Fintech: SME financing – AMP teaches banks how to lend to their own customers

Peter Lee
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Micro SMEs still cut off from bank finance; new way to lend against cash flow.

AMP Credit Technologies, a specialist provider to banks and other financial institutions in Asia of credit scoring and loan portfolio management technology that enables lending to micro small and medium-sized enterprises (SMEs), launched in the UK last week.

It seems strange timing. For the first time almost since the financial crisis, the intense political pressure on banks to lend more to SMEs seems at last to be abating.

In the UK, the Federation of Small Businesses (FSB) announced in March the results of a survey of 1,630 firms, showing that the number of businesses which have applied for a loan from their bank and been approved this year has increased to 57% compared with 45% 12 months ago.

John Allan, chairman of the FSB, says: "It is incredibly encouraging to see the banks approving more credit for small firms, suggesting we may have finally turned a corner on this front."

The European Central Bank’s (ECB) latest lending survey in January showed that, even though growth is far less robust in the eurozone than in the UK, bank lending standards eased in the final quarter of 2014 on loans to both large corporations and to SMEs. The ECB’s expectation is for this trend to have continued in the first quarter of 2015.

However, there are still large numbers of SMEs that are struggling to raise financing, especially smaller companies that simply lack those forms of collateral that banks invariably require to lend against.

  It’s lending based on quite traditional credit scoring against cash flow and character, not on use of social media and the like

Thomas J DeLuca,

At the Innovate Finance global summit for fintech firms in London in March, Louise Beaumont, head of public affairs at GLI Finance, argued: "Out of habit and a lack of wider awareness, many SMEs will approach their bank as the first port of call in order to discuss finance options.

"The reality is that banks are set up to lend to Industrial Revolution-era companies with tangible assets to secure loans against, whereas millions of companies are now fundamentally knowledge economy companies, with IP assets, meaning banks are often ill-suited to best serve such businesses."

AMP Credit Technologies, which started life named Advanced Merchant Payments, has built an entire business around banks’ lack of inclination to lend to companies with strong cash flows but no collateral. While the company itself lends to these micro SME borrowers, it does not see itself as an alternative lender.

Underserved micros

Rather it sees its biggest opportunity in licensing its credit-scoring technology so that the banks themselves – which benefit from a much lower cost of funding as well as abundant loan origination opportunities – can do the lending instead.

Thomas J DeLuca, founder and chief executive of AMP, is a serial entrepreneur with long experience in the payments-processing businesses, especially around merchants’ credit card payments. This fits the typical profile of the underserved micro SMEs that AMP aims to catalyze bank lending for.

He says: "Our borrowers are typically small B2C companies in the retail and service sectors, often 'mom and pop’, sole trader companies. They could be doctors or optometrists, or they could be florists or restaurants or IT consultants.

Louise beaumont-large
 Banks are set up to lend  to Industrial Revolution-era companies with tangible assets

Louise Beaumont,
GLI Finance

"While these businesses invariably lack the collateral that banks require to lend against, they often have strong cash flows, based on large volumes of small payments. They also typically have a single-business bank account that provides a clear electronic footprint for tracing the history of those cash flows. By analyzing those flows, we calculate capacity to repay. It’s lending based on quite traditional credit scoring against cash flow and character principally, not on use of social media and the like."

DeLuca continues: "Banks that wouldn’t normally lend to such micro SMES in the absence of collateral or years of consolidated financial accounts, by using our credit-scoring system can now provide unsecured loans at reasonable risk-adjusted margins comparable to credit card APRs."

AMP has been operating for five years in Hong Kong, Singapore and the Philippines. Typical loan maturities are from six months up to one year, approved quickly, and taken out typically by borrowers as working capital to stock up on inventory before a busy period for sales, to finance marketing campaigns or modest new capital-equipment needs.

Even though banks have a ready supply of such micro SME borrowers to lend to, it’s revealing of their unwillingness to credit score these obligors that many of the lenders that have taken AMP’s service in Asia have also required the company to put its own skin in the game and lend to these borrowers as principal alongside the banks.

"We license our technology on a software-as-a-service model and banks that use it will always control origination and we can customize our credit-scoring algorithms in line with their particular concerns," says DeLuca.

"We also lend as principal ourselves and have done almost $50 million of lending alongside banks, with a default rate at 3% that the margins well cover. But the big opportunity here is for the banks, with their low cost of funding and many thousands of such customers, to put loans on their balance sheets and provide a new unsecured short-term working-capital lending product to these SMEs that they simply can’t offer now."