If information is power, the lack of information creates a vacuum, especially in small business banking.
As to what’s needed? Call it a single source of truth, a worldwide registry and roster of small business information, some of it self-supplied, that offers a real-time and holistic view of a company’s fortunes and challenges.
Markaaz CEO Hany Fam told Karen Webster that in financial services — particularly for small businesses seeking to establish banking relationships and access to capital — a dearth of information, redundant information or the wrong information can close off beneficial relationships for banks and the small businesses that need them.
Business intelligence is not anchored around a generic idea but should be centered around a flow of information that changes as the business itself changes, he said.
Small businesses are fast and dynamic, said Fam, who added that they may not be tracking the day-to-day ins and outs of their cash flows and other data. Banks asking them to voluntarily submit that information may not be getting the whole picture.
“I’ll let you in on a … little secret,” Fam said.
Within banks, there are two sets of data on firms, he said. There’s a file of what the business offers to the bank, and then there’s a file that’s kept for compliance reasons. The bank often buys data from various credit bureaus and other reporting sources — and in the latter case, there can be dozens of datasets with those compliance files.
Yet even though some large banks spend between $50 million to $100 million to buy that data, “not a single player in the market uses intelligence to merge those two sets of files to create a single ‘golden record’ for their customer base,” Fam said.
As a result, every incremental dataset that is duplicated and matched with another dataset causes what he termed an “exponential level of friction and complication.” The bankers facing the client firm have one view of the company, the compliance folks have another, and what one’s got at the end of the day, in Fam’s picturesque phrase, is “an entirely manual argument between the two parties.”
To fill the gaps, legacy banks use algorithms to help determine which small businesses will get their favor. They tend to be preoccupied with serving the “upper end” of the small- to medium-sized business (SMB) market, he said. The verification levels with all those datasets can be in the low 50% range.
None of it means the data is accurate, said Fam, who added that datasets might not be updated in a timely fashion, and the end user, the SMB itself, is rarely called upon to keep matters current. In many cases, the SMB is faxing information to the bank, an inefficient flow of information.
The businesses themselves don’t know what they don’t know — and in some cases are not even cognizant that they have a credit score as a business, Fam said. Those credit scores may not be updated for months.
Fam recounted how Markaaz’s own scores were not updated for more than 250 days in one instance.
The consequences of not knowing — would-be-lenders not having enough information to judge creditworthiness, and businesses not knowing how their data can and might be collected, analyzed or presented — are significant, he said.
“We have not spent anywhere near enough time speaking about this, in the market, in terms of cost,” Fam said.
The lack of information, in effect, falls back on the shoulders of the business owner to present information, and the bank resorts to scoring risk based on that owners’ individual credit score, or skewing to minimum loss ratios, which means that the bank doesn’t extend anywhere near the capital the SMB needs to thrive or even survive.
Sometimes the most basic information flows are shockingly inefficient, even non-existent, Fam said.
As many as 30% of small businesses that apply for various financial services, including loans, are rejected because they cannot be verified, he said. Banks are leaving $150 million to $200 million of lost revenue on the table — that’s the card business alone — due to that simple hiccup in the process.
The pain points don’t stop even if, and after, companies are able to set up accounts. As many as 30% to 50% of customers that are onboarded have their accounts frozen or are locked out within the first month. The result is that as many as 40% of firms are de-banking.
The solution lies with that golden record, a universal lens that represents all businesses large and small in the form of a centralized database, Fam said. The data can be grouped simply, and firms like Markaaz are doing it.
The first column ties in all publicly available information. (Fam’s firm provides about 200 of those data sources to its client firms, representing nearly everything available in the public domain.)
The second group of data represents everything that a business voluntarily contributes about itself.
The third group embodies everything a bank knows about its customer and centers around the banking relationship.
The fourth group uses artificial intelligence (AI) and advanced technology to project cash flows and business performance (where, say, projected fuel prices can impact the “fleet performance” of a small trucking firm).
Ideally, he said, “the record lives as partly the property of the business and partly as two parties doing business together,” as banks and FinTechs underwrite and serve small businesses more efficiently.
In the years ahead, he said, the shift in the data-driven lending market will be seismic, and Markaaz is having discussions with those players and all manner of media companies and credit bureaus that want to have a business-intelligence-focused approach to banking while finding the best business customers with which to forge relationships.
“He who moves fastest — and first — gets the cream of the crop,” Fam told Webster.
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