WHITE PAPER

BANKS! IT’S TIME TO CHANGE

YOUR GAME IN SME LENDING
WHY AND HOW

Abstract
Small and medium-size business enterprises (SMEs) are vital for the
economic growth and competitiveness of any country; hence supporting
the SMEs’ financial needs is crucial. For banks too, SMEs form a key and
loyal customer segment. Unfortunately, in spite of these factors, the recent
years have seen significant unbundling in the banks’ SME lending business
across the globe. Consequently, the historic strong relationship between
banks and their SME customers has gradually begun eroding. If banks do
not change their approach towards the SME lending business, they risk
losing – forever – a major portion of this very important customer segment
to the alternative SME lenders. It’s therefore the need of the hour for banks
to thoroughly review and transform their SME lending business. This white
paper provides insights on the market disruptions being rendered by
alternative SME lenders, the key challenges faced in banks’ SME lending
business, and recommendations for banks on ways to transform their SME
lending business.
 Overview Market Disruption by Alternative SME Lenders
Small and medium-size business Banks are facing increasing competition automation investments to originated
enterprises (SMEs) are crucial for the from the alternative SME lenders such as SME loans in huge volumes, over the
economic growth and competitiveness online peer-to-peer lenders (e.g. Prosper, past few years. They have also been
of any country. Consider this – in the Lending Club, and Funding Circle), using technology innovatively to
USA, small businesses comprise 99% payments companies (e.g. Paypal, Square), simplify the lending process, enhance
of all companies, employ over 50% of online balance sheet lenders (e.g. Kabbage, speed, provide price transparency,
the country’s private sector workforce, OnDeck), lender‐agnostic marketplaces improve customer experience, and
contribute over 50% of the non-farm GDP, (e.g. Biz2Credit, Fundera, Lendio), and reduce SMEs’ borrowing cost. Refer
and for the past two decades have created others. These alternative lenders have been Figure 1 for key illustrative capabilities of
around two‐thirds of the net new jobs. leveraging their multi-year experience and alternative SME lenders’ solutions.

Similarly, in Australia, the nearly 2 million

SMEs make up for around 70% of all
industry employment. In the UK, the SMEs Alternative SME lenders’ solutions: Key illustrative capabilities
employ nearly 60% of the private sector Innovative and robust technology platform
workforce. And most of the innovations Customer portal; Access to databases Real time risk profile assessment using
across all geographies happen through partner API having millions of a myriad of traditional (e.g. personal
the SMEs. and portal SMEs’ information; credit history) and alternative data (Yelp
1000s of data points reviews on business, predictive indexes
From the aforementioned, it is obvious that
automatically on current cash flow data from Quick
supporting SMEs’ financial needs is crucial
evaluated Books entries and bank accounts)
to a country’s growth. Having seen this, it
is no wonder that in recent years, policy Highly automated Data collection from Real-time analytics capabilities; model
makers in many countries (for example pricing and numerous sources monitoring and revalidation
US, UK, and the EU) have embarked on decision engine (online banking, social
initiatives to encourage SME lending. For data, credit bureaus,
banks as well, SMEs form a key and loyal payments data)
customer segment. Unfortunately, despite
Cloud-based credit Lending decisions using Much lower operating expenses
such positive factors, the recent years
scoring, backed by predictive modelling,
have actually seen significant unbundling
big data analytics data aggregation
in the banks’ SME lending business. SME
lending on the banks’ balance sheets Superlative customer experience
have decreased significantly, even as Quick application Fast funding approval Takes 2 weeks or less for funding (good
their loans to large businesses continue with minimal to number of loans get disbursed within 48
to rise. Consequently, the historic strong nil paperwork hours)
relationship between banks and their SME Less expensive Enhanced price
customers has gradually begun to erode. loans as compared transparency
If banks do not change their approach to daily payment
towards SME lending business in earnest, loans
they risk losing – forever – a major portion
of this very important customer segment. Figure 1 – Alternative SME lenders’ solutions: Key capabilities

External Document © 2018 Infosys Limited

Banks’ SME Lending: Key Challenges
Refer Figure 2 for key challenges faced in SME lending from the banks and Figure 3 for key process issues in the banks’ SME lending.

Key challenges faced by SMEs

Banking consolidation Lack of support from banks Stricter collateral needs and covenants
Large scale banks’ consolidation SMEs believe that banks don’t In many countries (e.g. Australia), in addition to usual
resulting in significant reduction understand their needs or support financial covenants like leverage ratio, minimum interest
in SME lending (e.g. No. of them well (only 1 out of 5 SME loans get coverage or current ratio, lenders apply many other non-
community banks in the US have approved by banks) financial covenants (e.g. restrictions on business mergers
dropped to less than 7,000 today and acquisition, any considerable changes in the SME’s
from over 14,000 in 1984) business, etc.)
Community banks, which form a Banks still focus on traditional service In recent years, the value of real estate, which make up
major source of SME lending, have and sales models, and which are the majority of the SMEs’ assets and collaterals, have
been getting absorbed by large unaligned with today’s SME needs reduced immensely. Many banks today prefer liquid
banks collateral over real estate
Many banks refuse to lend to certain Many SMEs lack the credit score, cash flow, or collaterals
SME categories (e.g. restaurants, or SMEs that banks are asking for – e.g. requirement for proven
with less than $2 million in revenue) track record for many years, owner having high (>680)
personal FICO score, etc.
Many big banks simply refer their SME
customers to their costly small business
credit card products for low-value loan
requests
SMEs spend over 25 hours simply on
their loan request paperwork, and have
to approach numerous banks with their
application
Successful loan applicants have to wait
for weeks, or even months for the funds
to get approved by the bank
Key challenges faced by banks
Dynamic SME sector Fast-evolving SME needs Regulatory
SMEs are highly sensitive SMEs’ needs are evolving fast; loan is no In many countries, in addition to myriad new regulations,
to changes in economic longer their sole expectation banks are also uncertain on the implications these
environment, usually operate in regulations have on their lending businesses.
risky markets, and have higher rate Consequently, banks are averse to lend based upon
of failure
“softer” underwriting criteria like long standing
relationship with borrower, etc.
Are amongst the most They expect banks to provide Regulations like Basel III, with their increased capital
challenging customer segments innovative and personalized services, requirements, have reduced the banks’ available funds
to acquire and sound advice on banking products for lending – with SMEs getting the most adversely
and on their wider business issues impacted
Are heterogeneous, active in Expect superlative multichannel Banks have to hire additional staff for focusing on
large number of sectors, and delivery regulatory enforcement – this has adversely impacted
difficult to segment using the the banks’ ROA
conventional banking models
Banks face difficulty in
specializing in, and targeting, a
particular SME market segment
Owing to SMEs’ heterogeneity,
banks have been unable to
develop optimal general
standards for assessing the loan
application

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 Credit assessment Process
Conventionally, banks’ SME lending has been strongly relation-based (e.g. Many banks’ SME lending processes are paper-
borrower’s management skills, business acumen, and attitude towards indebtedness intensive, manual, and cumbersome
have been considered)
However, in recent times, with the move towards algorithmic and sophisticated Many lack online application feature,
credit assessment models, banks are facing shortage of skilled staff to assess the automated approval process, or the automated
borrower’s credit-worthiness pricing capability
Many SMEs lack documentation on income statements, balance sheet, operating Lack of process and workflow automation, and lack
performance, etc. Also, none or very limited public information on their of an online platform are key reasons for many of
performance is available - as SMEs rarely issue debt securities or publicly trade the SME lending process issues
equity
Figure 2 – Key challenges faced in SME lending from the banks

Banks’ SME lending process issues Adverse impact on SMEs

• Failure in following established policies and procedures • High underwriting, transaction, and search cost
- in desperation to gain new SME customers
• Prospective borrowers asked to provide much more
• Origination – inordinate focus on manual data collection documentation than is necessary for judicious
and entry underwriting

• Credit analysis / sanctioning – multiple and redundant • Many banks enforce the same application and
credit decision levels; long lead time in communicating the underwriting processes for all of the loans
lending decision to borrower – irrespective of the complexity and size of the
requests, or the borrower’s risk profile. Consequently,
• Monitoring - long reaction time for deteriorating credit
the transaction cost to process a $2 million loan is
quality
the same as for a $100,000 loan
• Portfolio management - problematic data usability /
• It is difficult and time-consuming for qualified SME
availability at firm-wide aggregate level
borrowers to find a willing bank lender, and vice
• Workout / recoveries – long reaction time due to versa
fragmented and inconsistent documentation (e.g., on
collateral) • Process inefficiencies lead to high TAT, lack of
predictability and transparency for borrowers
• Loss data management usually happens through Excel
sheets, access databases, etc. Approach is reactive – data
collection happens post-default

• Document management solutions are not always

integrated with the loan origination or other processing
system, leading to manual and redundant entry of loan
information

Figure 3 – Banks’ SME lending – Key process issues

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Recommendation for banks
So what should banks do to raise the game in their SME Lending business? The following are our key recommendations.

• Engage SMEs early and use judicious lengthy loan review and approval own services and products, but also
segmentation: As SMEs usually do process that is used commonly for those of their key SME customers.
not switch easily from a bank with both the SMEs and larger corporates Additionally, banks can leverage
which they already have established must be abandoned and a simplified their online platforms to enable
relationship, banks’ focus should be process should be put in place instead. virtual communities for the SMEs to
on acquiring them at an early business In the new simplified process, a fully connect with each other and with
stage. Implementing needs and value- automated lending system (similar prospective customers and promote
based SMEs segmentation is crucial, to those used in retail lending) for their products. Such initiatives can
as investments needed by each of credit evaluation and decision- help enhance the SMEs’ trust in, and
the segments is quite different. For making should be enabled for some stickiness with, their banks. A bank’s
effective segmentation, customer size, of the SME segments and loan types. endeavor should be to become the
business profile, desired products and Low-value lending products for the ‘main provider’ for an SME, as SMEs
services, credit rating information, and SMEs that have strong credit history have proven to stick with their main
depth of client’s existing relationship could be routed through this fully bank for their other financial needs
with the bank, are some of the automated lending process. Similarly, (e.g. deposits, revolving credit etc.).
crucial parameters to be considered.
Judicious segmentation would help
SMEs that have good credit rating, and
long-standing profitable relationship
• Digitalization: Banks should
provide SMEs and their own staff
banks design granular processes with the bank, could be provided
with multi-channel self-service
for the specific segments. Instead with pre-approved credit limits. This
capabilities. For example, they
of trying to focus equally on all SME will help forgo the need for running
should enable online dashboards
segments, banks should identify some expensive, new loan evaluation and
to aid performance visibility
of the key segments that they could approval processes each time. Also,
and stakeholders’ management.
profitably target. for complex and risky loan requests
Similarly, enabling an online portal
that also need human analysis and
• Prudentially differentiated rating
judgment, appropriate levels of
would strengthen the SMEs’ self-
process: Considering SME loan sizes service capabilities. Digitalization
decentralized and localized decision-
are relatively small and that there is focus should be on enhancing
making should be enabled.
intense competition from alternative the SMEs’ experience – through
lenders, banks should innovate and • Advice and support: To gain traction features like user-configurable and
optimize the huge efforts spent by from early-stage SMEs, and also to graphical dashboards, and workflow
their skilled rating analysts. They increase their fee income, banks management tools. Designing flexible
should not have their rating analysts need to provide the SMEs more than digital platforms that provide end–
thoroughly review all of the lending just funding. The additional value- to-end services and offer a range of
applications. Rather, the loan review added services from banks could choices to SMEs is crucial. Banks’ omni-
and approval process can be tailored, include bespoke business advice and / multi-channel lending life cycle
making it a function of the borrower’s guidance, practical business support, capabilities should provide for easy
risk profile, loan value, and other and more. Offering a tiered range of online application, low documentation
available relevant information on the value-added services is recommended requirements, document imaging
borrower. The banks’ loan processing – from providing elementary credit capabilities, expedient underwriting,
costs can be significantly reduced if control templates and guidelines, to and funding, digital exchange of
application routing is prudently done enabling online business management documents across the life cycle,
through a differentiated, streamlined, newsletters and tools, and from HR graphically enriched cross-selling and
and automated decision-making and legal advice tools, to enabling what-if scenarios generation, online
process, which is in turn based on working capital advice platform. credit assessment and monitoring,
risk-adjusted decision-making and Banks could leverage their online intuitive wizard-driven interface, GUI-
pricing model. The banks’ existing channels not just for marketing their based parameterization, and more.

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 • Virtual Relationship Managers (RMs) example, banks can provide their field lending process is important for banks.
and Social Media: Enabling remote staff full-capability lending tablets They can consider implementing
virtual RMs would help banks enhance comprising tablet-specific lending consolidated lending platform
their responsiveness to SMEs’ needs applications, online dashboard for (having well-integrated origination,
and also aid in lower cost-to-serve viewing the SMEs’ cash flow and underwriting, and servicing
achievement. Virtual RMs can be made accounts, create what-if scenarios, capabilities). Such a platform would
available through online messaging and more. Having tablet specific enhance information visibility, improve
tools and through telephone. An applications with video functionality data management, enrich client-
online feature to book appointments can also allow banks to co-create their experience, enable collaboration,
with RMs for face-to-face discussion product and services by engaging provide automated workflow based
should also be provided. Further, SMEs virtual focus groups and customers on deal value, and support STP
periodically look for new ideas and in ideating for and testing of the new capabilities. It would also enable
answers to their pressing challenges. services and products. easy business-rules configurability,
Hence, banks can enable a social provide integrated customer view
platform-based community tool where
• Analytics: Banks can improve their
(including profitability across
lending decision by using advanced
the SMEs and their customers could product holding), augment effective
and next-generation analytics, BI,
connect and share insights. relationship life cycle management,
and big data tools. Investment in a
support self-service productivity
• Mobile: Robust mobile channel borrowers’ data consolidation solution
tools implementation, and more. For
capabilities should be made available is needed, to allow for effective
lending systems integration, balanced
to SME customers and to the banks’ portfolio analytics capabilities such
and intelligent integration rather than
own support staff. Banks’ RMs can as proactive identification of loan
“full integration” should be the way
be provided with mobile devices covenant noncompliance, credit-
to go. Focus should be on optimizing
to help them effectively manage quality-deterioration prediction, risk
the manual tasks and minimizing the
client relationships, loan marketing, assessment of payment default, etc.
repetitive manual data entry across
origination, and more. Similarly, The solution should have scalable,
applications. Refer Figure 4 for key
bank’s senior treasury personnel flexible, and standardized data
expectations from the SME lending
should have access to mobile features management architecture. Banks,
automation. Banks can also consider
like advanced alerts, transaction especially the larger ones, have
leveraging vendors’ advanced cloud-
approvals, payments initiation, cash information on millions of SME
based solutions, as appropriate. For
management, FX services, exception customers’ activities within the
example, quite a few banks have a
management, and other relevant business’ accounts. This information
case for sun-setting their unwieldy
features. Transaction approvals, goldmine should be leveraged
and complex legacy LOS systems and
balance checking, flexible account for predictive model creation. For
replacing these with robust cloud-
management, payments, calendars developing the credit-scoring
based solutions. Using SaaS-based
and scheduling, FX services, alerts, and algorithms, banks should leverage
solutions can especially be considered
basic reporting are some of the key big data solutions on the internal and
by banks for fraud checks, regulatory
features expected by SMEs and banks’ external structured data, as well as the
compliance, document preparation,
staff. Evangelizing the SME customers external unstructured customer data automated underwriting, and real-
and banks’ staff on the benefits of (e.g. from blogs, tweets, product, and time sanctions screening. Today, credit
the mobile channel, are important. business reviews). scoring is also being enabled through
In addition to the smartphones’
capabilities, banks must also enable • Automation and cloud: Automating a new generation of cloud-based
and optimizing the end-to-end organizations like Skyscorer.
robust tablet channel capabilities. For

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 SME lending automation – Key expectations
Single source system for Loan management system Automated servicing platform Automated underwriting based
collateral management integration with eBAM supporting customer service, loan upon the loan / product sizes
capabilities setup, default management
Integration with external Workflow system having Holistic decision engine backed by Automated data collection tools
databases and tools (social automated data feeds; predefined algorithms for feeding into risk models
tools, credit rating agencies, minimal need for manual
etc.) and with bank’s data-entry
core systems (using open
architecture)
Robust portfolio monitoring Automatic customer data Central capturing and indexing of Centralized loan monitoring
system synchronization; improved documents; centralized document system; advanced automated
Universal Customer Identifier repositories with role-based access reporting capabilities
(UCI) and obligor data across organization
management

Figure 4 – Key expectations from the SME lending automation

SME lending initiatives by proactive banks: Examples

Refer Figure 5 for examples on SME lending innovations and initiatives by proactive banks

SME Lending: Examples of initiatives and innovations by proactive banks

Barclays / HSBC Barclays launched ‘MyBusinessWorks’ - a fee-based service for the business start-up customers
HSBC opened its e-Masterclass-Global Knowledge Center for the SMEs’ learning. The Center also comprises free
learning modules
RBS Refers its SME clients, who have been turned down by it for loans, to P2P lenders – Assetz Capital and Funding Circle
Wells Fargo Has been offering business owners an online financial education portal (Business Insight Resource Center) –
comprising relevant award-winning articles, videos, podcasts, and other resources. SME owners can access the Business
Credit Center on the Business Insight Resource Center
BankInter Its SME customers can use its virtual channels to interact with the bank’s staff via the online video conferencing
It also launched its ‘Mobile Virtual Network’ in partnership with the Dutch telecom operator KPN, to reduce the
customer’s data transfer cost
Leumi Bank Israel’s leading commercial bank had launched ‘Leumi V’ application that delivers face-to-face contact for the
customers at their desktop and through mobile devices
Jack Henry and Had introduced the “Commercial Lending Center” - a hosted portal to allow community financial institutions to
Associates attract more business borrowers by enabling a more convenient loan application and management cycle. Using the
Center, community institutions can accept commercial loan applications 24/7, online, and better manage the workflow
process – thereby enabling faster response times
The center enables financial institutions to compete with alternative lenders and also expand their relationships
with businesses that do not generally qualify for the traditional loans
HSBC Is increasing its lending to UK SMEs by more than 25% in 2015
It would also be waiving certain fees on the SME loans
PNC Developed an SME version of its popular PNC Virtual Wallet online tool to help the SMEs better manage their finances
SunTrust Through its “Business Class Banking” program offers its SME customers business advice, enables better
understanding of the industry-based cash flow cycles and debt management programs
RBC Uses Nomis Price Optimizer 3.3 across its multiple lines of business to better execute its customer-centric approach
and quickly identify opportunities to grow its SME business

Figure 5 – Banks’ SME lending innovations and initiatives

External Document © 2018 Infosys Limited

Conclusion
It’s the need of the hour for banks to thoroughly review and transform their SME lending business with the leading goal of delivering
superlative services that the SME customers have begun to expect. For banks, being complacent in this business is no longer an option
with the irreversible onward galloping of alternative SME lenders. Banks should work towards innovating and growing organically in their
SME lending business; and also, wherever appropriate, can look at entering into joint ventures with some of these leading alternative
lenders as a strategic tool.

About the Authors

Anjani Kumar
Principal Consultant, Consumer & Commercial Banking group, Infosys

Anjani Kumar has over 17 years of comprehensive IT, domain and process consulting experience. Currently, he
manages several strategic initiatives including the Competency Development Program and Thought Leadership
showcasing efforts. Over the years, he has provided consulting services and managed many large and critical IT
engagements for numerous key clients. He was also recognized as the lead process auditor for the IT division of a
major global bank. He has extensive techno-functional skills and an in-depth understanding of quality and process
models – CMMI, Six Sigma, ITIL, etc. Anjani holds a Bachelor of Engineering degree from IIT Roorkee and, over the
years, has earned many reputed and industry-recognized domain and process certifications.

He can be contacted at [email protected]

Chetna Kothari
Senior Consultant, Commercial Banking group, Infosys

Chetna Kothari has over ten years of combined experience as IT Domain Consultant and Portfolio Manager,
specializing in Commercial Banking and Wealth Management operations. Over the years, Chetna has consistently
participated in the successful delivery of complex programs for large organizations spanning geographies. Her
engagements span a major banking organization that operates across Australia, New Zealand, and the Pacific
region; a leading U.S. bank; and one of the biggest banks in Switzerland that is also the amongst the world’s largest
private wealth managers.

She can be contacted at [email protected]

For more information, contact [email protected]

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