The Moment Is Now for Alternative Lenders to Innovate in Under Digitalised Verticals

Hong Kong is a city which continually reinvents itself evident by the perpetual construction works across the city’s skyline. It stands as one of the world’s most costly construction markets according to the International Construction Market Survey (ICMS) 2024 report. Yet behind the skyscrapers and cranes that grace the city’s skyline, is a major financing challenge.

A growing working capital gap running into hundreds of millions of dollars burdens construction contractors and subcontractors alike. Delays, back-to-back payments, and escalating expenses have created a complex web of challenges, squeezing profit margins and straining liquidity. Working capital financing options have been slim pickings as construction is still largely paper-based and as a result is often poorly understood by lenders. This has resulted in slow approvals, directors putting up their homes as collateral, or turning to high-rate money lenders. With rising inflation, the impact of this working capital gap has bled into society with delayed worker payments and struggling firms.

While working capital challenges in digitally native verticals such as eCommerce have attracted substantial innovation and capital from fintech, under-digitalised verticals such as construction and shipping, have been left behind. However, the game is changing as rising competition and recent advancements in technologies presents a unique multi-billion-dollar, blue ocean opportunity for fintech companies and financial institutions, not only in Hong Kong, but globally.

Right Place, Right Time

We’re in an era where data is king. Fintech and financial services companies can leverage data to assess risk, develop and underwrite lending products. In the alternative financing space, the low-hanging fruit has naturally gravitated towards digital-native verticals such as eCommerce or digital media. In Hong Kong, Asset-Backed Securitisation deals in their hundreds of millions were secured in 2024 to serve the cross-border eCommerce segment alone, with one firm locking in US$500 million. This is natural given eCommerce generates masses of structured data that are highly organised and readily interpretable data by machine learning algorithms.

On the other hand, the traditional nature of verticals like construction means many processes remain largely paper-based, resulting in significantly less structured data. Projects still generate substantial unstructured data which encompasses information lacking predefined structure and semantic models. The challenge with unstructured data is the difficulty and thus cost, to capture, organise and analyse. On a construction site, this might include field data for instance text, mobile activity, blueprints, schedules, photos and videos.

This is why digitally native verticals have attracted substantial capital and investment, but with it, competition. It might also explain why we have not seen fintech companies broaden their coverage beyond the likes of eCommerce and into under-digitalised verticals. However, advancements in technology in recent years is lowering the cost and complexity of addressing under-digitalised verticals.  

The Size of the Opportunity

Taking construction as a prime example, the size of the opportunity in addressing the working capital gap is substantial. In Hong Kong alone, we estimate that US$6.9 billion remains locked in the construction supply chain annually, hindered by paper-based processes and a lack of insightful data readily available to subcontractors and suppliers. In the U.S., the financing gap is an estimated US $100 billion while in Europe, this is as much as US$210 billion annually.

While technology is a key factor, it is by no means the panacea. A vertical like construction is an inherently unique and intricate operation. It is riddled with unique processes, scope changes and complex workflows that affect cash flow dynamics.

Technology, Understanding and Tailoring

For fintech companies to succeed addressing these verticals, a combination of harnessing advanced technologies, deep industry understanding and highly tailored financial solutions is needed.

From a technology standpoint, machine learning and natural language processing are essential to processing unstructured data, such as contracts, invoices, schedules, and site photographs, into actionable insights. Artificial intelligence can help fintech assess creditworthiness, underwrite loans, and manage risk more effectively. Meanwhile, blockchain can help provide transparency, traceability, and facilitate trusted data exchange.

In construction, many suppliers and subcontractors are small or medium-sized enterprises (SMEs) with limited resources. Cloud-based platforms with affordable subscription models can offer flexibility and scalability in this regard. When paired with intuitive user interfaces, it can enable SMEs to adopt digital financial solutions without significant upfront costs.

Another consideration is the complex nature of construction requires highly tailored solutions that account for irregular cash flows, milestone-based payments, and project delays. There is a demand for carefully considered, tailored financing products including progress-payment loans, invoice factoring or supply chain financing, that reflect the realities of the vertical.

Finally, traditional industries often have a close-knit circle of trust. As an outsider, fintech companies may find their biggest challenge is earning trust. In this regard, partnering with industry associations and established contractors to gain deeper insights into the ecosystem can help build credibility. Collaborations with technology providers already serving the sector such as those offering procurement software, can also provide valuable data and insights.

As economies across the globe continue to evolve, the demand for innovative financial solutions in particularly in under-digitalised, under-served verticals will only grow. It will be the fintech companies that position themselves as partners in this digital evolution, helping verticals like construction overcome their financing challenges, that stand to gain not only market share but also a pivotal role in reshaping how these verticals operate. In a world where competition in digital-native sectors is growing, venturing into less-explored verticals offers a promising blue ocean opportunity for fintech companies ready to innovate.