In recent years, the Southeast Asian financial industry has been witnessing radical changes due to the numerous innovations driven by fintech companies to improve financial services. According to a study conducted by Google, Temasek, and Bain & Company, the region’s emerging economies will likely reach a combined GDP of $4.7 trillion USD by 2025.
Thanks to an upswing in technology-driven business models, fintech companies have an increased opportunity to enter and grow the digital banking sector. These innovations and the current digitalisation trends are starting to modify or eliminate various business models used by traditional banks.
Fintech is changing the landscape of financial services
As an essential component for the digitalisation of funding and business operations in the SME industry, fintech is helping to overcome the new challenges created by the COVID-19 pandemic. Many startups and SMEs are currently struggling financially, leading to poor cash flow, reduced financial resources and accumulated debts. These difficulties are compounded by a lack of access to traditional funding, spurring the increased reliance on fintech companies as companies now turn to them for financial assistance.
This move is mostly because fintech companies have created solutions for funding SMEs using big data, complex algorithms, data analytics, and machine learning. Therefore, the financial technology sector can outperform traditional banking and non-banking options as the primary finance source.
Private-sector funding has been important for the growth of Singapore’s FinTech ecosystem, with angel investors, venture capitalists, and private equity funds injecting capital. In a study done back in 2019, approximately 65 percent of the FinTech funding in Southeast Asia was directed to businesses in Singapore. It is acting as a notable catalyst for financial digitalisation. Many SMEs are considering digitalising their operational capacities to accommodate the adoption of alternative sources of funding. Not only will fintech companies serve as this new way of funding, but they will also keep businesses in check concerning their spending and revenue-sharing model.
Overcoming the traditional lending mismatch for SMEs
The traditional lending system gives lenders access to credit reports of potential borrowers. However, it is difficult to find accurate credit scoring systems in emerging economies, including those in Southeast Asia. Over the years, traditional lending has failed to solve credit access problems, thereby hindering many SMEs’ potential growth.
Although many companies provide long-term projections, tax returns, and financial statements, they still have reduced chances of getting loans in the traditional lending system. A PYMNTS report also reveals that Southeast Asia has a large number of underbanked SMEs and that they rarely have the necessary collateral to secure loans. This has caused massive credit gaps, leaving some companies with little to no creditworthy records to present to banks.
The financial industry is currently witnessing an influx of SME-friendly fintech lenders that provide fast, easy, transparent, and cost-effective credit facilities for small businesses. An EY report reveals that 68% of businesses, including established companies, are willing to adopt non-traditional lending systems because of the fast loan approval process.
These new tech-led lending models allow SMEs to use the limited data they can provide to access loans for operation expansions or to cover cash flow during times of struggle. Using artificial intelligence and advanced analytics, fintechs can gain more insight into SMEs through transactional and alternative data, allowing them to easily evaluate risks, determine businesses’ creditworthiness and provide loans in less than 24 hours. Also, as these innovative solutions are continuously serving SMEs’ financial needs, they thereby reduce financial crises and put them in a position to unlock their full potential.
The future of alternative funding
SMEs now have access to alternative sources of funds because of fintech innovations and increasing awareness of investment options. This trend is likely to eliminate the old one models, where banks and wealthy individuals solely handled lending and investment. For small business owners, alternative funding is an element that will reshape the financial industry and unlock new growth opportunities.
Over time, fintech has evolved from a simple peer-to-peer donations model to a landscape run by companies developing innovative platforms to ensure the lending process’s effectiveness, transparency, scalability, and profitability. Currently, the business models used by fintech companies make them more flexible than traditional financial institutions; however, increasing industry policies and regulations may slow them down in the future.
As the industry evolves, alternative lending’s flexibility will be a critical factor in business’ growth and sustainability. It will also be a major determinant of how fintech companies and business owners reach agreements to enhance innovation and expand operations to both parties’ benefit.
With the increasing number of tech-savvy businesses and individuals, those seeking funding opt for convenient and user-friendly services where possible. The evolution of customer behaviour emphasises the need for a strong collaboration between fintech companies and digital banks. As governments increasingly encourage SMEs’ digitalisation, small businesses must also put in the effort to ensure a smooth transition and fintech companies will be an essential cog in this wheel.
