificial intelligence (AI), data analytics and machine learning (ML) that help reduce operational costs to better predict the needs of an SME customer, and by extension, be better positioned to serve them. Better analytics have enabled Fazz to transform the traditional credit risk assessment models that traditional financial institutions rely on. This commitment to technologies such as AI and ML, allows fintech companies to truly improve financial access in the region.
Value added service provided by Fazz
Fintech companies are able to provide value-added services that can elevate SMEs businesses by providing assistance and solutions in related areas such as alternative business banking account that helps businesses to do payments, savings, bookkeeping and accounting that is tailored to their needs.
Even though at this point SMEs are still facing a huge funding gap, there are emerging solutions coming from the fintech industry to address those issues by leveraging technology that traditional financial institutions may not have the capability of yet. There is also a growing trend by traditional financial institutions to partner with fintech startups to serve SMEs in a joint effort. This shows confidence that SMEs will be better served in the future as they are integral to the economic growth of Southeast Asia.