Research Overview
- Boasting 362,000 enterprises by the end of 2023, Hong Kong SMEs represent nearly 99% of all local businesses and make a significant contribution to the city’s private-sector employment (44%) and GDP (50%). This critical sector for the local economy exhibits various credit demands, ranging from funding for daily business operations to more specific purposes such as trade finance or franchising. However, despite robust credit demand, total SME loan balances in the city have remained stagnant at ~HKD 1.8 trillion since 2018.
Summary of Key Challenges
- From 2018-23, only ~60% of SMEs with a need for credit applied for a loan. Over the same period, of those SMEs who applied for a loan, an average of 34% were either rejected or only partially approved. Based on in-depth interviews with over 30 established SMEs in Hong Kong (i.e. > HKD 30 million p.a. in revenue), much of this stems from various operational inefficiencies across the SME lending journey, leading to largely unsatisfactory experiences for many borrowers, including:
- Acquisition: SMEs face challenges when choosing between different loans on offer due to the lack of availability / limited transparency of loan details, requiring extra effort to visit / call lenders for more information. While preliminary approval timelines may be highlighted by lenders, the approval process itself remains undisclosed.
- Onboarding / Account Setup: Most SME lenders do not offer pure digital onboarding. Onboarding times also take considerably longer (i.e. up to 3+ months) than advertised, especially for traditional and virtual banks, a function of relatively opaque documentation requirements and regular back-and-forth meetings / calls with RMs. A number of traditional banks also continue to impose minimum deposit requirements (e.g. up to HKD 200,000+) to set up a business banking account.
- Loan Application: Traditional banks have yet to embrace pure online loan applications, with SMEs needing to fill out and submit considerable amounts of physical paperwork and conduct branch visits. Like onboarding, most local SME lenders also take much longer than advertised to process and approve loan applications. Moreover, stringent document requirements, recurring follow-ups, and collateral and/or personal guarantee (“PG”) requirements create considerable borrower friction.
- Account Maintenance: Many lenders conduct annual or semi-annual account review processes to assess the financial health of their SME clients and adjust their loan terms accordingly. Reviews are often conducted at random and typically require additional documents to be presented during in-person visits or calls with RMs.
- Loyalty: Due to the lack of active engagement initiatives from local lenders, there is minimal ongoing engagement with most SMEs beyond transactional interactions, stifling long-term loyalty. As a result, all of the SMEs that we interviewed said they were open to switching to an alternative lender (i.e. their non-primary bank account) when presented with a more attractive loan proposition, smoother digital processing experiences, and/or enhanced service levels.
Capturing Untapped Opportunities
- We estimate the current addressable SME credit gap in Hong Kong to be HKD 170 billion. However, to tap into this lucrative opportunity, local SME lenders must reimagine the SME lending journeys, including making better use of technology across the customer value chain. While conventional technologies like OCR and gamification can address certain operational challenges, such as streamlining onboarding and improving customer engagement, structural issues, such as those related to SME document availability, persist.
- We believe the key to plugging Hong Kong’s stubborn SME credit gap lies in algo-based lending – in short, utilising alternative data (via targeted partnerships) to develop customised SME credit scoring models that can pre-qualify loans. This approach not only opens the ability to address previously underserved customer segments, but also helps to streamline the current SME lending journey. However, a fundamental rethink of lenders’ current strategies and operating models is needed for this bold new approach to work.
