- 25 October 2023
- SME Banking | Fintech | SME Financing | SME Financial Inclusion | Supply Chain Financing | Digital Lending | SME Lending Transformation
Q&A Interview: Validus Group COO Vishal Shah on empowering SMEs, bridging funding gaps, and transforming SME lending
In an in-depth Q&A interview with Sunrise Medium, Validus Group Chief Operating Officer Vishal Shah dives deep into SME lending, from AI, to strategic partnerships, products, and more.
Sunrise Medium: What’s the vision and motivation behind the establishment of Validus?
Vishal: Our vision is to improve the lives of the SMEs and the whole SME community. SMEs are a huge source of job creation across Asia. We target the under-served and the under-banked SMEs. We saw a significant funding gap in the SME and micro SME space across Asia, particularly in Southeast Asia. That’s where our co-founders Vikas Nahata and Nikhilesh Goel started Validus to focus on bridging this funding gap between the SMEs’ requirements versus what the traditional lenders such as banks and finance companies are able to address. We hope to provide an alternative source of funding to SMEs to grow, in turn uplifting the lives of business owners, all the employees within that SME community and their families.
Sunrise Medium: How does your financial solutions offering benefit your customers?
Vishal: There are certain segments where banks don’t really play that effectively, including the speed, simplicity, and the access to enough unsecured lending. Each bank has their own appetite for the SME. For example, if a company is less than three years old, they may fail to get unsecured lending, so they’ll have to place collateral.
Even if a small SME is selling to a large corporation, the bank may not be able to efficiently grant them facilities. If they are able to do that, the process will be very lengthy and it can take a couple of weeks at least, if not months, for them to grant the credit facilities. The loan disbursement process can also be quite cumbersome, unlike a FinTech like us that can make decisions based on our risk models in a matter of a couple of minutes.
There is no doubt that Singapore banks are very efficient. They have driven digitization in a big way, but their focus and prioritization will generally always be retail banking or corporate banks, which leaves many SMEs a little bit lower down in priority. I would say all the three large local banks here (DBS, UOB and OCBC) all have very large and dedicated SME teams which serve the Singapore market. But these banks are regional, so what we see is a huge under-served and under-banked SME segment.
In a developed market like Singapore, there are still segments or industries which banks don’t target or prefer, such as construction, marine cargo and shipping. That’s where alternative lenders like Validus play a huge part in closing the gap.
Sunrise Medium: When it comes to cooperation with traditional banks, what are their attitudes towards FinTechs like Validus, and are there differences across ASEAN markets?
Vishal: Banks realize that going and building everything on their own is challenging, particularly for the smaller banks and the mid-tier banks. They may not have the resources, the capital investment or prioritization. The retail business is always the bigger business, so they partner with us where they come onto our platform and through us, they are able to lend to the SME. Ultimately, they have customers on their books and they are able to cross-sell other products.
A lot of the big banks or mid-sized banks also want to participate in the SME lending. They have a strategy now to work with FinTechs like us. We see banks collaborating as opposed to being competitors. Every bank has their own approach, but what we generally see is more partnerships between banks and FinTech.
Every market has its own different way of thinking. In Indonesia, our funding sources include traditional banks, digital banks, fund houses, asset managers and high net worth individuals. The banks, depending on the market, are actually our strong partner. They grant credit lines where they come on our platform as a lender and through us, they are able to reach the SMEs. We are the ones who do the credit processing and list the loan on the marketplace.
In Indonesia, banks participate as a lender on our Batumbu platform (Validus’ operating brand name in Indonesia), where they take the risk as well. We do the credit assessment, risk scoring, and list the loan on the marketplace. Then the banks will fund whoever they want to fund. In Indonesia, banks are the largest funding source we have. We don’t see them as competition.
In Singapore, there are only three large local banks and they’re very large. They have deep pockets, so they prefer to do things on their own. We have a USD 100 million facility from Citibank. That’s a securitized structure where they have granted that facility to us to onward lend to SMEs.
Sunrise Medium: How did Validus gain credibility and build strong partnerships with large corporations?
Vishal: Validus was founded in 2015, and our first loan was granted in Singapore in 2017. Our largest shareholders are Vertex Ventures SEA and India, and Vertex Growth. Vertex Holdings is a subsidiary of Temasek Holdings in Singapore. One of the partners at Vertex Ventures is also a Validus board member, and one of our early investors is FMO, a Netherlands based bank, which focuses on development financing, particularly for SMEs. All these built up our reputation.
Then our business started to grow. We started with SMEs who are suppliers to many large corporations in Singapore who are government owned, government linked, or professionally-run entities. Our business began with accounts receivable financing (invoice financing), where a small SME could be a supplier or a service provider to large conglomerates like Keppel, ST Engineering, SMRT or any of the government linked companies and large MNCs. As we grew our business, we kept gaining reputation. Subsequently we entered the Indonesia market, followed by Vietnam and Thailand.
For each of our overseas markets, we have a local joint venture partner. In Thailand, SCG (Siam Cement Group, one of the largest conglomerates in Thailand) is our local JV partner and we are known as Siam Validus. Similarly in Vietnam, we have our local JV partner TTC Group, which is a large conglomerate with businesses across agriculture, real estate, energy, and more.
Having somebody like Vertex as our major investor and then having JV partners in the three other markets, it demonstrates that Validus might be a startup, but has very strong investors backing us. In each of these markets, we have a strong local team who come with years of experience in banking and finance and have then chosen to move to a FinTech company to do things which we couldn’t do in a bank. That’s really the driver for many of us to move into the fintech space. Personally, I come from the banking and finance industry and I’ve spent most of my career in Asia. In large corporations or banks, you could be senior, but you may not have that flexibility to operate, and Validus offered me a platform to be an entrepreneur.
Sunrise Medium: What services does Validus provide to help companies solve their dilemmas?
Vishal: We are very much a credit-focused lending platform, and we focus on underbanked and the underserved SMEs. Our solutions target “household businesses”, which are individuals conducting business. Our customer could be a super small micro SME all the way to mid corporate SMEs. Most of our clients are in the sales turnover range of 0 to 10 million US dollars.
In terms of products, we started with supply chain financing (invoice financing and purchase order financing), and this is a big part of our business in Singapore. There could be small SMEs who are supplying manpower or are conducting technology servicing, technology outsourcing, so we can discount the receivable. There also may be SMEs selling to our corporate partners, including large buyers, multinational companies, government owned or a subsidiary of a government entity. In this case, the risk of payment is on the large corporation or the multinational or the government linked company. We then provide them with loans.
The second product is “corporate value chain products”. It’s on the distributor side. In Indonesia, there could be large brand owner manufacturers, such as multinationals like Unilever, or local companies like Yamazaki MyRoti, which is one of the largest food and beverage companies. Large corporations typically appoint their Level 1 distributors across the country, which are also fairly large in size. The turnover could be 5,000 or even more than 100 million US dollars.
Now, the space which the brand owner manufacturer sells to a Tier 1 distributor, is very well covered by banks. However, in markets like Indonesia, Vietnam, and Thailand, there is a long distribution chain. The Level 1 distributor may sell to a sub-distributor, who is then selling to a wholesaler, who then sells to the retailer, then lastly, sells to the consumer. This is a sweet spot where we would underwrite a sub-distributor or a wholesaler, just like a Level 1 distributor.
FinTechs like us would partner with the brand owner manufacturer or Tier 1 distributor, helping them to sell more by providing financing to their deep tier. Also, we would fund the sub-distributor when they are buying from the Level 1 distributor and grant credit to the wholesaler when they buy from the sub-distributor.
Thirdly, I am most proud and excited about our digital lending product. We started digital lending towards the end of 2021 when the COVID pandemic was still ongoing in Singapore. Our digital lending product is a very simple installment-based working capital loan product. We started with a 12-month tenor, where an SME can go onto our platform and apply for the loan. All they have to do is provide their credit bureau report and last 6 months bank statements. In less than 5 minutes, we can make a credit decision based on our proprietary AI-driven credit risk models.
To do this, we rely heavily on the government infrastructure, which has been built in terms of KYC information, so we can directly pull the information from the government records, subject to customer consent. This means our clients don’t have to upload their IC, passport, or provide company’s memorandum and articles of association. Thanks to the high level of digitalization in Singapore, everything can be easily pulled from the government database.
We then launched this product in Vietnam, where it took slightly more time because while our platform is ready, the government infrastructure is still in the process of digitization. Now we have also launched this as a pilot product in Thailand and Indonesia.
From left to right: Mr. Alvin Tan, Minister of State and Board Member of the Monetary Authority of Singapore (MAS), presents the award for first runner-up in Singapore Fintech category at 2022 SFF Global FinTech Festival Awards to Mr. Vikas Nahata and Mr. Vishal Shah, Group Chief Operating Officer at Validus.
Sunrise Medium: What are the new features Validus is working on and expanding at the moment?
Vishal: We have recently launched a new product only available in Singapore – a digital business account for SMEs’ banking needs. The business account also comes with free virtual SME corporate debit cards, which offer unlimited 1% cashback on all card expenses. SMEs can issue these corporate debit cards to employees as corporate expense cards for more efficient expenses management.
There are four basic features. One is the business account itself, and the whole onboarding journey is digital. Compared to going to banks physically to open an account, you go to the branch to meet face to face, maybe you get an appointment after two or three weeks. Even account opening is quite cumbersome. That’s where we developed a very simple and straightforward onboarding journey, following all the KYC requirements of the regulator.
The second is minimum balance. Most banks today still have a minimum 10,000 Singapore dollar balance requirement. If you don’t maintain that, they charge you a fee. For us, there is no minimum balance requirement.
Thirdly, a lot of banks in Singapore charge domestic fund transfer fees. If you live in Singapore and want to transfer money on the retail side, the fees are not there, but when an SME makes payroll or transfers money to another company, there is a fee of 50 cents for every payment transaction. We have done away with those fees, so all domestic fund transfers are free. In addition, businesses incur zero FX fees and enjoy better than bank FX rates when they use our overseas FX money transfers service.
Lastly, our SME corporate debit cards are an efficient expense management tool that saves time and rewards businesses with cashback. SMEs issue these cards to their employees for making online purchases, charging travel expenses, software subscriptions, and more. While banks take a long time to process and you may not be able to customize the limits on spend management, in Validus, everything can be done instantly on our app or platform.
We have a minimum marketable product every three months, and we keep enhancing our features every sprint. We’ve just launched a top up feature for our existing customers. If they have paid six installments on time, they do not need to give us any documents. Based on the Credit Bureau report, we are able to top up their loan. That is something which we’ve just recently rolled out, which makes it even more simple for a lot of our existing clients.
We keep improving our propositions where we want to make it very simple and seamless for our existing clients, especially for those with good track record.
Sunrise Medium: Please explain how your credit assessment can be this efficient and require lesser documentation compared to other banks? How do you integrate innovative technologies in the solutions?
Vishal: Through partnership with manufacturers, subject to the borrower’s consent, we have access to data to see how much the flow of goods is, and how their payment is coming to the Level 1 distributor. We then provide lending based on that. In traditional banks, SMEs would need to provide 3 years of financial statements, 6 months of bank statements, taxation records and other information. Whereas for us, the process is very simple. They simply apply on our platform, upload KYC documents, and we will make a decision on the same day.
We do see many cases where experienced professionals want to start their own business but have never borrowed. Singapore is a very well-banked market as a developed country. Everyone at least would have a credit product like credit cards. The beauty in this is that the company and the owner or the owners are fungible.
The company’s credit worthiness is very similar to the owners. We would check the owner’s individual credit history and credit performance via Credit Bureau Singapore. We look at their credit card history, if they have a mortgage loan, etc. We also look at their bank account, bank statements, business activity and more. Based on those information combined, we then use AI to develop our own proprietary risk models, which can decipher the information such as what their sales turnover is, what the free cash flow is, and whether they have the ability to pay.
We started with expert models, but as our data set keeps increasing and the client base keeps increasing, the models are learning and improving by themselves. That is what helps us to make a much faster credit decision.
Sunrise Medium: Validus is the first in the industry to innovate an AI-powered credit underwriting algorithm that makes underwriting decisions within minutes with just two documents. How do you ensure the fairness of the learning models? If there is a hidden bias, is there any mechanism to examine this?
Vishal: We have our own in-house data team consisting of data engineers, data scientists, and data analysts. They are in charge of 3 key pillars. One is to make sure the right data is available in the right format. Second is the development of the risk models, sales propensity models and predictive models. Third is to make the analytics available for business to make better decisions.
Specifically to the risk modeling team, all our team members are well-trained and experienced in the lending business. The model development roadmap generally starts with “expert rules”. From that, we then move into a credit model based on through-the-door population. Then we train the model to be self-learning, which is where AI comes in.
In many cases, we can buy information to further enrich and enhance the data set. That has been a long journey. We need to keep testing and learning, so that it will move from an expert model to a validated model, and then to a self-learning model.
Regarding the bias, I would say it’s a huge topic by itself. Let’s say you’re targeting medium-sized companies, but the algorithm is developed on a data set, which is for real small companies, it will not give you the right results. Similarly, if the data set is for the food and beverage industry, we cannot apply that in the construction industry, or it’ll give you very crazy results. Therefore, we have to have expert judgment depending on the industry or the size of the company. That’s where our proprietary technology comes in, and of course we keep learning as the client base increases.
Sunrise Medium: Could you describe an example where you helped a SME with loans and they then made great progress in that industry?
Vishal: The trust bond we had with our clients is very strong since we helped them when they were very small. We have many successful cases where our clients started as an SME and then became corporate clients of banks. Some of them started as our borrowers but then they became so large that they turned into our corporate partner.
One of our large clients now was very small and they were supplying manpower and cleaning services to one of the largest MRT and bus operators SMRT, which is our corporate partner. This company was very small, started with less than 10 people. Today they have a 10 year contract with SMRT and their turnover is more than 10 million US dollars.
After five years, they are still our customer, and we help them grow through the journey. We helped them when they didn’t have a track record. We approved their loans because they were appointed by SMRT and they had raised invoices from them. That’s where we provided them accounts receivable financing. After that, the company won awards from other transport operators in Singapore (SBS Transit). They also provided cleaning services to some of the largest real estate investment trusts, who have many commercial properties.
We were able to offer them not just supplier finance for SMRT, but also funding for their account receivables from other large companies. Lastly, we gave them a certain working capital facility for their day-to-day operations. As a growing company, they have many more employees and sometimes they need to hire more manpower as well.
Till now, this company already has offers from other banks, but they still stay with us because of their loyalty, and also because of how smooth and simple our lending process is. Whereas in banks, they can take a long time to disburse a loan or grant credit.
Sunrise Medium: What are the challenges you encountered when driving a solution or service?
Vishal: We have a couple of ongoing challenges. Firstly, since we’re in multiple markets, we have to customize our products to suit markets’ needs. Singapore is more of a development and knowledge center.
Secondly is our risk models. When we enter a new market, we don’t have the local data set and the experience, so we have to start with certain expert judgment and rules-based decisions. That’s where a strong local team who has worked in the market comes in, and I would say this is a challenge for any new player.
Thirdly is the funding sources in different markets. In some markets, the funding is available; in some markets, the funding sources would come from local retail, high net worth investors, banks and other finance companies. When we start operations in a new market, it takes a couple of years to develop our reputation.
Having a pan-ASEAN presence does help us to leverage on the track record of another market. The same investor may want to invest in different markets. A lot of the Japanese conglomerates, even development banks like FMO in Europe, want to grow in Southeast Asia in the SME segment. That’s where we work with them to either directly lend on a platform or have a structure where they would lend through us to the SMEs.
As of now, we have no immediate challenges, but one external challenge is if the credit cycle turns around, or if we have something like a COVID lockdown again, that’s clearly going to put a lot of pressure on a lot of SMEs in terms of their business and cash flow.
Also, high interest rates are a challenge as well. Interest rates have increased significantly in the United States and Europe, and even in Singapore. However, in a lot of our other markets like Indonesia, Vietnam and Thailand, the interest rates are flat or in fact reduced. That creates a very different and difficult situation where developed market interest rates are quite high and therefore the currencies also keep appreciating. If the interest rates in the developed world remain higher for much longer, a lot of Asian countries may have to eventually start increasing interest rates if inflation increases in the Asian markets, which makes it more difficult for SMEs to service the loan.
Sunrise Medium: Granting loans to SMEs can be quite risky, how does Validus diversify the risk?
Vishal: We have our own risk model to evaluate the individual companies’ risk. For lower risk products such as supply chain financing, we can grant higher limits. But for our digital lending products, the ticket sizes tend to be much smaller. Also, we have a very granular exposure, we distribute our risk to thousands of SMEs, and since we’re in four markets, that diversifies our risk more. That way, our exposure is not limited to one market, product or industry. Our risk is spread across multiple industries and thousands of SMEs, and across four markets. Ultimately, this is a risk taking business and if it’s easy, every lender would do this.
Sunrise Medium: With more and more platforms and traditional banks integrating AI into their services, what makes Validus stand out from the competition?
Vishal: We have a clear value proposition to be efficient and simple. We won’t be the cheapest lender, but we have a very user-friendly interface and customer experience. The application process is simple and we make a decision very quickly. We do see a very high repeat ratio, where 90% of our existing clients keep coming back to get more credit or top up their loans.
In addition, from a market perspective, Validus is a well-established and trustworthy FinTech in the SME lending space. We are backed by very reputable investors. SMEs take trust into huge consideration because nobody wants to start a relationship with someone you don’t know if they are committed to do business with SMEs. While some banks put their focus on customers in technology fields, our focus and strategy is to serve the underbanked and the underserved SME and their ecosystem in Southeast Asia.
Sunrise Medium: What is your global market strategy? What are your future expectations and plans?
Vishal: Our plan is to do more of what we are doing. Firstly, we want to double down on our existing markets and grow the business further. Next, we do see a lack of support for micro SMEs and the household segment. They are truly the underbanked and underserved. In Indonesia, there are 60 million businesses, who are essentially individuals running a business. In Vietnam, the number is between 6 to 7 million. Most of the banks in the SME division do not target them.
The retail banking division in most banks would focus more on individuals who are white-collared employees, not specifically businesses who are very small in size. That’s where our digital lending product which targets micro SMEs comes in. Lastly, we may look at geographic expansion into the Philippines and Malaysia over the next few years.
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