Investment Strategies Evolve as Technology Takes Over - A Review of Flagship Global SME Finance Forum Panel
The SME financing industry is undergoing a period of rapid change and disruption of the status quo. The introduction of fintechs, expansion of data, and digitalization of financial services is transforming the way traditional development finance and international finance institutions approach investment in SMEs. Peter van Mierlo, Chief Executive Officer of Dutch development bank FMO, and Alessandro Tappi, Chief Investment Officer of the European Investment Fund (EIF), took a moment to share what they thought were some of the greatest challenges and opportunities to investors in this evolving landscape.
FMO has an annual investment portfolio of approximately $3 billion, a third of which is poured into Africa. As an institution, their goal is to create jobs in developing countries. Mierlo sees the role of technology in reaching this objective as a double-edged sword; on the one hand, the use of technology is displacing some workers from their jobs, while on the other hand, technology and digitalization represent immense potential for growth of small and medium businesses (and subsequently, an increase in employment opportunities). New partnerships between DFIs and SMEs, DFIs and fintechs, SMEs and banks, are each made possible through new and innovative technologies that are breaking down long-standing barriers to financing for these underbanked enterprises.
EIF is capitalizing on these emerging opportunities for unique partnerships by investing in and working with European fintechs. Tappi says technology provides an avenue towards creating a network of information sharing – an aspect of the investment sector that, in his opinion, is underdeveloped and integral to closing the SME financing gap. He believes that the time has come for DFIs and banks alike to rethink their business model to adapt to the changing times. The incorporation of innovative technologies and data collection will propel these institutions into the new world of SME investment.
- Information sharing between DFIs – their successes, their trials, their ventures – is critical to improving performance and service, and is made possible through the use of technology
- Technology helps to mitigate the problem of asymmetric information between banks and SMEs, which in turn combats credit rationing
- SMEs’ lack of collateral is a central challenge in their efforts to secure credit and/or loans
- New partnerships between companies from different sectors and countries are made possible through technology, digitalization, and data sharing
- It is time for DFIs to rethink their business model to accommodate for the technologization of SME financing
- As an industry, investors need to reevaluate how they assess a company’s risk profile – this moves beyond cash flows or market share
- Measurement tools are needed for DFIs to determine the success of their initiatives – at an industry level, leaders need to decide what markers to measure, and how to do so
- SMEs are not clients, but partners
Prepared by Kat Pardoe, Marketing Analyst at SME Finance Forum.
We believe the biggest challenges are climate change and development. The solutions would be investments, focus, and bringing knowledge and networks to the #SMEs
— SME Finance Forum (@SMEFinanceForum) October 7, 2019