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Trust Machine initiative aims to bridge SME funding gap

Trust Machine initiative aims to bridge SME funding gap

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Finastra has announced plans to deliver a range of initiatives which enable its customers to accelerate through change, as well as creating positive outcomes for millions of people around the world. The move is part of the company’s ongoing innovation and open cloud platform strategy. We find out more about the company’s Trust Machine initiative and how this is will support SMEs.

Finastra and its customers are set to positively impact over nine million lives around the world, through technology and collaboration.

One of the focuses for Finastra is the bridging of the SME funding gap. Finastra is piloting a revolutionary microfinance initiative, Trust Machine, in Kenya.

Together with partners in data, financial literacy, Blockchain and scenario modelling, the resulting loan and balance sheet optimisation solution aims to reduce the US$19bn funding gap by 1% in the country which could potentially create 50,000 new jobs to encourage sustainable economic growth.

We spoke to Arnaud Picut, Senior Director, Risk Management, APAC, to find out more about the initiative and how SMEs are set to benefit.

Can you tell us more about the idea behind the initiative – when did it launch and what prompted the idea?

The idea began during a series of Design Thinking sessions that we ran with development banks and microfinance customers back in 2019. They were run to explore ways in which we could bridge the SME funding gap by orchestrating the entire financing chain from investor to local bank to SME to citizens – in a trustable, efficient and transparent way – and apply this to specific industry sector value chains.

SME funding is a multi-faceted challenge that goes beyond simply access to financial services and we unpicked the multiple dependencies; lack of financial education, lack of credit history, market data scarcity – all of the factors that made small loans either too expensive or not suitable for borrowers.

The aim was to find a way to balance the loan between lender and borrowers and find a way to make it work for both sides. From there, we identified FinTechs and universities that we could work with, such as the University of Leeds which, with our investment, was able to build synthetic data generator capabilities, to fill the gaps in the optimum funding process.

We began the programme as a CSR initiative, but without sustained investment, CSR projects tend to be finite. So, we focused on building a model that had two streams; CSR (in which innovation was funded by Finastra and the ecosystem to be rolled out to developing countries) and Commercial (in which the balance sheet optimisation components developed for Trust Machine were packaged up and licensed to banks).

This means that we can continue to fund the CSR microfinance initiative in a sustained way, for the countries and sectors that need the most support to create jobs for economic growth.  

What are the main goals of the initiative?

Our initial goal was to improve the flow of funding between borrower (M/SMEs) and lender (microfinance and development banks) by making loans more tailored and affordable. But we realised that, done correctly, the programme had the potential to improve investment in developing countries, give SMEs the opportunity to grow and create employment opportunities that boost tax revenues and in-country GDP for critical regeneration projects like infrastructure and healthcare.

Our experience also told us that supporting ‘emerging’ markets through to ‘developing’ and ‘developed’ stages is critical to long-term economic growth, and so while boosting local economies such as agriculture, we want to enable a parallel FinTech economy to create the jobs of the future. We’re coaching and financing these younger FinTech entrepreneurs that will become part of the fourth (digital) industrial revolution, as well as creating opportunities ‘on the ground’ for FinTechs and partners to join the programme.

Combined, these elements will promote long-term financial health, opportunity and job creation, and ultimately eradicate poverty and inequality, and so our key aim reflects our bold ambitions; to reduce the funding gap in the countries we target by 1%.

What steps has the initiative been through so far?

Following the conception, we identified and onboarded the FinTechs that were best placed to overcome all of the challenges that we identified, such as financial inclusion and market data scarcity, to create the Trust Machine ecosystem. Being a FinTech was a critical element, as the services they needed to provide must be consumed via APIs in order to make this project available, cost-effective and scalable, anywhere in the world. We looked at the value chain of several industry sectors such as agriculture to define a workflow that could be implemented totally or partially, particularly where digital infrastructure is a challenge.

From there, we developed the platform to fully integrate the partners using our open platform With all building blocks in place, we are at the final stage; partnering with critical microfinance, development banks, infrastructure and on-the-ground sponsors, which will be disclosed in the coming weeks.

Can you highlight any initial benefits you’ve seen from the initiative in Kenya?

After identifying Kenya as our initial launchpad, we coached a local FinTech, Aqila, over a 12-month period, in support of our goal to boost the local FinTech economy. It has now integrated its proprietary coach-matching app and AI-based SME credit scoring into the Trust Machine and is ready to take it to market.  

We’ve been working with our ecosystem to generate the missing market, credit and loan data to finely calibrate the loan optimisation model and create the e-learning programme specifically for Kenya. The final step is finalising a partnership with a consulting firm to roll out the programme and use its expertise in local specificities, regulations and governmental relations. Kenya has an over-reliance on expensive pay-day loans but a burgeoning FinTech scene and so we thought this would be a great opportunity to pilot the programme and reduce the US$19bn funding gap by 1%, which could create over 50,000 jobs in the long term.

What are the next – and long-term – aims of the scheme?

As we start rolling out the programme in Kenya, we’re using it as a blueprint for other countries including India, South Africa, Brazil, Philippines, Thailand, Pakistan and Indonesia – the programme is attracting interest from banks and partners alike. In each country, we will engage universities to support the programme and generate data for each market/sector to continually enhance the modelling capabilities.

Building out the e-learning/education aspect of the programme is also important, so that opportunity is extended to those with lower levels of literacy and just as important is building out the data underpinning the modelling to holistically encompass sector, country, fiscal, political, macro-economic and environmental factors.

‘Data’ plus ‘education’ are the building blocks to ‘anticipation’ – a state that enables both lenders and borrowers to better envisage the future and plan accordingly.

When we reach this state, we have put in motion a way to support both borrower and lender that will create opportunity in primary and digital economies, while reducing the cost of capital – and it is this self-sustainability that creates the conditions to reduce the funding gap by 1%…and more.

How will it be scaled to more countries?

Industrialising at scale requires two partners; one FinTech and one consulting firm in-country. As Trust Machine is an ecosystem of cloud-based components, it is being developed for consumption via a uniform API, deployable in a few clicks. The FinTech will customise it for the local market and the partner will provide the local knowledge and platform to access entrepreneurs and SMEs.

Why is it so important for vendors to support SMEs, particularly in developing countries?

SMEs are the lifeblood of the global economy but hit hardest by the pandemic. Keeping money flowing to the sector via initiatives like Trust Machine will bring more people into financial and economic ‘visibility’, and reduce the devastating impact that a ‘K’ shaped economy recovery would have, in which some sectors recover quickly while others decline, exacerbating inequality.

SMEs don’t just need affordable finance, they need the tools, support and opportunities to bring themselves into long-term economic growth. And as they grow, they contribute to the success of their country, attracting more investment and improving the lives of their citizens and nations. Supporting SMEs is supporting the next generation of opportunity and equality.

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