Q-Lana, a US based Fintech company, managed to complete its first implementations in 2018 and is ready to present its solution to the banking sector in Central and South East European countries. We talked to Christian Ruehmer – Co-founder and Director, and Svetlana Zikic – Q-Lana Representative in Europe to tell us more about Q-Lana’s concept of Knowledge-Based Lending for Small and Medium-Sized Enterprises.
Christian Ruehmer: We founded Q-Lana in 2015 as professionals with decades of experience in financial services and technology, and used our skills to develop the concept of Knowledge-Based Lending due to identified challenges which limited banks for broader MSME lending:
- First, there is significant demand for loans from Micro, Small and Medium-Sized Enterprises (MSME), but banks often lack the tools and skills to assess the credit risk of those companies to approve and monitor the loans. According to a recent study by the IFC, there is a funding gap for loans to MSMEs of at least USD 5.2 trillion for formal and USD 2.9 trillion for informal companies. Therefore, globally, millions of MSMEs are constrained in terms of appropriate lending support as banks have been and continue to be reluctant to financially support this sector. We started within this context. Furthermore, looking at European economies, the importance and impact of the MSME sector is considerable and growing in terms of GDP or employment contribution.
- Second, Fintech companies already challenge the business model of traditional banks. Very often, these companies select niche markets, offer their products through an efficient, low-cost approach and are not subject to the same regulatory constraints as banks. While they are technologically advanced and more radical in their approach, they are also interested in joining forces with successful banks. On the other side, banks have access to a broad range of clients demanding specific products and are able to develop professional client-bank relationships. Hence, there is a great opportunity for cooperation between banks and Fintech companies.
- Third, looking back, banks have been approached to digitization of certain part of business operations, but the lending process has remained more traditional. Digitization generally requires better IT skills among staff and the ability to migrate to a more digital business model. This goes beyond the traditional tasks of change management and requires a lot of guidance by Fintech solutions, from staff inhibitions to handling technology in the workplace, to complying with existing banking Digital Strategies and may contribute to their optimal formation.
By addressing all three challenges, we wanted to show how the Q-Lana Knowledge Lending methodology can be an ideal base for banks as traditional financial institutions to apply a structured approach to digitization, offering enhanced financial services and implement successfully by supporting the staff in the digital migration.
Knowledge is the key to successful MSME lending
Knowledge of MSME business in the target markets is the most important factor for successful lending. Information is mainly collected through the work of bank’s manager, who knows clients the best, and by using alternative sources of data to evaluate potential clients as well. The challenge is to structure the knowledge and to capitalize on the vast amount of information, most of which is qualitative. Different instruments, technologies and statistical tools can help to support the collection and analysis of information. This includes multiple versions of scoring and data analysis tools for risk assessment and monitoring.
Information about clients is crosschecked and analyzed. Further, the overall workflow should be automated. This allows the bank managers to focus on value-added tasks, such as interaction with clients and decision-making.
Our digital lending platform allows integration of other services through an API concept and is placed at the core of the banking system. It provides support for Front-End activities as well as Back-End areas, such as operations and risk management. The workflow functionality of such a platform covers first contact, loan application, approval, monitoring and collection. It also covers management of collateral, documents and impact measuring. The platform can be used to assess the value of qualitative and quantitative information and feeds analytics back to users in a context-sensitive manner. This allows the bank to fully replicate existing processes and procedures, and provides opportunities to upgrade lending methodologies, where new instruments are suggested.
Components of Knowledge-Based Lending
Knowledge-based lending is built around several innovative tools and concepts to support the various stages of lending processes with clients. Those concepts enable the bank to service clients better while minimizing risk exposure. The components relate to:
- Business Assessment: these tools help bank managers to understand the business model of the client better. Using SWOT Analysis, Business Assessment Questions, Porter’s 5 Forces Model or the Business Canvas allows knowledge of a client’s business to be structured. Having a library of this information about a number of clients allows for comparison and benchmarking.
- Rating and Scoring Models help in the assessment of borrower risk in a structured manner. Credit assessment is both an art and a science, which means that on the one hand, qualitative analysis should not be neglected, but on the other, rating and scoring models have a clear role in structuring information.
- In the Loan Application Process, tools such as the analysis of the 5Cs and configurable financial modeling to project a company’s financials over multiple periods help highlight key risk factors.
- An Early Warning System identifies clients with potential payment challenges before they actually default. Through questionnaires and quantitative analytics, alerts can be created to remind bank managers of potential problems related to credit quality.
- Collaboration and knowledge sharing is essential. The platform facilitates collaboration and communication across teams and integrates with core banking systems.
Placing Q-Lana platform at the Core of your Digitization Strategy
Most financial institutions have expanded into digital business due to client demand and threats from FinTech companies. Specifically, the latter create fear and confusion among traditional banks, and experts are warning that the traditional business model for banks is already outdated and will soon be replaced by mobile wallets, peer-to-peer lending and loans that are auto-approved/declined through scoring models. Banks’ management and governing bodies feel pressure to adjust and are afraid of “missing the boat”. On the other hand, banks need to be conscious that they have a business model that is generally successful business model but that needs to be upscaled and adjusted in light of clients’ current needs and trends for upgrading clients’ user experience.
When it comes to digitization, a shortsighted patchwork approach of combining new products with partial process improvements mixed with fashionable tactics needs to be avoided. It is not necessary to revolutionize the business process and product portfolio all at once. A step by step approach, defined by the Digitization Strategy, is recommended, as long as steps are taken towards a clear vision of the indicated structure. The steps of the Digitization Strategy are:
Those steps are:
- Digitize – start with digitizing existing business processes, decision support and structuring of data collection. Taking small steps when entering the field of digitization improves the adoption rate among staff.
- Improve – business processes can be improved through the addition of digital tools such as rating and scoring, early warning systems, monitoring and structured collection.
- Launch – with data about existing clients in place and workflows that are optimized, it is easy to adopt new products or products that are in use by Fintech companies.
Added Value for the bank
Svetlana Zikic: While the Q-Lana platform guides banks through all the steps and advances credit portfolio management, it enables banks to create new business opportunities with MSMEs, reflecting added value expected by clients.
One more benefit of the platform is the ability to gradually implement digitization in line with the three steps mentioned above: the replication of the existing processes happens as a first step. Improvements and the need for new tools becomes obvious through experience in this step. Once the institution successfully establishes the second step, the integration of new, innovative products is easily incorporated via the platform.
Navigating through pitfalls during execution
Even with the best strategy in place, financial institutions often fail when it comes to execution. There is a significant need for consulting before decision-making. The Q-Lana team is prepared to work with management teams and to prepare the necessary materials for the boards of directors. A decision process about digitization can be lengthy and needs to cover all concerns voiced by the management and the board. Q-Lana consulting and advisory support should be on-site for an extended period to navigate potential pitfalls, such as complexity of processes, fear and resistance from staff members and issues related to data integration. There is usually at the management level a significant difference between strategic expectations and operational details. A consultative approach to those problems is usually appreciated by banks and considered a key factor for the success of the digitization effort.
Q-Lana has been developed as an integrated platform to provide knowledge-based lending to MSME clients. It fully digitizes operations and allows other providers to connect. It is paired with consulting services to facilitate the important steps along the digitization path. It has been developed with a focus on emerging economies due to the importance of the SME sector for overall economic growth. Nevertheless, thanks to its characteristics and general trends and needs, it is equally needed and useful in developed countries.
So far, Q-Lana has been launched or is in the process of launching with seven customers across Europe, Africa and the Caribbean. The experience of this work has further shaped the company’s approach to sales and implementation, and has received very positive feedback across the industry. We introduced our product at a few International events, including the Global SME Finance Forum in Madrid last year, and have become a respected member of their network.
Q-Lana was founded by 3 partners, combining different skills and expertise: Christian Ruehmer, has 30 years of experience in finance and working for several large international banks in the areas or Risk Management, Credit Portfolio Management and Investment Management; Kurt Vandebroek has a very strong background in technology for financial institutions and has launched several companies; Bharath Kumar is the managing partner of the software development company that developed Q-Lana. He has successfully managed multiple products in that space across many continents.
Representative office in Belgrade is managed by team member Svetlana Zikic, who has a wealth of expertise and experience in microfinance. She is the first contact within the company and is able to provide more details on the ways in which Q-Lana can become the solution to your digitization efforts for SME lending.
 MSME FINANCE GAP: Assessment of the Shortfalls and Opportunities in Financing, Micro, Small and Medium Enterprises in Emerging Markets, IFC 2017