To understand the financial system’s “missing middle” problem, think about a local plumber known for making late-night house calls when the pipes freeze. That plumber may be flush with hard-earned knowhow about pipes but, even after years in business, may not understand the difference between assets and income, says Patrick Reily, co-founder of small business lending data startup Uplinq, a participant in Mastercard’s Start Path program. To a household with a leak, this is a non-issue. But for a bank, untidy accounting can make it harder to assess a business using traditional underwriting inputs and cost-wise not worth the effort to evaluate manually.
Even though small and midsized businesses account for about 90% of the world’s firms and approximately 70% of jobs¹, they continue to struggle to access the capital needed to grow. Too complex for the highly automated system of consumer borrowing and too small to justify the costs of traditional commercial underwriting, many are left underserved.
Based on Uplinq research, the unmet borrowing opportunity now totals an estimated $10 trillion in the U.S. alone. Drawing on that research, Reily notes: “In the U.S., big businesses borrow $2.52 for every dollar of economic activity they produce. For small firms, it’s just four cents.”
Allan Gonzalez, Director, Enterprise Credit Risk, at Mastercard, notes that access to capital for small businesses has been a challenge for decades even as technology has improved many aspects of finance.
"The financial industry has not lacked innovation,” he wrote in a recent report on how to scale small business lending. “It has lacked integration."
What’s needed, he argues, is a move away from lending practices he describes as ‘artisanal,
individualized and time-consuming processes that rely on paper forms and traditional information sources, such as tax returns, toward a more easily scaled approach that incorporates many more data points and a seamless architecture.
Today’s lending ecosystem, says Gonzalez, is similar to a strip mall, with each location providing something useful to lenders who want to serve the missing middle. One might help a lender verify a borrower’s identity, another might help monitor the health of a loan portfolio. But as with the tae kwon do studio and the pizza joint next door, they don’t work in tandem with one another, raising costs and putting off financial institutions from trying to close the lending gap.
“There are countless fintechs out there saying we can solve access to capital,” Gonzalez says. “But they’re only solving one piece of the puzzle. What we need is an ecosystem of different players all working together, doing what they do best, but in a chain that’s connected.”
Mastercard’s work with Uplinq illustrates the point. Reily’s co-founder, Ron Benegbi, says he was inspired by his father’s experience as an immigrant whose dream of opening convenience stores came true only after a local banker overrode his underwriting department to extend a $5,000 loan based on gut instinct. “How can we help small business lenders better assess and evaluate risk through a new lens?” Benegbi wondered.
To solve the problem, Reily and Benegbi created a credit scoring platform that incorporates a range of information about would-be borrowers, going so far as to include satellite data that might, for example, show if an office building is fully leased or if delivery trucks are busy.
“Long before a business has the opportunity to borrow and build a strong credit profile, we can already see signs of strong performance,” says Reily. “These insights help lenders better understand that underlying business strength.”
Mastercard is helping enable this shift toward a more connected lending ecosystem. Its Credit Intelligence suite brings together borrower‑permissioned transaction-based insights that can be used along with other lender inputs, to give a more complete view of business performance that supports better credit decisions.
Adding in technology for disbursing funds and monitoring loan performance, among other tasks, creates the level of automation needed for lenders to serve small businesses as scale.
“When you invest in small businesses, everyone wins,” says Gonzalez. “Small businesses don’t stay small; they become the next generation of enterprise.”
