The Use of Alternative Data in Credit Risk Assessment: Opportunities, Risks, and Challenges
Digitalization accelerated by the pandemic has exponentially increased the number and variability of alternative data sources. The stay-at-home requirements during the pandemic forced several business models to be digitized. This helped spur the digitization that had been ongoing pre-pandemic, largely driven by governments as countries sought to leverage the benefits of the digital economy. Advances in technological innovations are also facilitating the development of advanced credit underwriting models and the use of structured and unstructured data to assess creditworthiness. This has enabled the financial industry to actively integrate alternative data to gain a competitive edge. This study examines the evolution of the use of alternative data in creditworthiness assessment since the ICCR issued its Policy Guidance Note in 2018. The report identifies the use cases of alternative data in creditworthiness and the emerging models across geographical regions. After assessing the evolution of associated legal and regulatory frameworks, it concludes by offering recommendations and policy considerations.
Convergence Blended Finance, the Global Blended Finance Network Driving Private Investment in Developing Countries, joins the SME Finance Forum.
Global Legal Entity Identifier Foundation (GLEIF), which enhances market transparency and combats financial crime through the implementation and use of the Legal Entity Identifier (LEI), joins the SME Finance Forum
Visa Case Study w/Uplinq - "Transforming global small business underwriting with augmented data"
Uplinq is thrilled to unveil our latest collaboration with Visa. Together, we’ve released a groundbreaking case study titled "Transforming global small business underwriting with augmented data"—a deep dive into how AI-powered credit decisioning is reshaping small business lending worldwide.
Leveraging sophisticated AI and machine learning models to augment existing underwriting processes, the case study found that Uplinq helps FIs approve more loans while driving significant time and cost savings. Key data in the case study reveals that on average, Financial Institutions using Uplinq’s technology have seen a:
• 50% reduction in underwriting operating costs
• 15x reduction in credit losses
• 3x average increase in line of business profitability
“Ensuring small businesses have ready access to the affordable capital they need is a critical part of Visa’s mission and a key factor in broad economic health,” said Jonathan Kolozsvary, Global Head of Small Business, Visa. “We look forward to continuing to work with Uplinq to strengthen credit access, which, as this case study demonstrates, has substantial benefits for small businesses and lenders alike.”
Read the full press release Read the full press release here
Visit the Visa website to download the case study here
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Uplinq is a Member of the SME Finance Forum
Banking for small and medium enterprises
Small and medium enterprises face many challenges within a rapidly evolving economic landscape—one that demands innovative banking solutions.
Small and medium-sized enterprises (SMEs) form the representing 90% of all firms, employing approximately 70% of the world's workforce, and contributing 50% to global GDP. But banks are not keeping up with solutions that meet SME needs.
Realizing this, banks are seizing the opportunity to redirect costs toward investing in exponential technology and ecosystem platforms. In response to the needs of SMEs, some banks are moving beyond merely reacting to short-term trends and are strategically redesigning their operations.
Our research provides strategic insights into the current state of SME banking and its fintech future. Conducted by the IBM Institute for Business Value (IBM IBV) in collaboration with the Banking Industry Architecture Network (BIAN), the study benefits from the expertise of the SME Finance Forum, managed by the International Finance Corporation (IFC).
We offer actionable insights into how banking strategies can embrace innovation to meet the evolving needs of small and medium enterprises. Our survey data is enriched by qualitative interviews with senior executives at financial institutions, bringing to light the perspectives of key decision-makers in SME banking.
Looking ahead, the transformation of business culture, operating models, and IT systems is essential to align with a digitally driven global economy. Realizing the benefits of technology-led innovation in SME banking requires both a strategic perspective and pragmatic actions.
An untapped small and medium enterprise market
Small and medium enterprises tend to be particularly vulnerable to economic fluctuations, funding costs, and credit availability.
Notwithstanding more than a decade of accommodative monetary policies that has lowered funding costs in most countries, the Organization for Economic Cooperation and Development (OECD) estimated that SMEs had to pay a risk premium relative to larger corporations when borrowing from financial institutions.
Moreover, the escalating cost of capital—caused by the regulatory response to the 2008 financial crisis—has forced banks to prioritize tighter risk management over serving SME segments where credit risk is harder to estimate. The diversity of business scope within SME markets, and the scarcity of granular data to inform lending decisions, makes credit risk assessment inherently complex.
As the financial landscape continues to evolve, and interest rates hiked, a new set of challenges are on the horizon. For example, our survey reveals that SMEs complain about the difficulty of accessing sustainable finance due to the heavy burden of reporting requirements.
According to a by the World Bank, SMEs need to do more than merely access finance. They must also acquire the skills necessary to integrate new technologies into operations and innovate to expand their customer base.
And because the challenge for SMEs spans beyond traditional banking relationships, banks have the opportunity to help SMEs bridge the gap between business intent and tech-led productivity.
The tech foundations of banking competitiveness
Bankers acknowledge the imperative to improve their services while simultaneously reducing the costs to serve.
Where to begin? We posed the question to bankers, seeking their insights into the most coveted technology that’s poised to transform the industry. 65% of respondents identified the journey to cloud for business-critical processes, 58% of bankers highlighted the potential of AI to enhance credit risk analysis, and 57% advocated making core banking architectures modular and flexible (see figure). In addition to these priorities, more than 35% of executives indicated embedded finance and generative AI as transformative initiatives.
Banking executives look for sounder IT foundations, an essential precondition for innovation.
However, many banks have yet to fully capitalize on the transformative potential of hybrid cloud, data, and AI. There remains a hesitation to transition from integrating AI into existing business functions (+AI) to making AI the foundation for all business operations (AI+).
Read our report to learn more about how technology and innovation can help to develop banking strategies that support SMEs as a global economic force.
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IBM Institute for Business Value is an Industry Partner of the SME Finance Forum
