By Lee Naik
More than 98% of South Africa’s businesses are small and medium enterprises (SMEs), employing up to 50% of the workforce, according to McKinsey, contributing up to 34% of the country’s GDP, making it clear that they are the backbone of our economy. That shouldn’t come as news – and nor should the reality that they often fail because they face seemingly insurmountable financial challenges, with cashflow and access to capital being among their leading challenges.
What many don’t realise, however, is that the problem runs deeper than just access to finance – in South Africa, as in many African countries, the problem is that small businesses lack financial inclusion, simply because so many operate informally.
Informal traders have an additional hurdle to overcome: accessing the finance they need to grow their business or access new markets is challenging because they don’t have the formal reporting that lenders use to assess risk, like income statements and balance sheets. They are what we, in the financial services industry, call ‘thin file’ clients: they are practically invisible to the economic mainstream because they have no credit history within our system to evaluate.
Let’s consider the economic landscape in South Africa – we still have one of the highest inequality levels in the world with a Gini coefficient of 0.67. Our unemployment figures are at a staggering 31.9%. Inflation is high. The legacy of apartheid still looms, affecting access to credit for many black South Africans, and financial illiteracy is widespread, especially in our rural areas.
Our adult population now numbers just over 60 million people, with only 37.51% being ‘served’, ‘underserved’ or ‘new to credit’ – which means that more than 60% of the South African population are what we term ‘unserved’. That means they have no credit history and are, essentially, completely invisible to the financial/lending ecosystem and cannot get any access to credit.
Where the unemployment figures intersect with those who are ‘unserved’ by the financial services industry is a large cohort of people who could be setting up businesses, feeding themselves and their families, and potentially creating jobs for others. Because they are financially excluded, however, that potential will remain unrealised.
TransUnion is working closely with the World Bank and the broader industry to find ways to assess the risk of previously un-scoreable businesses. The answer may lie in using alternative data to qualify more SMEs.
Alternative data is any data that is not directly related to a consumer’s credit behaviour, in contrast to the kind of data that credit bureaus traditionally collect and share with lenders via credit reports and scores. Alternative data draws on non-traditional sources and techniques to assess the individual and their business potential where applicable.
Alternative data makes those who were once credit-invisible visible – and thus scoreable. Telco data can bridge the information gap between traditional credit information and the data generated by consumers and entrepreneurs when they use their mobile phone. This gives lenders a record of their ability to make regular or semi-regular payments and can help demonstrate the ability to afford monthly credit repayments.
We have demonstrated the power of this data through a suite of solutions that use alternative data points such as mobile device, commercial interest, asset ownership, family construct, occupation or geospatial location. In one year, these solutions opened up an additional 107.8 million enquiries for credit and resulted in 7.2 million net new accounts being opened in South Africa that would traditionally not have ever been considered.
That’s 7.2 million net new consumers who have been welcomed into the financial inclusion ecosystem, and who now have access to an increased standard of living, education for the next generation, homes for the homeless, upgraded access to transport, and so on.
A more telling statistic is that our business solution introduced a net new enquiry base of 62 000 South African small enterprises looking to obtain credit to grow their business. Having access to credit means that these SMEs could open up even more employment opportunities that would in turn uplift society as a whole and contribute to the GDP.
Today’s world is driven by data, and growth is led by data-driven insights. If we aren’t using the data at our disposal to its full potential, we’re missing a critical opportunity to use tech and data innovation to create a positive impact and overcome a challenge that has existed in South Africa for decades – unlocking not just financial inclusion, but a new era of prosperity for all.
Lee Naik is the CEO of TransUnion Africa
BUSINESS REPORT