Who Are the Winners in Closing Mexico's SME Credit Gap?
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Who Are the Winners in Closing Mexico's SME Credit Gap?

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Alejandro Salas By Alejandro Salas | Managing Editor - Wed, 05/17/2023 - 15:10

The ease of obtaining credit has opened the banking world to individuals and businesses, but it also poses potential hurdles. The main challenge is the risk of over-indebtedness, which can lead to financial instability for both the borrower and lender. 

Financial education plays a vital role in encouraging responsible borrowing and repayment practices to mitigate associated risks, says Manolo Atala, Co-Founder and CEO, FairPlay. He highlights a significant disparity in financial education in Mexico, particularly when compared to other markets like the US, where credit scores are introduced earlier.

The lack of education in Mexico should not stop SMEs from embracing financial alternatives, says Armando Herrera, General Manager Financial Products, Konfío. Due to the crucial role of SMEs in the economy, it is not feasible to wait for financial education to reach a higher level of sophistication before addressing the credit gap faced by SMEs, he adds. Instead, both initiatives must progress simultaneously.

Alternative assessment tools can help lenders understand better the payment capability of businesses and meet the substantial demand for financing among SMEs. According to Dan Pinchasi, Co-Founder and CEO, Kalto, operating as a B2B platform provides the company with valuable insights into the cash flow dynamics of its clients. By managing its clients' payments, Kalto gains a comprehensive overview of their strengths and weaknesses, enabling Kalto to offer tailored financial solutions and effectively mitigate risks. 

“Understanding businesses through their transactional data provides us with valuable information to comprehend their cash flows and offer tailored products that suit their needs,” says Patricio Diez de Bonilla, Director General, Banco Compartamos.

Experts concur that data is essential for closing SMEs’ credit gap. "We have to be responsible in analyzing how much credit we can offer and really understand what needs we are solving, so we do not over-indebt companies," says Atala.

Companies can also adapt once the period of high demand ends by implementing risk management strategies, such as diversifying their credit portfolios and regularly assessing creditworthiness. Additionally, businesses and individuals can explore alternative lending models, such as peer-to-peer lending and crowdfunding, which can help them to reduce their risk exposure and provide additional funding sources.

Traditional banking primarily caters to larger clients and often neglects the needs of smaller entities, such as Mexican SMEs. In light of this, Diez de Bonilla argues that SMEs represent a significant market demand, creating an attractive opportunity for innovative credit solutions. "Konfio, as a Mexican company, understands that there is a lag in financial education but SMEs represent three out of every four jobs in Mexico and close to 50% of Mexico's GDP; it is up to us to help this sector evolve” says Herrera. The needs of Mexican SMEs can sometimes be best recognized by other emerging companies. "Many of us who create these types of solutions targeted at SMEs are also entrepreneurs, and we have empathy for the needs of SMEs," says Herrera.

"Banks work well with large clients but [Fondeadora Negocios] caters to an underserved sector. This way, we gain experience and each party works with the sector in which they have the highest degree of capability and expertise," says Thomas Cluzel, General Manager, Fondeadora Negocios.

Technology can streamline the credit application process and reduce entry barriers while maintaining appropriate levels of risk management and underwriting. For example, artificial intelligence and machine learning algorithms can analyze vast amounts of data and assess creditworthiness quickly and accurately. "AI and machine learning interplay well in the industry, providing efficient and accurate credit assessments, facilitating risk management and enhancing financial inclusion," says Cluzel.

Online and mobile platforms can make credit more accessible to individuals and businesses but, to take advantage of newer technology, fintechs have to solidify their products. ”While new technologies are taking up a significant space, we must first prepare ourselves by refining our business models and guiding the users accordingly,” says Pinchasi.

However, balancing technological advancements with adequate risk management and regulatory compliance is essential. For example, digital identity verification and secure payment processing systems are crucial to ensure the security and privacy of sensitive financial information. 

Clear regulation could bring many potential benefits to Mexico, says Cluzel. Mexican regulation, regarding digital and technological financing, has some strong points that the regulations of other countries do not have, he adds. “SAT's electronic invoicing system allows us to conduct an alternative credit assessment analysis. This tool is pioneering worldwide. Mexico has very interesting regulatory tools that provide access to transparency, which is highly valuable,” says Cluzel.

Nonetheless, a young sector such as fintech also faces some challenges that require cooperation from the industry. “In Mexico, fraud remains a significant risk. As an industry, it seems that we all strive to collaborate to reduce it by improving the quality of credit assessment using the tools at our disposal,” says Pinchasi.

Increasing access to credit can provide significant benefits for individuals and businesses, but it also poses potential challenges such as over-indebtedness and financial instability. Financial education and risk management strategies can mitigate these risks, and technology can streamline the credit application process while maintaining appropriate risk management and underwriting levels. The financial sector must continue to adapt and innovate to ensure that credit is accessible, affordable and responsibly managed.

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