Leveraging AI and Alternate Data for SME Access to Finance.

SME access to capital is a global challenge

SMEs are the backbone of global economies, contributing approximately 50% of GDP and employing 50% to 90% of the private-sector workforce across regions. Despite their pivotal role in driving economic growth and employment, SMEs face a massive financing gap of $5.7 trillion annually in emerging markets only – marking this gap more than $10 Trillian globally. This shortfall is especially severe in regions like Asia and Africa where underdeveloped financial infrastructures exacerbate access challenges. Alarmingly, SMEs receive only 7% to 12% of total bank lending globally, a vivid contrast to consumer lending at 40% to 50% and corporate lending at 35% to 45%. This disparity highlights the systemic barriers SMEs encounter in accessing formal credit markets. Affected by these impediments only 36% of SMEs globally utilize external financing, with large percentage opting for slower growth to avoid the complexities of borrowing. Closing this financing gap is essential to unleashing the full potential of SMEs as engines of innovation, employment, and global economic prosperity.

The root cause and the recommendation

In 2020, the Bank of England published a highly insightful report that not only identified the root causes of the challenges but also provided comprehensive and actionable guidance to address them effectively. BoE attributes the root cause of the whooping gap in SME access to finance to a key dimension – Asymmetry of data – two major information asymmetries in SME lending. First, the lender vs. borrower asymmetry arises because SMEs often lack long credit histories, making it challenging for lenders to accurately assess risk, which leads to higher borrowing costs or limited credit availability. Second, the incumbent bank vs. competitor asymmetry occurs because an SME’s current bank has privileged access to financial data, such as cash flow and loan performance, giving it a competitive advantage. This discourages SMEs from seeking better financing options due to the lengthy and cumbersome process of sharing equivalent data with other lenders. As a result, Bank of England also recommended an intermediary platform a concept similar to DigiAlly to smoothen the gap for third party transactions.

The ground situation demands ‘demystification’ of SMEs

This has created a pressing reality - SMEs often remain enigmatic to the corporates they interact with - whether as lenders, customers, vendors, investors, insurers, or, increasingly, regulators navigating the intricacies of IPO proceedings. SMEs have traditionally posed greater counterparty risk due to a lack of comprehensive data, creating a "black box" effect in risk assessments. This elevated risk stemmed from limited financial records, reliance on personal relationships over objective metrics, inconsistent reporting practices, and minimal digital footprints. These factors created an opaque environment where stakeholders struggled to accurately gauge SMEs' financial health, leading to conservative lending, higher interest rates, and missed opportunities. The resulting information asymmetry significantly amplified both perceived and actual counterparty risk in SME transactions.

Good news -  Rise and rise of alternate data for SMEs

Times have evolved, bringing a new clarity as the veil begins to lift.  SMEs are increasingly generating a robust digital footprint across eight critical domains, leveraging advanced tools and platforms to optimize their operations and strategies. They are generating ‘data as new soil’ through  (1) Consumer Behavior Data through tools like Google Analytics to track user activity and Shopify to analyze purchase trends; (2) Financial and Payment Data by using platforms such as Stripe for payment analytics and QuickBooks for budgeting; (3) Market Trends, with Google Trends for monitoring consumer interests and SEMrush for SEO insights; (4) IoT and Operational Data, where IoT devices enable real-time logistics tracking and AWS IoT Core provides predictive maintenance analytics; (5) Competitive Intelligence, using SpyFu to analyze competitor ads and Prisync for dynamic pricing strategies; (6) Customer Feedback, utilizing Qualtrics for sentiment analysis and SurveyMonkey for satisfaction metrics; (7) ESG Metrics, with tools like Carbon Trust for carbon footprint analysis and EcoVadis for sustainability benchmarking(8) Recruitment Insights, employing LinkedIn for hiring trends and BambooHR for applicant tracking. By generating these digital footprints, SMEs are not only enhancing efficiency and scalability but also positioning themselves to thrive in competitive markets.

Need for rewriting SME story through new lens

For ages, the story of small and medium-sized enterprises (SMEs) has been told through the narrow lens of financial and credit data—a framework that reduces their identity to mere numbers on a balance sheet. This overreliance on “ability to pay” metrics offers a limited perspective, failing to capture the essence of these businesses. It ignores the critical dimensions of intent, integrity, and potential—the driving forces behind innovation, resilience, and growth. The reality of SMEs is far richer and more complex, woven from threads of entrepreneurial ambition, customer engagement, operational efficiency, and sustainable practices. By expanding the scope of data to include these factors, we can rewrite the narrative and paint a truer picture of their potential. Banks are still struggling for credit expertise and high-quality resources are scarce, impacting the operational metrics significantly. Fintechs have paved way for a revolution in credit. Fintech platforms like Plaid, Funding Circle, and Square Capital integrate real-time financial data and alternative metrics like transaction history and customer feedback for credit evaluation. Tools such as QuickBooks Capital and BlueVine leverage AI to assess cash flows and invoices, while peer-to-peer platforms like LendingClub and Prosper provide financing options based on comprehensive data insights.

Credit score – does it still mean anything ?

Expanding the credit score model for SMEs to match the maturity observed in individual and corporate credit systems requires significant innovation and infrastructure. Despite progress in credit scoring for individuals and corporations, SMEs face unique challenges that create gaps in creditworthiness assessment. Credit scores for SMEs are an outdated and inadequate measure of their financial health and potential. By relying solely on past financial data, these scores fail to capture the dynamic, evolving nature of SMEs, often misrepresenting their status. They overlook critical factors like operational improvements, growth potential, customer loyalty, and management's entrepreneurial drive. Start-ups and innovative businesses, which lack extensive financial histories, are particularly disadvantaged. To truly reflect the value of SMEs, we must move beyond credit scores and embrace broader, forward-looking metrics that highlight their intent, integrity, and potential for growth.

New horizons with alternate data

In summary, businesses can achieve faster decision-making and service access by leveraging alternate data across newly emerging datasets. Fintech platforms like Kabbage or DigiAlly enable instant credit scoring and automated lending, reducing loan approval times to minutes by analyzing transaction history and financial health. AI tools streamline supplier and logistics management through real-time supplier evaluation based on shipment tracking and performance data, while IoT devices and predictive analytics enable dynamic pricing and inventory management, helping to avoid stockouts and oversupply. In marketing, AI-driven platforms enhance customer segmentation and export market analysis, using global trade data to identify profitable markets and accelerate targeted campaigns. Automated compliance tools integrate with business operations to simplify regulatory filings, saving significant time and effort. For customer support, AI-powered chatbots provide instant query resolutions 24/7, improving operational efficiency and customer satisfaction. Collectively, these use cases enable businesses to operate more efficiently and remain competitive in a fast-paced environment by use of alternative data.

Enhancing speed of business with DIgiAlly

Enhancing counterparty risk assessments by integrating alternative data sources beyond traditional financial metrics is vital for addressing a wide range of risks, including operational, industry-specific, ESG (Environmental, Social, and Governance), and cybersecurity concerns. Traditional methods often focus narrowly on financial risk, overlooking these critical areas. AI-driven approaches enable scalable, repeatable, and unbiased assessments, providing businesses with clear, actionable insights. By addressing the gap in infrastructure for structured risk evaluation, we empower clients with a deeper understanding of risks, helping them make informed decisions, strengthen their competitive edge, and significantly accelerate business operations. Join us in this revolution to optimize risk in your ecosystem of customer, vendors, investors and all key stakeholders - Giving them their 'True Identity'.

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