Digital Financing Vs. Traditional Banking

Digital financing has revolutionised access to funding by making access to financing easier and more convenient. However, traditional banking is still the financial behemoth of old, with a recent survey finding that 69% of Singaporeans prefer it over digital ones.

This article looks closely at the intricacies of digital financing and traditional banking, their differences, and their benefit to small business in Southeast Asia.

Table of Contents

The Uptrend of Digital Financing Amongst Small Businesses

While traditional banking is an excellent funding source, that does not ring true for small businesses. At 46%, East Asia and the Pacific have the most considerable portion of the world’s micro, small, and medium enterprises (MSME) funding gap.

Traditional banking has rigorous application requirements, requiring applicants to have a lengthy credit history, which most MSMEs do not have. That provided the perfect platform for digital financing to thrive and plug the region’s funding gap.

Digital financing platforms, along with other financial technology firms, make up the 40% of all FinTechs in Southeast Asia who had their base in Singapore at the end of 2020. That placed Singapore fourth worldwide, behind New York, London, and San Francisco.

The industry registered an annual 5.7% value growth between 2016 and 2020, against a target of 4.3%.

Digital Financing and Its Benefits for Small Businesses

Digitalisation in finance refers to the use of digital devices such as computers, smartphones, apps, and software to access financial services.

Small and medium enterprises (SMEs) benefit massively from digital funding. For instance, 72% of SMEs in Southeast Asia saw an increase in revenue after utilising digital finance. Here are the other benefits of digital financing for SMEs:

Ease of access to funding, with rapid loan inception, approval, and disbursement
Minimises risk of loss and theft associated with transacting in cash
Cost-effective
Boosts efficiency and reduces human error

Finance digital transformation brings financial services to underserved communities.

Digital Financing vs. Traditional Banking

1. Accessing finance

Digital financing is convenient as customers can apply for loans online, wherever they are. As for traditional financial institutions, clients must visit a bank branch to receive funding.

Traditional banking customers endure a lengthy application process compared to digital financing, which involves filling-in voluminous documents. Conventional banks take longer to approve funding, while digital financing can release the funds in as little as 24 hours of application.

2. Traditional banks are stringent

Securing working capital and short-term loans from a conventional bank is a tall order for most small businesses. Traditional banks generally reject many SME loan applications because of reasons like the lack of collaterals to pledge.

However, many digital financiers offer SMEs funding with less strict qualification criteria as most MSMEs do not have long credit history. To plug the gap, digital lenders use non-traditional data to complement underwriting, such as transaction information, online reviews, and supply chain data.

3. Vulnerability

Digital financing providers are newer and less established than traditional banks, which some might consider risky, but that enables them to be more dynamic and innovative in comparison.

Is the Future of Small Business Financing, Digital?

Artificial intelligence, big data analytics, cloud computing, and machine learning have given digital finance a wealth of new capabilities. Digital banking Singapore firms are making steady progress toward their ultimate goal of changing the funding landscape.

Similarly, customers of digital financing platforms get to enjoy the convenience and ease of accessing funding and a wealth of financing knowledge provided by the digital lenders.

Small businesses will stand to benefit from jumping on the digital bandwagon. Interested in exploring business financing options for your business? Check out our financing solutions below.

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