COLLABORATIONS between banks and fintechs (financial technology firms) - even as they explore leading- edge technology - could also play a big part in addressing the traditional gap in small company funding here.
This comes as two local banks, DBS Bank and United Overseas Bank (UOB), extend their reach to smaller companies through tie-ups with fintechs, pushing ahead of their peers in using new technology to target the small and medium-sized enterprise (SME) segment.
It's a notable development, given that smaller companies have tended to be underserved by banks. A study in 2015 showed that about 60 per cent of SMEs in Singapore rely on bank loans for financing, leaving the remainder unserved by financial institutions. The Visa and Deloitte digital SME banking study suggested that the low-risk appetite of banks was limiting the amount of lending to SMEs.
DBS kicked off the year by introducing a new way of assessing credit risk of small businesses, which are unable to obtain short-tenor unsecured loans, by partnering with a fintech in Asia.
Working with Hong Kong-based AMP Credit Technologies, DBS uses electronically verifiable cash flows, such as card payments, to assess each application. These electronic cash flows are studied and measured against sector models of payments and collections, and a credit assessment is made accordingly.
This allows them to obtain a working capital loan of up to S$100,000 and, critically, without collateral.
A DBS spokeswoman said the bank now has about 200 SMEs in its loans pipeline, with the average loan size at S$70,000, and at an average loan repayment tenor of six months.
This is a structural shift in lending, from the bank's point of view. The bank noted that small businesses without audited accounts and personal income statements tend to be underserved because banks find it difficult to credit-assess them. Banks prefer to lend to companies that can back the debt with collateral, have an established operating track record, and at least two years of audited accounts.
Most recently, DBS in April inked cross-referral agreements with two homegrown peer-to-peer (P2P) lending platforms: Funding Societies and MoolahSense.
With these partnerships, DBS can link the lending platforms with some of the smaller businesses that the bank itself is unable to lend to. The lending platforms can also refer borrowers who have completed two successful rounds of fund-raising to DBS for larger commercial loans and other services such as cash management.
UOB has meanwhile found some footing in expanding into this fintech collaboration space. It is the first Asian bank to partner an equity crowdfunding platform, Israel-based OurCrowd. Through the partnership announced in March, UOB aims to allow its SME clients to draw investments from accredited investors. In doing so, it highlighted a S$180 billion "SME funding gap" in Southeast Asia. The bank, Singapore's largest SME bank with the widest network in Asean, invested US$10 million in the venture.
Since then, the bank has gained "meaningful traction" in matching investments from OurCrowd's portfolio companies with UOB's customers in areas such as clean technology and security services, said Janet Young, head of group channels and digitalisation at UOB. She would not be drawn into talking about the number of companies that the bank has matched, but said there is a healthy pipeline.
"We are delighted that, following this latest partnership, UOB is now able to offer end-to-end financing solutions, from equity crowdfunding and venture debt to term loans and capital market solutions to support SMEs in every stage of their growth," said Ms Young, who joined UOB just over a year ago from Bank of America Merrill Lynch.
Most other banks declined comment on fintech collaborations specific to SME lending, though a few broadly pointed to accelerator programmes for startups, including fintechs.
An Accenture report in April noted the rising collaboration between fintechs and incumbent banks. Investments targeting collaboration represented 44 per cent of all fintech investments last year, up from 29 per cent in 2014.
Accenture said: "Fintechs - from those that began as collaborative players to those that turned to collaboration after failing to compete effectively - are increasingly viewing incumbents as potential partners."
The impact of technology on financial services has been well examined. A recent report from Baker & McKenzie.Wong & Leow showed that over the next three years, the most dramatic changes in financial services brought about by artificial intelligence (AI) - defined loosely as technology that picks up patterns and learns how to respond - will be in the areas of trading, financial analysis and IT.
More than half of 424 finance executives polled globally also think machine learning will "materially affect" risk assessment, credit assessment, and investment portfolio management.
Financial institutions in Asia Pacific are also slightly behind the curve in investing in machine learning, according to the report.
Amendment: In an earlier version, we said the SME funding gap stood at S$180 million. It should be S$180 billion.