Where Credit Scores Are Scarce, Mobile Devices Fill In The Gaps For Lenders

Financial regulations forced banks to pull back from small business lending in the wake of the financial crisis as pressure to reduce risk exposure increased. Risk mitigation is also behind massive regulations like KYC and anti-money laundering rules. So while SMEs have faced a tough journey finding a bank loan across the globe — and that includes major economies like the U.S. and Europe — small businesses and entrepreneurs in emerging markets find they’re being shut out of the bank lending market altogether.

Alternative lending company Kountable recently spoke with PYMNTS to explain its approach to this problem. According to Chris Hale, Kountable’s founder and CEO, the strategy requires an understanding of the business customer, tapping into the potential of the mobile device and leveraging alternative data.

“Some of these problems are universal,” Hale told PYMNTS of the struggles small businesses face when looking to access financing. “We see them here in the U.S., where an SME can win projects and deals and opportunities that exceed their balance sheet, and therefore they’re prohibited in participating.”

In East Africa, where Kountable operates, a small business that has an opportunity to land a major contract but doesn’t have the money to actually fulfil that job not only means the SME loses out, but local economies do as well. Hale pointed to one hypothetical, in which an SME has the chance to provide brand-name technologies like computers and other hardware to, say, a local hospital.

The challenge in this scenario is that the SME is a critical component to the deal getting completed, but without financing, that small business can’t move forward.

“Manufacturers will say, ‘If you wire me $250,000, I’ll ship you the goods.’ But a hospital might say, ‘When you give me the goods, I’ll give you the $250,000,’” Hale explained, adding that this scenario leads to a sort of “standoff” where a small business can act as the middleman to complete a transaction.

If the small business can’t afford to procure those brand-name goods first, however, the entire transaction can fall apart. It’s this predicament that has Kountable turning to trade finance, as opposed to other types of financing, to reduce risk while still enabling a small business with funds to complete a deal.

“These SMEs are providing goods to high-quality customers, but the value of those goods often exceeds what they would be able to access in a traditional, balance sheet transaction,” the CEO said. “A bank often wouldn’t give our SMEs $250,000 to bring, say, Philips imaging equipment into the country to sell to a hospital.”

Trade finance, he continued, enables the lender to focus on the balance sheet of the end customer — in this case, the hospital — rather than the SME. This structure also enables small businesses to initiate multiple deals at once with Kountable, too, he said.

The Mobile Device

But in addition to SMEs often not having the balance sheet necessary to get bank loans, these small businesses are also lacking data that helps lenders mitigate risk. For Kountable, that’s where the mobile device and alternative data come in.

“The proliferation of handheld mobile devices far outstrips the proliferation of desktops and laptops, certainly,” the executive noted. By reaching entrepreneurs and small business owners via mobile device, it enables Kountable to access data on that device critical to the trade financing process.

“It allows us to leverage the data on the device to manage the identity of our customers, which is very valuable to us in a market where identity is difficult to solve for,” said Hale, adding that often concepts like traditional credit scores and Social Security numbers simply don’t exist in these markets.

Mobile devices also enable Kountable to collaborate with a small business to gain real-time data on the progress of a particular deal.

“We can work with them by providing support on things like third-party logistics and enabling them to deliver to us some of the documentation — like photographs and staging — things that demonstrate that the transaction is progressing on schedule and effectively,” he said. The mobile device facilitates the aggregation of key, real-time data points like geolocation, while it also links Kountable to alternative data sets for compliance purposes like KYC.

“Above all, [the mobile device] is more real-time, more accurate,” the CEO said. “There is this concept of an aggregated virtual self. And a lot of that data that the mobile device engages with in the cloud, everything you interface with throughout the app, is often significantly more accurate than your own personal memory.”

Leveraging nontraditional data is critical, especially in developing markets like East Africa, he said, and the mobile device is the richest source of that information. Hale said this technology-first approach will continue with the company as it looks to expand in new markets, including Asia and Latin America, an expansion Kountable is now able to pursue thanks to a $150 million line of credit secured earlier this year for small business lending purposes.