The power of the crowd: Why crowdsourcing is set to change the face of SME finance

A white paper by the SME Finance Forum entitled 'Crowdsourcing: The future of SME Financing' brings together 59 authors - 43 men and 16 women - to provide their expert insights into the phenomenon of crowdsourcing and the impact it is having on SMEs and communities from 26 developed and developing economies across as many as six continents.

Ultimately, those who have questioned the power of the crowd in the past can be left with no doubt in the light of recent events in the run up to the US election and it's nail-biting outcome that when a crowd makes up its mind to change the course of a country, an economy or an ecosystem for the better - it is like a Juggernaut rolling inexorably and nothing can be allowed to stand in its path.

What constitutes a wise crowd?

When is a crowd truly considered wise? (Credit: IFC)

At the outset, Matthew Gamser, the CEO of the SME Finance Forum, which is managed by the International Finance Corporation (IFC) , comments on the now increasingly accepted philosophy of the 'wisdom of the crowd', first expounded by the New Yorker columnist, James Surowiecki. He notes that aggregating information from groups results in better decisions than almost any individual can made. 

He accepts in the same breath that not all crowds are created equal and elaborates on the five critical elements that make up a wise crowd: diversity of opinion, independence, decentralisation, trust and aggregation. 

He notes with gratitude that when the SME Finance Forum set out to learn about the 2030 outlook for SME Finance from its large global community of members, partners and followers, entries were received from banks, FinTechs, development banks, consultancies, research institutions, ministries, central banks, and more. Most importantly, these essays came in from diverse authors who worked independently of each other and trusted the care of their visions with the SME Finance Forum to aggregate and bring to the wider world in one consolidated version - thus taking care of the fifth and final element that constitutes a wise crowd.

Tales of SMEs and impact

Unlocking funding to set SMEs free (Credit: IFC)

When authors who are all experts in their fields and hail from a cross-section as diverse as FinTechs, Banks, Development Finance Institutions, Consultancies, Technical Assistance Partners, Fund Managers and Central Banks, as well as as many as 26 countries across six continents, it is a daunting task to say the least to select just the one essay that resonates with me the most.

Faced by such a daunting challenge, I have taken the easy way out and selected three, all from authors who have directly held SME finance and its resulting impact - whether through unlocking funding, enhanced use of technology or easier credit scoring - at the heart of their pieces. Here's my humble selection, but I would urge all readers to go through the entire stellar anthology of essays before deciding upon their own personal favourites:

African Poverty - SME Impact Investment the Solution

Trevor Hambayi, Senior Partner at Development Finance Associates, authors a thought provoking essay where he speaks cogently about how the latest World Bank Africa poverty report estimates that the share of Africans who are poor fell from 56% in 1990 to 43% in 2012, however the number of people living in extreme poverty rose from 280 million in 1990 to 400 million in 2012.

He goes on to note that the UN strategy to tackling the all important Sustainable Development Goal of eradicating poverty has been skewed towards strengthening and providing enhanced social protection to the most vulnerable.

However, he rues that social protection is not a reality for a large majority of the world’s population - for instance, in 2016, 55 per cent of the world's population was not covered by any social protection cash benefits: from a staggering 87 per cent without coverage in sub-Saharan Africa to just 14 per cent in Europe and Northern America. He underlines that the UN's strategy will thus not be able to take Africa out of poverty and what the continent needs instead is a clear focused approach to unlocking the potential of its large SME sector. 

He concludes on the note that while the continent receives around USD 19 billion in aid, Africa's poverty levels continue to increase or are not decreasing at a rate that can create the desired impact. He urges governments, private sector bodies and SME support agencies to collaborate to unlock financing to the SME sector, in blended financing to support sustainable economic growth that has both social and environmental impact as well as an investment return to drive a new agenda towards the last mile decade of the SDGs. 

What will SME financing look like in 2030?

For his part, Max Johnson, who heads business solutions at Fidor Solution, notes that the recent past has seen competition intensifying between FinTechs and banks, quoting statistics from the World Bank to show that over 50 percent of SMEs in the emerging markets lack access to finance and this number touches a staggering 70 percent when micro SMEs are considered. 

He then underlines that while incumbent banks continue to be slow to the table, FinTechs are taking no time to seize this opportunity by forging products which disburse the funds within minutes of an SME applying for a loan, and, given this pace, by 2030, FinTechs will acquire a dominant market share of SME Finance.

He also stresses that banks at present serve numerous segments across multiple departments, and SMEs are by far not a high priority; while FinTechs have a laser-like focus on specific SME pain points and are able to implement solutions quickly, without having the trouble of spending months in bureaucratic meetings and lengthy User Acceptance Testing (UAT) processes. He underscores that the results show strong growth in FinTech adoption rates, up to 61% in some markets, and this trend is ever-increasing with 2030 likely to witness this gap turning into a chasm.

He concludes on the note that the current global SME FinTech adoption rate is 25% (and this builds up to 54% for SMEs with international customers) - so affordable FinTech solutions will likely become the norm, with or without the support of banks. Altogether, he paints an SME centric future on the note that, a decade down the line, SMEs will have a choice to be a part of a truly digital ecosystem which is built for them, allowing them to easily grow into international businesses or a traditional bank account with a few FinTechs products loosely stitched together.

The Future is Bright

Finally, an optimistic piece by Nadia Sood, founder and Group CEO of CreditEnable, sees the former staffer from the Office of UN Secretary Kofi Annan make the emphatic assertion that the world of SME finance will have fundamentally changed by 2030.

She expects that banks will continue to be subject to strict regulatory norms and will, therefore, continue to move away from direct lending into the smaller end of the SME credit market. At the same time, banks will become more aggressive about outsourcing their SME lending activities by providing loans to downstream partner lenders that specialise in this segment like Non-Banking Financial Corporations in India, Non-Banking Financial Institutions in Africa and alternative lenders in developed economies that are better equipped to distribute to SMEs.

She particularly makes the point that 'the mass introduction of Artificial Intelligence (AI) into SME lending holds the greatest chance of democratising access to credit'. She stresses that 'not only does it hold the promise of eliminating inherent biases around gender, minorities, socio-economic classes and geography, AI and machine learning will cut the cost of capital for SMEs even while reducing default risk for lenders.'

She articulately makes the point that predictive AI which can model for the future - for black swan events like COVID in particular - and thus duly identify patterns of opportunity and risk, will be embedded in most FinTech offerings and banks will have identified the right use cases and invested heavily in AI.

She concludes on the note that the 2030 certainly will look very different from today, but 'the future is certainly going to be a brighter one in SME finance.'

The jury is out - but the crowd is certainly in 

A bright future beckons SMEs (Credit: IFC)

While all the authors may have slightly or serious divergent views on what the exact face of SME Finance will resemble in 2030, there is one consensus that emerges across - the power and wisdom of the crowd will certainly be a dominant facet of what the SME financing landscape will look like a decade down the line.

As the crowd of SMEs seeking finance, FinTech start-ups and lenders keen to reach out to this ecosystem makes their voices heard increasingly and with greater impact, supplemented by the use of technology that speeds up and smartens up the financing process, it is clear that the future is indeed, both bright and beautiful for SMEs in a post-COVID context.