On October 19, 2019, Chile’s capital city of Santiago was in flames. What started as a student movement to evade subway fares has since launched into a widespread movement against socioeconomic inequality that has swept, and in some cases paralyzed, the country for well over a month. The Chilean peso has lost value at an astonishing rate, coming in second only to the Venezuelan Bolivar as the least-stable currency in Latin America in October.
As political institutions reel from the blow and face systemic solutions, Chile’s financial sector nervously awaits the last month’s sales data, expecting a massive drop in sales as a result of the unrest. Small businesses have been among the worst-hit, seeing sales drop by over 70% with little access to credit or support to help these mom-and-pop shops survive the blow.
Chile is not alone; Latin American countries including Ecuador, Bolivia, and Colombia have seen significant protests against inequality and corruption over the past few weeks, putting a damper on business activity. However, improved financial technology (Fintech) might provide a light at the end of the tunnel for SMEs who traditionally struggle the most during times of social unrest.
Specifically, Fintechs that can access and process real-time data can provide financial services such as credit and loans while traditional institutions balk at the risk of lending based on a year-old balance sheet.
What is real-time data?
Banks and financial institutions traditionally score risk based on historical financial statements – sometimes more than a year old – including repayment rates, SEC filings, and credit scores, where these data exist. While this information can help understand a large company over a period of relative financial stability, small businesses and financial crises throw a wrench in the traditional system.
Real-time data includes sales, bill payments, transfers, remittances, credit card receipts, and even social media use and cell phone usage. This data can provide instant and up-to-date insights on a company’s performance, even if most of the transactions are informal or the business does not have a credit score.
While traditional data streams can help institutions calculate risk assuming the economic situation stays the same, these models are not flexible or agile when the economics change. Therefore, in situations of economic crisis such as what Latin America is experiencing right now, companies that can tap into real-time data can provide credit or grants to businesses without compromising fraud or default risk.
Latin America’s competitive advantage: electronic invoices
One of the best sources of real-time data is an electronic invoice, which is a standardized digital document sent to the government’s internal tax service every time a company processes any transaction. The data from these invoices is a gold mine of information about a company’s partners, payment history, processing volume, and more, and it is updated every day.
Latin America is a leader in electronic invoicing, processing over half of the worldwide e-invoices produced yearly. While banks and financial institutions are wringing their hands over an assumed drop in sales, Fintechs with access to e-invoices have current data on small business’ financing needs, even in the midst of a crisis.
For a bank to capture all of the updated information they would need to properly price a loan in the current financial environment, they would require enormous resources to manually track down all of their customers and get access to their current financial data. These institutions have no automated process to import daily or hourly revenue or review outstanding invoices to evaluate how to provide credit. Fintechs do, and they are using this data to provide credit to companies that are struggling to make ends meet during a crisis.
Helping SMEs in an information vacuum
Rather than providing loans in a potentially-contracting economy, banks across Chile and other countries have likely put a freeze on credit until they can get a better understanding of the future of business. While there is no public information on the contraction in lending available today, banks are likely holding back on loans they may have taken in the past to avoid taking on excess risk. Businesses that are feeling a liquidity crunch given low sales could die in this insecure period before banks can sort out how to calculate risk in the new status quo.
Fortunately, two actors are stepping up to help small businesses survive: governments and fintechs. Across Latin America, many governments have access to current financial data that is not available in the US, because of the electronic invoice. Government loan programs can fill in financing gaps where banks are unable or unwilling to take on the risk of lending in insecure environments. Chile’s government has already announced plans for credits and loans to SMEs harmed by the manifestations.
Fintechs that can access real-time data can also make smarter predictions about the future of the economy and individual businesses, meaning they do not necessarily take on more risk when lending, even when the economy is struggling. These companies have an opportunity to make a real difference for small businesses who have a stable financial history, but who have faltered given the current economic situation in Chile and Latin America.