The perfect storm for SME digital financing in Singapore

The year 2020 is set to be a watershed year as the COVID-19 pandemic tests our mettle at an unprecedented scale. The pandemic threatens the livelihood of many small and medium-sized enterprises (SMEs), which are the foundation of most economies, as governments and financial institutions stretch to respond to the global uncertainty. As Mr K. Shanmugam, Minister for Home Affairs and Minister for Law, pointed out in April 2020, “none of us in our lifetime have encountered an economic shock like this [1].” The shock also presents a major challenge to the financial technology (FinTech) sector, especially digital financing for SMEs. Yet amidst the crisis, there is always a silver lining at the end of the storm.

Against the backdrop of this crisis is the major role that financial services and SMEs play in our economy. As an international financial hub, the Singapore economy relies considerably on the financial services sector for growth. Similarly, SMEs contribute to nearly half of the country’s GDP and employs 2 out of 3 persons in Singapore. Even as we recognise the importance of SMEs, according to our research, only 22 per cent of bank loans are extended to SMEs. This results in an underserved financing gap of S$20 billion. While the massive government support for SMEs has been a lifesaver, financing remains part of SMEs’ top 5 hurdles and it is likely that this structural gap will continue.

Like most FinTech lenders in the world, the crisis heightens the risks for credit default and credit crunch. This potentially drives the consolidation of the FinTech lending industry as a whole. Nevertheless, it also represents a potential turning point for the sector, accelerating digital adoption and consequently, SME digital financing. With SMEs trying out online solutions, the convenient end-to-end digital experience may prompt the adoption of alternative digital financing to complement existent banking options, even beyond the pandemic. Social distancing may be the catalyst for SME digital financing like cash discount was to e-commerce and ridesharing.

On a risk perspective, the crisis also stress-tests the credit models of FinTech lenders. FinTech lenders use big data models in replacement of manual credit assessments, resulting in faster and more objective evaluations at lower turnaround times and processing costs. For example, Funding Societies has started using Random Forest algorithms to automate underwriting months prior. This has been done for selected financial products. Pro-digital government policies further power SMEs’ adoption of software in business operations, creating precious digital footprint that is critical for digital underwriting. Naturally, not all FinTech lenders will pass the stress test. However, for those who successfully ride out the crisis, the experience and track record will be invaluable.

Another upcoming impactful event is the operation of Singapore’s digital banks which are designed to drive financial innovation. The capital requirement for digital bank licenses in Singapore are among one of the highest in the world. These requirements are necessary for digital banks to comply with existing regulatory frameworks. Some may argue that the high capital requirement and the negative macro environment would make it less conducive for digital banks. However, with MAS thoughtfully extending the assessment period [2], the launch of digital banks would likely be in H2 2020. This coincides with the time in which scientists expect vaccines for COVID-19 to be widely available, giving the market much needed optimism. The operation of digital banks are thus likely to further boost SME digital financing.

COVID-19 is undoubtedly a crisis of historic proportions. However, amidst the doom and gloom, there is transformation and renewal. We are hopeful that SME digital financing will follow the path of e-commerce and ridesharing to become a mainstream fixture in this decade.


[1] Ministry of Law, Apr 2020

[2] Straits Times, Apr 2020

Kelvin Teo | Co-Founder & Group CEO | Funding Societies

In 2015, Kelvin Teo co-founded Funding Societies | Modalku; currently the largest SME digital financing platform in Southeast Asia, licensed and operating in Singapore, Indonesia and Malaysia. Selected as one of the Top 200 FinTech Influencers in Asia, Kelvin has spoken at major conferences such as LendIt Shanghai and Money20/20. He has also been featured on Bloomberg and the Business Times. Prior to this, Kelvin was a consulting professional at KKR, McKinsey and Accenture. He graduated from Harvard Business School and National University of Singapore.