Colombia-based OmniBnk provides SMEs in Latin America with a fully digital alternative to the slow, traditional bank business loan process. Its platform is able to extend lines of credit to SMEs by evaluating a company’s financial health within minutes using real-time data. Robin Arnfield reports
There is a massive opportunity for digital fintech B2B lenders such as OmniBnk, as Latin American banks focus on lending to large companies, and their underwriting and risk management systems aren’t set up for loans to SMEs.
“If banks do lend to small businesses, they just provide a very small loan and take months to process an SME’s application,” says Diego Caicedo Mosquera, OmniBnk’s CEO. “Banks lack tools to assess the risk of an SME, so they use the same process for underwriting a $100 million loan to a corporate that they use for SMEs. This means the cost-to-revenue ratio for the bank is non-existent in the SME lending sector.”
According to OmniBnk, banks can’t lend to SMEs in Latin America for the following three reasons: a lack of any way to evaluate SME risk; high origination and servicing costs; and a lack of hard assets as collateral.
OmniBnk: international expansion plans
Currently, OmniBnk is active only in Colombia and Chile, but plans to expand its services to Mexico and is looking at some other Latin American countries to enter in 2020 such as Brazil and Peru. Ultimately, OmniBnk aims to provide SME loans across Latin America and become the region’s equivalent to US small business lender Kabbage.
During 2019, OmniBnk originated $250m worth of loans to around 2,500 SMEs, and aims to have 5,000 borrowers on its books in 2020. It has a wide spectrum of different types of businesses on its books. As of early December 2019, OmniBnk had raised $5.4m in venture capital investments, led by Latin American fintech investment firm Magma Partners.
LatAm SME market is getting crowded
Latin America’s small business lending market is getting crowded. “There are many competitors to OmniBnk in Latin America for SME loans, receivables finance, and payables finance,” says Patricia Hines, Celent’s head of corporate banking.
“Some of the more well-funded fintech lenders include Konfio (Mexico), Afluenta (Argentina, Mexico, Peru), and eFactor Network (Mexico). Receivables finance is an attractive alternative to short-term loans, whether supplied by bank or non-bank providers.
According to The Cambridge Centre for Alternative Finance 85% of alternative lending in Latin America and the Caribbean (LAC) is business-focused. Business lending in LAC grew 142% between 2016 and 2017, amounting to $566m lent to 25,639 businesses in 2017.”
LatAm B2B lending major deals
The Latin American B2B lending sector is attracting the attention of major investors. In August 2019, Goldman Sachs provided a secured credit facility of $100m to Konfio. Then in December, Japan’s Softbank Group led a $100m investment in Konfio in the Mexican firm’s fourth financing round, Reuters reported.
In August 2019, another Mexican B2B lender, Credijusto received $42m from Goldman Sachs, Point72 Ventures and other investors, with Goldman Sachs providing a credit facility of up to $100m to Credijusto in March 2019.
OmiBnk operates in the accounts receivables finance space, allowing companies to receive early payment on their outstanding invoices. In 90% of loan applications, OmniBnk is able to make a same-day credit decision. All credit supplied to its clients is securitised, with a lien taken on their future receivables.
OmniBnk offers three financial products and one data product.
OmniPay confirmed receivables financing. In a confirmed receivables transaction, the buyer, also known as the obligor, provides validation that an invoice submitted by the supplier is accurate, effectively confirming their obligation to pay the supplier for the underlying goods or services delivered;
OmniCash, unconfirmed receivables financing: OmniCredit, pre-invoice financing, effectively working capital finance; and OmniGrid, an analytics platform for OmniBnk’s clients.
Lending 100% driven by alternative data
Because in many Latin America countries, tax authorities mandate that businesses file e-invoices with them, OmniBnk is able to base its credit-scoring on this publicly available information.
“Our lending system is 100% driven by alternative data,” says Caicedo Mosquera. “We don’t depend on any of the financial statements that a bank would use, as we rely 100% on tax returns, invoices, and social security information to assess and create a loan of up to $1m for an applicant.
Around 90% of our clients are ‘thin-file’ applicants, which means there is little or no information on them at credit bureaux.”
Caicedo Mosquera says that OmniBnk’s data-driven approach is similar to Kabbage’s in the US. “We look at everything that our loan applicants buy and sell as well as their financial relationships in order to build a comprehensive data model,” he says.
“For example, who do they owe money to, and what have they bought from their suppliers? Has a client worked with its suppliers for a long time, or has it just started working with them, in which case it might have some operational issues.”
“A user-friendly, efficient, decision engine can lower the cost and improve the accuracy of credit decisions while providing small businesses with immediate funds,” says Hines.
“A digital platform eliminates traditional paper-based processes such as faxing invoices or mailing paper documents to the lender. The best measure of success of OmniBnk’s technology will be its accuracy in predicting the creditworthiness of borrowers over the long term.”
OmniBnk: tech winners
“We first invested in OmniBnk in 2017 after they won our regional fintech competition,” says Magma managing partner Nathan Lustig. “We have since followed-on twice because the OmniBnk team and their tech are clear winners. They’ve created a solution that not only has the potential to help millions of SMEs access credit at fair rates, but also could become a billion-dollar business.
Latin America leads the world in electronic invoicing and tax payments, which gives OmniBnk access to thousands of data points that enable them to analyse SME risk faster and more accurately than anyone else on the market today.
OmniBnk has a multi-year lead creating machine learning models that will help create global credit scoring for SMEs, democratising access to finance for millions of entrepreneurs around the world.”