Innovation in MSME Finance: First Circle in the Philippines
The vast majority of businesses in the Philippines — 99% or more — belong in the micro, small, and medium (MSME) category. However, the same does not hold true for business loans. Filipino banks’ products and services aren’t geared toward the needs of MSMEs. According to the Asian Development Bank, the Southeast Asia region has an unmet demand for SME capital of $50 billion. There, as in much of the world, there is a perception that small businesses are costly and risky to serve due to their small ticket size, lack of credit history and collateral, and in some cases remoteness from bank branches. Moreover, when banks do fund MSMEs, they only offer longer-term loans, typically require collateral, and have a slow and long approval and underwriting process. Most small businesses require shorter-term loans that match their working capital cycles, particularly as they look to fund inventory, purchase raw materials, and finance growth.
The lack of traditional financial institutions in this space presents opportunities for fintech companies to develop solutions, as highlighted in our recent publication Bridging the Small Business Credit Gap Through Innovative Lending. In the Philippines, one such company is First Circle, founded in 2015, which has developed a digitized lending platform for small businesses. Its proprietary software leverages alternative data sources, allowing it to make quick decisions on loan applicants’ creditworthiness. Its clients, predominantly small retailers that have a presence in the metro Manila area or that sell through one of the e-commerce platforms in the Philippines, can apply for funding online and can be approved and receive funds in a matter of days.
The efficiency of its technology, use of varied data sources, and partnerships with e-commerce platforms, payment gateways, and other enterprises allows First Circle to acquire new customers relatively affordably and at scale. It also has automated systems covering the entire customer lifecycle, from application to data access for underwriting and even loan contracting, enabling quick and affordable disbursals of loans to customers.
In an interview with TechCrunch in April 2017, at the time First Circle and Accion Venture Lab announced their partnership, CEO Patrick Lynch explained that First Circle’s loans are underwritten by a credit pool supplied by a mix of asset managers and family offices.
As First Circle looks to accelerate its growth, Tahira Dosani and I recently flew to Manila to work side by side with the team, digging into a number of forward-looking opportunities, including optimizing customer segmentation strategy; refining value proposition, messaging, and channel strategy; and developing a credit policy and ensuring processes are in place to manage its risk.
The First Circle team is incredibly passionate about solving customer pain points and creating a world-class customer experience. They have also been very thoughtful about investing in fundamentals, such as building a strong technology infrastructure, which will become increasingly critical as they scale.
Looking to the future, First Circle is focusing on further developing its digital platforms and building a solid customer base in the Philippines, which offers ample potential for expansion. The market’s biggest opportunity continues to be using new or alternative sources of digitized data, such as e-commerce data, to better understand and underwrite customers. We are excited for First Circle to harness the potential of alternative data points and further broaden access to underserved SMEs in Southeast Asia. We look forward to continued collaboration with First Circle as they progress to their next stage of growth.
This article is part of our global series on MSMEs in seven key countries where we work. Read the paper Bridging the Small Business Credit Gap Through Innovative Lending or check out the series.