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3 Keys to modernise SME lending in the Nordics

Modernise SME lending in the Nordic countries

SME lending is undergoing a major transformation. Digitalization and a thriving startup climate met the covid years with a rising demand for alternative finance solutions. At the same time new challengers on the lending market have pushed the boundaries of what is considered first choice lending partners for SMEs, adding more tailored, timed and even simpler lending options to the menu. 

On top of this, open finance changes how lenders can access data. Unified APIs such as Zwapgrid API.1 enables SME lenders to get both real time and historical data directly from the SME clients accounting systems and files. 

Enhanced credit management, increased efficiency and timing stands out as three of the most important keys to success for your SME lending, going forward.

Key 1.
Enhanced credit risk management

The economic landscape both globally and in the Nordics is steadily uncertain, with factors such as rising interest rates, inflation and geopolitical tensions contributing to financial volatility. According to McKinsey’s article “Navigating economic uncertainty: New guidance for credit risk management” the current combination of events is unprecedented and they recommend SME lenders to “...revisit current capabilities and resources and enhance data and forecasting capabilities—as well as to reconsider the assumptions that underlie them.” In other words, it’s not a sustainable strategy to just be more conservative in general, risk management has to change.

"...Finally, by enhancing risk models and making decisions in more consistent way, banks can reduce the risk of nonperforming loans (NPLs) by 10 to 25 percent." McKinsey, How banks can re-imagine lending to small and medium-size enterprises.

McKinsey looked closer at the opportunity of enhancing risk models in "How banks can re-imagine lending to small and medium-size enterprises". They found that it was possible to reduce risk on non performing loans with enhanced risk models and making decisions in more consistent ways. McKinsey recommends using data sources to enhance credit decisions, build a modular approach to credit models for cross-selling, implement dynamic risk-adjusted pricing and limit setting.


Key 2.
Increased efficiency

Operational efficiency

Efficiency is a pathway to profitability for SME lenders. Streamlining processes, automating tasks, and optimizing workflows can reduce operational costs and enhance overall efficiency. This is particularly important given that the loan profitability for SME lending can be low, without efficient operational processes. 

"Digitizing the customer journey and touch-time reductions can yield operational-efficiency gains of 20 to 30 percent". McKinsey, How banks can reimagine lending to small and medium-size enterprises.

According to research made by McKinsey there is an opportunity to increase in operational efficiency if touch-time and customer journey can be reduced, for example with a quick onboarding process to provide the required accounting information for assessments or invoices for factoring. McKinsey’s study also indicates a potential to boost revenues with 10-15% with higher conversion rates and increased margins.

Customers expect efficiency

At the same time that operational efficiency is a way to increase profitability, SME businesses expect faster access to credit, according to studies made by EY. Efficient processes can enable factoring companies to meet these customer expectations. Moreover, customers are also willing to pay more for quicker access to funding, making efficiency a competitive advantage.

"...of the SMEs who received bank loans to help them through the COVID-19 crisis, 48% would have liked faster access to credit. This trend is not limited to pandemic conditions: in general, more than half of SMEs (55%) would like to be funded within seven days..." EY, The five-step journey to SME banking transformation.

According to a study made by EY, 66% wanted faster access to credit and 26% indicated that they were also ready to pay for this. To keep up with the competition, lenders have to provide an efficient digital customer journey. The recommendation from McKinsey is to define processes internally that support instant decisions for the simple cases, reducing time from loan application to available credit.


Key 3.
Timed and tailored experience

In this rapidly changing economic landscape, leading lending providers are proactive in tailored offerings and timed lending solutions to meet their client's financial needs. A number of new SME lenders, such as Fejron and Float have entered the market over the past years with a clear focus on connecting their customers' accounting systems to them, to ensure that they provide value to their clients even before they need funding. This connectivity gives them the data needed to offer their clients what they need, maybe even before they know it themselves. 

Timed and tailor made experiences require data for a deeper understanding of your clients financial situation. Your SME clients might be more positive than you think to share that with you as long as you offer them value in return.

According to a survey made by EY, SMEs are very open to sharing more data to receive a more personalized experience. As many as 82% of the SMEs participating in the study were at least moderately interested in sharing data with their primary financial provider. 

"Banks that embrace this change can also count on new revenue streams in the long term, as 50% of SMEs would be willing to pay for this enhanced experience". EY, The five-step journey to SME banking transformation.

EY’s study also suggests that SME lenders are ready to pay for a tailored experience, presenting a clear opportunity for new revenue streams bridging the gap between being more conservative in times of turmoil and offering what the SMEs need, when they need it.


Start with unified access to data

One factor both McKinsey and EY describe as a success factor is having the capabilities to access data from many sources to enhance risk models, standardize operations and understand your SME clients to tailor and time your offering. The more efficiently you can access your SME client’s data and the more processes you can standardize, the better base you will have to evolve from a more classic lending setup to a modern structure that can tackle a volatile lending climate.

This is something we at Zwapgrid also can see in the collaborations with our partners, such as banks and platforms. We help them get started using our open finance solution/Unified API, called Zwapgrid API.1. It works similar to Open banking, but instead of sending data to and from banks, we send data to and from accounting systems and at the same time include file parsing to enable them to access all data in one unified way.


To summarize

You need to enhance your risk management, increase efficiency and be able to time and tailor your SME client experience. Your competitors are already looking into this and you need to get smarter. A great way to get started or add pace to your transformation is to connect your SME clients data to you. 


Next step

Learn more about Zwapgrid API.1 for factoring.

Watch on demand webinar "3 steps to get unified invoice data for factoring in the Nordics"

Talk to a tech geek about unified data.


EY article The five-step journey to SME banking transformation.
EY article Why digital lending is the future for banks and SMEs.
McKinsey Navigating economic uncertainty: New guidance for credit risk management.
McKinsey How banks can re-imagine lending to small and medium-size enterprises.

Author: Magnus Serratusell Wallin