CFC – the Human-Machine Approach

26 March 2019

In the fourth quarter of 2018 the local economy extracted itself from a technical recession by growing by 2.2%. However, challenging times still lay ahead, particularly for small to medium-sized enterprises (SME) as they are more sensitive to contractions in consumer spending and dips in consumer confidence.

With the World Bank forecasting economic growth of just 0.9% in 2019, many businesses will struggle to keep the doors open due to a dip in revenue and constrained cash flow. Many will look to credit providers to fill the financial gaps.

However, interest rates are now on an upward trajectory and financiers across the spectrum are more risk-averse in this tougher economic climate. They, therefore, apply stricter underwriting and risk management criteria to every credit application.

With little appetite for SME funding from mainstream credit providers, many businesses will rely on alternative lenders for the financial support they need. And it is the financiers' risk appetite that will determine who are the winners and losers in these volatile market conditions.

Lending to SMEs is always risky, even in strong economic times, but there are always opportunities to fund promising business outliers. The key to sustaining a positive loan book in this environment is predicated on a lender's ability to identify these standout performers, or those businesses that have something unique to offer, while adequately rating the associated market risks.

Those lenders that take credit scoring for granted and look to push loan amounts to boost top line earnings in this environment are playing a risky game. As such, credit scoring will remain a key element to the success and sustainability of the alternative lending business in the near-term.

In this regard, technology will play a pivotal role. Advanced machine learning algorithms and predictive analytics capabilities can, for example, be applied to big data sets to deliver a consolidated yet granular view of an SME's vital business stats.

However, underwriters generally have limited access to data on SMEs, which is why we prefer to apply technology in our business to augment our experienced team's decisions, rather than allow technology to determine which loan applications we approve.

We're also cognisant that business owners prefer to have a human element in their engagements around business financing. While digital channels are starting to dominate the credit extension space in more advanced markets like the US, in South Africa it will be some time before businesses are willing to transact via digital-only services.

It is, therefore, on back-end systems where technology now adds the greatest value to lending operations such as ours as it creates greater operational efficiencies. We leverage technology and rely on the scalability it enables to keep costs down, while providing the predictive analytics that help to manage our risk exposure.

But we continue to build and maintain interpersonal relationships with our clients to understand their business and their unique requirements. Data can certainly provide a detailed analytical view of a business and deliver pertinent information, but without understanding the client’s needs, you will never build sustainable client relationships.

It is only through the intuition of expert financial experts, developed over years spent working at the industry coalface that a lender is able to fully assess a business's potential to succeed. That's because no two businesses are the same. Operating a business is complex and each has its own unique attributes and challenges. As a consequence, understanding the essence of a business becomes an art, and the team at CFC are masters in this regard.

Our clients are more than just a collection of data points fed into a business intelligence system. We engage with every applicant to understand their business in a context that data is unable to elucidate. A fair outcome that does our client justice is our ultimate aim. We therefore assess every application according to two key elements – credit risk and affordability.

In this regard, affordability pertains more to a holistic view on how the business is doing and its future prospects, rather than specific data points such as a cash flow statement or a positive balance sheet considered in isolation. However, we stick to a conservative approach, loaning clients what we believe they can afford to repay, rather than merely shoving money down their throats to improve our top line. We pride ourselves on providing the “right size” deals.

And through this process we are also empowered to become trusted advisors along our clients' journey to long-term sustainability and success. By taking this augment human-machine approach to credit extension, once we establish a good relationship, we can offer our clients insights that can perhaps help them make better decisions and ultimately realise their growth ambitions.

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