Innovation and SME Finance Matthew Gamser CEO, SME Finance Forum CUPID Conference February 2015

Why avoid financing SMEs? 2 Expensive to acquire Expensive to serve

TWO MODELS and

New data sources, plummeting transaction costs More digital data, more diverse data, and more real-time data means more data can be predictive data, provided you can find it and use it Big data: what’s different today?

5 © 2014 IBM and Global Payments Experts llc. All rights reserved. The digital universe is more than doubling every two years; emerging markets will surpass mature markets by 2017…. …only 1% of this data has been analyzed How much data and where?

Failure to commit to MSMEs and innovation makes banks vulnerable to a new breed of digital competitors all along the credit and payments value chains Online supply chain finance Mobile micro- lenders will graduate to SMEs M-POS acceptance/value add Analytic firms aiming to revolutionize credit models, drive growth Invoice financing Rethinking MSME payments and credit

They have convenience, cost, speed, and new data competitive advantages over bank lenders; they can “out-FICO” FICO! 2 P2B lenders “Best fit” MSME- lender matching Online direct lenders Alternative online lenders shaking up MSME credit

8 © 2014 IBM and Global Payments Experts llc. All rights reserved. Cross-sell is the holy grail of successful SME bankers; MSMEs with business products buy more products than firms that use consumer products only Source: Javelin Strategy and Research % to 25% of consumer portfolios are MSMEs* They are easy to identify because their behavior gives them away * Forrester Research (2009) and Javelin Strategy & Research (2009). “Under-Banked Business Banking Segmentation.” Big data: finding MSMEs hiding in consumer accounts

Banks must provide needs-based solutions based on the SME sub-segment they are targeting MSME financial services needs Big data: addressing MSME financial services needs

Opportunities to build on data-driven lending Risk Sharing Facilities Securitization Capital and Bond Markets Core objective is to guarantee loans offered by FIs to a borrower subject to both payment of a premium and a range of rules and conditions. Can be organized as mutual guarantee institutions, credit guarantee banks, or credit guarantee funds owned and operated entirely by the public sector or by a combination of public and private. Effective vehicle for reaching underserved groups such as start-ups and small firms. Encourages banks to enter the SME market and improve lending and risk management systems. Systemic solution to strengthening FIs’ capabilities to supply long-term funding to SMEs. Securitization of individual loans does not necessarily improve access to finance for individual SMEs, but on a portfolio level FIs are able to expand SME lending thus having a positive impact on the overall availability and conditions of loans. Credit rating agencies are integral to securitization and ratings focused on SMEs further enhance conditions of loans to this segment. Financial Institutions Group (FIG) 10 Domestic corporate bond markets provide a number of benefits: they help diversify economies, reduce systemic risk, and mitigate exposure to currency swings. As economies evolve, local companies grow larger, and develop more complex funding needs (e.g. handling larger investments and managing liquidity, interest-rate, and foreign currency risks). Other benefits include: More efficient distribution of resources, Greater corporate and market transparency, and more efficient risk pricing.

Implications for Policymakers 11 INFORMATION/PRIVACY BALANCE

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