Transforming SMB lending: Bank-fintech collaboration in the post-Covid era with Socheat Chhay

Socheat Chhay (Group Head of Corporate Ventures at Sopra Steria) examines the frustrating status quo of small business lending and highlights how collaboration between banks and fintechs could transform this vast market. Drawing on real-world examples from the Covid-19 crisis, he illustrates how such partnerships could make this enormous market more appealing to traditional lenders, for the benefit of all parties. 

Financial services have progressed tremendously, thanks in large part to technological innovation. And you don’t have to go back very far to see it. 

Reflecting on my early days in capital markets, I recall pricing products manually with calculators and VBA on Excel. And that was in the 2000s—not actually very long ago. But now algorithms and robots provide and refresh quotes automatically.

We went from writing options prices on a chalkboard and shouting at each other, to trading on computers in just a few years. And now, people are barely even pressing buttons.

High-frequency trading was maybe 5% to 10% of our flow at the time. Nobody really cared about it. Today, ballpark industry figures are between 33% and 60% of all orders. That’s a huge volume of trading with no humans involved. Similarly, asset management has evolved. Where investors once focused mainly on listed equities such as NASDAQ companies, today they can invest in alternative asset classes like commodities, crypto, real estate or private equity startups directly through banking apps with just a few clicks.

This rapid progress is partly due to regulatory changes and broad digitalization. But as a tech investor and former entrepreneur, I’ve witnessed firsthand the impact that technological innovation has had in this space. 

Today, I work to bring innovative startups closer to traditional businesses and large corporate groups. I spend plenty of time at the intersection between banks and fintechs, and see huge potential every day. 

I want to use a specific example—small business lending—to show how these two groups can keep working together and make further progress. Let’s start with the problem today.

Why banks don’t prioritise small business lending

In every country, the number of SMEs is massive, representing a huge market of potential customers in need of loans and guarantees—services that are traditionally bread and butter for banks.

But from a business perspective, banks have less incentive to prioritize SME clients. For one, the average account size is relatively small. They’d rather go after a client that brings in €50,000 of P&L through one loan versus 10 clients that bring in €5,000 each. Second, the risk to loan to an SMB is almost always greater than for an enterprise. And third, it's operationally easier to study one client than ten.  

This preference aligns with their current operational setup. Studies have shown that an account manager can only handle 40-80 accounts correctly, with the best ones able to manage up to 200-300. So banks need more SMB account managers and/or technology to cover for a greater number of companies.

Some new tech challenger banks, like Starling, can efficiently manage thousands of accounts, but for traditional banks, it's a low volume, high reward game.

Scaling from handling a few high-value clients to managing hundreds or even thousands of smaller accounts requires significant investment and operational changes. Given that banks are already meeting their financial targets with their current models, it’s understandable why they might ask: why bother?

This is not to say that banks are uninterested in SMBs. They recognize the potential profitability of this segment and would gladly secure new potential sources of revenues.

They just don’t yet have the optimal processes to figure out which are worth it. 

Why fintech collaborations are so valuable

Banks already invest a lot in innovation and would gladly serve SMBs at scale if it was profitable and low effort. However, most of their efforts are focused on digitalizing narrow, specific areas that extend their existing services without fundamentally altering their core business. For instance, using Gen AI to help sell a bit more credit. But not on their broad markets. 

This is where fintechs play a critical role. Unlike banks, fintechs have the incentive and agility to innovate around SMB lending by bringing new client experiences. 

They can't compete with banks on scale—they’re not even in the same league. They don't reach what is usually called in banks, the “significance level”, which is the minimum percentage of market share the fintech has compared with a bank.

‍A fintech may have tens of thousands, hundreds of thousands at best of good business clients. Banks like Crédit Agricole, HSBC, Banco Santander have millions.

Fintechs thrive by identifying underserved, underexploited and large growth markets—with SMBs being a prime example. Banks recognize this and are content to let fintechs experiment, ready to step in when real progress is made. They're hoping fintechs will:

1. Find the most efficient way to onboard, KYC and score small businesses
2. Spot financial and extra-financial data patterns and characteristics that make certain small businesses profitable to banks.

A few years ago we saw lots of bets on neobanks. Large banks knew that these would be popular with small businesses—the very customers that they couldn’t serve effectively yet. 

By making strategic investments in these fintechs, banks could monitor their progress, improve their own user experience and if successful, integrate these innovations into their own ecosystems. A perfect French example is Boursobank.

This approach allows banks to benefit from fintech advancements and tap into new customer segments without directly bearing the risk of innovation.

• ‍Want to offer a best-in-class credit journey to customers? Learn more about Defacto Core.

Covid as a catalyst for innovation and collaboration 

The value of this fintech-bank collaboration was particularly evident during the Covid-19 pandemic. 

I was at Bpifrance during Covid, and the company was faced with the daunting task of guaranteeing loans for around 700,000 SMEs within a two-month time frame, as part of a national effort to keep small businesses afloat. Similar to PPP loans in the United States and CBILS in United Kingdom.

At that time, the odds were heavily against small businesses applying for loans, with a 55-75% chance of being denied due to their risk pattern. Bpifrance, like many traditional banks, was well-equipped to score large companies, but lacked the extra-financial data and processes to operate and assess the vast number of SMEs accurately.

To address this, thanks to the open innovation framework set up a few years earlier, the bank partnered with 10-15 startups which had been tested prior to digitalize the bank. Each specialized in different aspects of the lending process, from digitizing onboarding, to KYCs, to automating loan originations.

By leveraging fintech innovation, Bpifrance was able to build a full platform to filter and process the massive volume of loan applications with unprecedented efficiency. We ultimately delivered loans to 50,000 SMBs (on top of the 700,000 guarantees) in a fraction of the time it would have normally taken.

What might have normally been a slow, step-by-step process was transformed into a swift, collaborative sprint. This experience showcases the potential of fintech-bank partnerships, where combining forces can lead to remarkable achievements in a fraction of the time. 

One innovation I’m hopeful for

There’s a fascinating statistic from the World Resources Institute on climate research related to capital markets and asset management—the world I come from: it would take €5 trillion per year (7-8%% of all assets under management worldwide) to meet climate and biodiversity goals. That’s nothing. This highlights an incredible opportunity.

The real challenge lies in redirecting this capital to where it’s most needed: sustainable and climate-friendly initiatives.

I believe the appetite is there and that if we make it easy for investors to reallocate their funds toward these goals, many will eagerly do so. However, the current financial infrastructure—banks, asset managers, and governments—lacks the governance, tools and processes to facilitate this transition effectively.

That’s a challenge fit for a fintech for good. A real problem that begs for disruption—one that fintechs are uniquely positioned to lead, driving change that could reshape the financial landscape and contribute to a more sustainable future.

‍

About Socheat

Socheat Chhay is Group Head of Corporate Ventures at Sopra Steria where he funds and supports startup synergies with the group. His background includes capital markets and trading at Euronext, early employee and operator leading operations, regional business development,and opening new markets for ETF Securities, a UK Asset Manager unicorn, Cofounder of a Round B climate tech and lead open finance and credit scoring projects at Bpifrance. 

Socheat is experienced in and passionate about social entrepreneurship, green tech investment, and is proud to have a sustainability mandate among others in his role at Sopra Steria.