Reducing Loan Costs with Technology
Approximately five million household businesses nationwide significantly contribute to the economy. These businesses encompass a variety of sectors, including retail, handicrafts, small-scale manufacturing, and essential service provision for everyday needs, as well as agricultural, forestry, and aquatic product processing.
Under current classification, household businesses are typically owned by individuals, groups, or families and employ fewer than ten workers. Smaller entities include farming families, street vendors, and low-income service providers who are not required to register their businesses.
However, accessing financial services remains challenging for this group. Credit institutions (CIs) often enforce stringent evaluation processes with complex regulations to meet high safety standards. Consequently, most household businesses find it difficult to access traditional financial services from CIs. It's understandable, as CIs cannot lower lending standards and take on undue risks to accommodate these entities.
This issue of capital shortage for household businesses is not unique to Vietnam but is a global challenge. A survey of 1,000 newly established SMEs worldwide, who sought loans within the past five years, identified that the primary barrier to accessing credit was the lack or absence of collateral, affecting 67% of respondents.
How have other countries addressed this issue? They have developed specific funding channels for SMEs through close cooperation between CIs and fintech companies. While CIs possess rigorous operational procedures, fintech companies leverage their technological strengths to provide diverse data sources, creating a comprehensive ecosystem that facilitates quick, efficient, and safe credit decision-making.
Research by Ernst & Young indicates that the cost of lending to an SME through traditional CIs ranges from $100 to $300 per loan. In contrast, utilizing fintech platforms can reduce this cost to between $5 and $35, a reduction of up to 95%.
In Vietnam, the number of bank branches per 100,000 people is relatively low, around 3.5 branches/100,000 people, compared to 9-15 branches/100,000 people in South Korea and other regional countries. Therefore, geographical coverage must be improved, and currently, only technology can address this issue effectively.
Finviet, with its Eco e-wallet, has focused on digitizing the distribution and retail system, enabling grocery and retail businesses to access CIs for small loans, typically ranging from 10 to 20 million VND per household. During our implementation, we found that business owners and retail store operators urgently needed capital to expand. This is where Finviet aims to act as an "extended arm" of the CIs.
With the government recently issuing Decree 52/2024/ND-CP on non-cash payments, replacing Decree 101/2012/ND-CP, along with the 2024 Law on Credit Institutions, the legal framework for non-cash payment activities, including opening and using payment accounts, non-cash payment services, intermediary payment services, and the management and supervision of payment systems and fintech companies, has been updated and supplemented. However, we believe that current regulations still do not fully cover market needs or exploit the full potential of fintech development.
For more significant breakthroughs, state regulatory agencies should promptly complete and implement a controlled sandbox mechanism. This mechanism should allow CIs to closely collaborate with fintech companies in executing the National Comprehensive Financial Strategy. It should also permit technologically and financially capable organizations to participate in the small-scale capital market through digital and technologically advanced banking models.
When implemented, these entities will gain access to modern, comprehensive, and widespread financial services at lower costs, contributing effectively to achieving the goals of the National Comprehensive Financial Strategy.
The Role of Fintech in Economic Development
The role of fintech in economic development is crucial. By leveraging technology, fintech companies can streamline the process of loan approval and reduce the operational costs associated with traditional lending. This cost-efficiency is particularly beneficial for small and medium-sized enterprises (SMEs) and household businesses that typically struggle with accessing affordable financial services.
Digital transformation is a key enabler of financial inclusion. By digitizing financial services, fintech companies can reach underserved populations in remote areas. This includes providing access to savings accounts, insurance products, and investment opportunities that were previously out of reach for many.
The integration of fintech solutions into the financial system can also enhance transparency and accountability. Digital records and transactions provide a clear audit trail, reducing the risk of fraud and ensuring that financial activities are conducted in a fair and transparent manner.
Despite the promising potential of fintech, there are several challenges that need to be addressed. One of the main challenges is building trust among users. Many individuals in remote areas may be unfamiliar with digital financial services and may be hesitant to adopt new technologies.
To overcome this, it is essential to invest in financial literacy programs that educate people about the benefits and uses of digital financial services. Additionally, fintech companies must ensure that their platforms are user-friendly and accessible to people with varying levels of digital literacy.
Another challenge is the regulatory environment. While recent changes in the legal framework have been positive, there is still a need for a more flexible and supportive regulatory environment that encourages innovation while protecting consumers. The implementation of a regulatory sandbox can provide a controlled environment for testing new fintech solutions and ensuring that they meet regulatory standards before being rolled out on a larger scale.
