[Viewpoint] The Need to Promote Credit Evaluation Services for Small Business Owners

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

[Asia Economy] The sales slump of small business owners caused by the novel coronavirus infection (COVID-19) is raising concerns about loan defaults in the financial sector. Despite the recent base rate cuts, loan delinquencies among small business owners using high-interest loans due to low credit ratings are increasing. The delinquency rate on personal business loans at savings banks in the first quarter of this year rose to 4.6%, up 0.3 percentage points compared to the same period last year. Accordingly, savings banks are concretizing efforts to strengthen risk management in preparation for potential loan defaults. From the second quarter, savings banks have reduced loans to vulnerable borrowers, lowering loan approval rates to below 10%. After the effect of the emergency disaster relief fund disappears in the second quarter, the loan conditions for small business owners are expected to worsen further. Ultimately, credit enhancement measures are urgently needed to expand loans to small business owners.

Recently, a financial service that supplements insufficient credit information to enable small business owners to receive reasonable financial benefits has been launched, attracting attention. A so-called credit evaluation (CB) service providing reasonable credit ratings for small business owners was recently introduced by domestic credit card companies. This service calculates the likelihood of business suspension or closure and the expected bad debt loss rate of small business owners by combining borrowers’ financial and non-financial information, made possible after the revision of the Credit Information Act, and provides this to financial institutions so that small business owners can obtain loans at lower interest rates.

CB services have already been introduced by fintech companies in the UK and the US. In Korea, the introduction of such services was delayed due to regulations under the Data 3 Act, so to assist the future launch and activation of various forms of CB services, we will examine representative advanced cases. First, the UK’s Iwoca service is a prime example. Iwoca is a CB service provider targeting small and medium-sized enterprises. Launched in 2012 as an online lending platform, Iwoca sets appropriate interest rates based on credit ratings analyzing the business viability of small business owners such as retailers, restaurants, and hotels across Europe. It offers loan products with lower interest rates than existing loans based on sophisticated credit analysis for low-credit borrowers.

MoneyLion, established in New York in 2013, also rationally assessed borrowers’ credit ratings through credit rating monitoring services. MoneyLion encourages financial consumers to subscribe to a free credit score monitoring service that offers interest rate reduction benefits as incentives. The diverse customer data collected through the service is utilized to assign precise credit ratings using machine learning technology.

Credit Kudos, founded in the UK in 2015, provides accurate credit score estimates using consumer transaction data regardless of income level. This company’s service is well-known for rationalizing credit scores required for loan screening and approval through data analysis reflecting consumer spending habits.

Petal, a tech start-up established in New York in 2016, issues credit cards to financial consumers who have difficulty obtaining credit cards due to lack of credit scores. Petal’s service is characterized by segmenting customer grades to offer annual interest rates ranging from 14.74% to 25.74% and credit limits from $500 to $10,000. Additionally, Petal provides credit history opportunities to low-credit consumers by launching credit cards without overdraft fees, annual fees, or late payment fees.

CB services are expected to play a positive role in analyzing the non-financial information of low-credit small business owners with insufficient financial history, thereby alleviating borrowers’ financial burdens. In particular, credit card companies equipped with detailed customer information and competitive machine learning systems are likely to gain a relative advantage in the CB service sector. CB services, which enable reasonable credit rating assignments through sophisticated credit evaluations, are expected to contribute to reducing small business owners’ financial costs by lowering loan interest rates and preventing loan defaults for financial institutions. We look forward to the rapid launch and activation of various forms of CB services.

[Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University]