To Expand Credit Access to Small Businesses, Banks Must Tap Alternative Data

Chris Hendrickson, senior vice president of small business strategy at Comerica, and Scott Steinberg, chief product officer and chief operating officer of Enigma, said a multidimensional underwriting process is needed to give a critical lifeline to companies seeking to navigate an uncertain macro environment — and to grow.

The Federal Reserve has hiked interest rates again to a high of 5.25%.

And per other, just-released Fed data, banks are tightening their underwriting standards.

In the midst of it all stand the small- to medium-sized businesses (SMBs) that power the U.S. economy. PYMNTS data estimates that as many as half of these firms may be seeking credit in the months ahead.

From Comercia’s vantage point, said Hendrickson, the tightening underscores the fact that “speed and access to capital will remain very important for small businesses.”

Against that backdrop, said Steinberg, technology can aid and streamline the processes that SMBs must navigate as they apply for credit. A better online onboarding experience can be a significant improvement here, as can using alternative data to help forge new ways of scoring risk.

Considering Other Information Flows

“We’re seeing an increase in interest from banks to leverage data that can help increase the approval rate and find those populations,” especially on the smaller end of the business spectrum that traditional data sources may overlook, Steinberg said.

After all, many smaller firms lack the operating histories — and thus the credit profiles — of their larger brethren. Hendrickson noted that the alternative data sources that can help flesh out a fuller sense of creditworthiness might take payroll data, even industry or geographic-specific trends — data that is already in-house, so to speak — into consideration.

“We have to be open to these ideas in the post-pandemic era,” he said.

Providers including Enigma, said Steinberg, can take internal data sets from enterprise clients and through partnerships with entities such as Plaid to get more granular insight into small businesses’ financial activities and standing. The insights gleaned from alternative data (such as merchant services activities) can help a small business card issuer boost its approval rates significantly, improving SMB credit access in the meantime.

As Hendrickson contended, “the scoring models can thus expand the customer bases — and solidify the customer bases — within banks.”

And for the would-be lenders, he said, it’s become imperative to understand how business customers have been operating across multiple accounts, how receivables are managed, and how money flows into and out of the company itself.

The Current Environment

Asked by PYMNTS about the state of the current environment — in essence, what smaller firms want, or would want, to do with fresh capital — Hendrickson said that “there’s always a demand to bolster your dry powder in an environment of uncertainty.”

But there’s also demand to put capital to work more immediately, as firms want to buy buildings and property in an age where commercial real estate is relatively inexpensive, he said. They also want to buy new equipment to adapt to changing technological landscapes.

“When opportunities arise, these firms can grow, and they can grow quickly,” Hendrickson told PYMNTS.

Steinberg maintained that the demand for financing is taking different paths. Construction firms are seeking varied avenues and types of credit to finance new equipment, while a service-oriented firm may opt for a somewhat more straightforward business credit card.

In the months and years ahead, said Steinberg and Hendrickson, the multidimensional approach to lending will give insight into the cash flows of the business that are happening outside of the bank itself.

By taking all those factors into account simultaneously, said Steinberg, “you see the ‘predictiveness’ start to become strong within underwriting and risk models,” while driving new revenue opportunities for forward-thinking financial institutions.

Added Hendrickson, of the ways credit access could be improved for smaller businesses, “the possibilities are endless if you have the right mindset.”

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