Industry experts identified key trends for 2022 and beyond, which they shared in the Trade Ledger Business Finance Predictions 2022 report. Which ones really matter to your organisation? How can you capitalise on them? We look at these trends, and the most effective ways to deliver for your customers – and your bottom line.
Keeping up with customer demands, managing risk, staying profitable, using the right technology, and working with the right partners, is a complex balancing act. In the business finance industry, five strong upcoming trends emerged from the industry experts who contributed to our report:
Since banking first went online in the 1990s, banks and lenders have been digitising. To start with, it wasn’t so much digital transformation as digital transition, as legacy core systems and processes couldn’t be jettisoned or sidestepped. Consumer banking has now gone through a dramatic transformation and the customer experience is largely digital. But business banking is a decade behind and lenders need to catch up in a hurry if they are to survive and grow over the coming years.
The transformation of consumer banking has shown us the difference between digitisation and digitalisation in finance. We know that digitising a layer on top of legacy systems isn’t enough, as it results in customer journeys that switch between digital and manual. For example a customer might be able to fill in a form online, but then have to print it out for a wet signature and either scan or mail the form. It’s awkward and time-consuming compared to a fully digitalised journey.
To catch up, or even race ahead of consumer banking, business banks must have digital as the cornerstone of their strategy – digitalised banking. This is the new world of tech-enabled, data-driven lending which relies on specialised platforms, APIs and other data feeds, cloud hosting and hyper-connectivity. It coincides with the opportunity for banks to procure this technology through licensing arrangements instead of the traditional buy and build options, giving banks unprecedented flexibility and access to innovation. They can partner with providers of purpose-built technology like Trade Ledger, to get the tools that best match what they want to deliver for their customers.
This business model can be referred to as componentised, composable, or modular banking. It’s something we do ourselves on our business lending platform. Instead of inventing our own version of solutions for certain capabilities, we integrate with other best-in-class providers like Microsoft Dynamics 365, Mambu, Codat and DocuSign – which are widely known, used and trusted by banks already. There’s more about componentised banking in the Business Finance Predictions 2022 report, page 32.
The Trade Ledger platform provides bank-grade lending as a service (LaaS). It supports new lines of business that are being set up from scratch, like Green Loans or Buy Now Pay Later (BNPL) solutions, or replaces legacy processes for more traditional products like term loans, overdrafts and invoice finance by slotting into your existing lending infrastructure.
It’s been designed from scratch to support all forms of commercial lending:
It will set your business up for the future of data-driven lending.
What do business borrowers want from their provider?
Cost isn’t, for once, high on the list of requirements. Martin McCann, CEO and co-founder of Trade Ledger, says:
"It’s not about cost. Business banking isn’t a cost-sensitive market – it’s an experience-sensitive market.”
Lenders clearly have a mandate to focus on the customer journey.
Typically it takes 30 hours of work to apply for a business loan at present, and it can be 30 to 120 days before initial drawdown. This represents a huge opportunity cost for both borrower and lender. Many successful businesses don’t even qualify, thanks to the outdated way their risk is assessed, particularly since the pandemic – the past two years’ performance may give no indication at all of what a company will be capable of now. Of those that do qualify for a lending facility, there’s a considerable risk they will end up with the wrong product due to being overwhelmed by the range of complex solutions and tiresome application journey.
This is where the Trade Ledger lending platform can be truly transformative.
Lenders using the Trade Ledger platform say they have originated million-dollar finance, from application to drawdown, in under 24 hours.
How can it be this fast?
Here’s how it works. Borrowers tap in a few details, and grant consent to access to their bank account and accounting records. The platform acquires and analyses relevant data automatically, and generates assessments and recommendations for factors such as debt serviceability and dilution, according to the lender’s risk policies. It presents these to the BDM or underwriter, who can either take further mitigation actions or decide straight away to progress the application.
The borrower can now spend more time thinking about how to use the loan than actually applying for it.
For your employees, all the documents and information they need are in one place rather than being spread among emails, folders and spreadsheets. The platform is highly configurable, so you can build in your own workflows and create tasks on the fly for more complex businesses or funding requirements. Banks’ staff users are guided through the process at every stage, with simple prompts and notifications delivered straight to the screen or their inbox.
Much of this can be automated:
And the benefits can be significant:
Risk assessments that draw heavily on historical indicators, such as previous trading performance, have become less useful since the start of the pandemic: some businesses have traded throughout, some were put on ice but are now bouncing back, and some continued trading thanks to government-backed loans but won’t return to their former glory. To manage risk effectively, lenders need to consider different sources of data and the insight they get from it – particularly near-term and forward-looking indicators such as real-time cashflow positions, which show what companies are doing right now.
Lenders can consider all of a business’s assets before offering the products that reflect what the business actually needs and can be approved for. Read our guest blog from Allica Bank for more on this.
Now that it’s possible to assess risk more accurately, and offer new products based on new collateral types, this opens the potential for serving brand new market segments, such as small and medium enterprises (SMEs). We know there’s a vast credit gap (see below under ‘Building a sustainable future’ for more on this), which means a huge opportunity for lenders willing to reassess their approach to risk and grow their loan book in overlooked or underserved segments of the market.
With the Trade Ledger lending platform you can use the data inputs of your choice for assessing potential borrowers. You can bring in real-time performance data from sources including your core banking systems, transactional data from open banking APIs, feeds from credit bureaux and company reference sources, and other data. Then you can apply your risk policies using our powerful, configurable Credit Decision Engine.
The Credit Decision Engine is a purpose-built proprietary feature of our platform that takes care of calculations and metrics. It enables business development managers (BDMs) and credit analysts (CAs) to make evidence-based decisions at speed, reducing time-to-decision and significantly improving the customer experience.
The CDE generates a risk rating. It provides guidance to the BDMs and CAs in making immediate lending decisions, or taking mitigating actions to support more complex analysis like audits and surveys. These were traditionally done on site using spreadsheets and paper-based processes. All the metrics and scoring are visible to underwriters, so ‘black box’ sanctioning is avoided. Fraudulent/suspicious invoice detection is built in. It provides effective control against the errors of manual calculation.
This automation of data assembly and segmentation of applications also frees staff time to take a closer look at outliers or more complex risks, or spend more time focusing on new business opportunities, improving performance and overall job satisfaction.
The platform also makes it cost effective to offer invoice finance, which was once an administration-heavy product. It’s streamlined by the Trade Ledger platform, which enables applicants to share some or all of the invoices from their cloud accounting package.
What’s the best business model to set up lenders for future success? Flexibility to respond to changing market conditions is essential, and that plays into what we’ve already looked at: customer focus, the right product set, data sources, decisioning models, and the tech and partnerships that provide the tools to operate effectively.
One part of the market that’s not changed for a long time – and is ripe for addressing – is the SME sector. There are huge opportunities here, with an estimated credit gap worldwide of nearly US$10 trillion (we’ll come on to that in section 5 below). Before digital, it was hard to acquire data about small and medium enterprises and therefore hard to calculate and manage risk. Paper-based bank statements, invoices, journals and ledgers weren’t easily accessible to lenders. So their needs were underserved, due to lack of data and a high cost to serve. But SMEs are moving – or have moved – to manage their businesses with a range of new SaaS tools, like Microsoft Dynamics, Xero, Quickbooks and Sage, to which they can grant their lender access, using open finance. Open banking likewise lets them share their bank transaction records in a few clicks. As we’ve seen, a business model that makes good use of data will set you up for the future, and working with tech partners can take you there rapidly.
A unified data model, which means that all the departments and processes needing access to data work off the same data (Single Customer View, SCV) is the best foundation for fully exploiting data. This is at the heart of the Trade Ledger platform.
It’s infrastructure-agnostic so can provide CRM functionality, or integrate with your CRM system, so that marketing, BDMs and underwriters all work off the same rich dataset. Your teams can see clearly and simply the status of each loan application and their business performance in real time.
The Trade Ledger platform can also support multiple business lending products, which means you can analyse a borrower’s suitability for any of the products you provide, and can offer funding that’s right for their needs. Instead of starting with a product and seeing if it matches the customer, you can start with the customer and assess which product(s) are right for them. If a borrower requires multiple products, you can assess risk and carry out oversight across them all under a single credit agreement.
In the future, borrowers might get the right product for them without ever hearing about forfaiting or invoice financing” – Martin McCann
Within three years we expect borrowers to connect their data to a service which may belong to the bank or to a third party; the service will analyse the information and come back with insights including recommended products and next best actions, and could connect them automatically to the bank’s application processes, fulfilled directly at the back end of the analysis. The Trade Ledger platform can underpin all of this, providing the data acquisition and analysis, and connectivity with other systems and suppliers.
Six improvements to the business model for lenders, available from our website, looks at the steps to a forward-looking business model in more detail.
There are many initiatives under way to help the world transition to net zero, which all need funding. Government guarantees for green finance have been proposed (page 30 of our report), to get things moving. Lenders will need to tap into data such as carbon footprint, and environmental, social and governance (ESG) ratings, and include them in borrower assessments. They’ll want to ensure that borrowers’ businesses align with their own ESG commitments, using a meaningful, structured and consistent scoring method that can be monitored and improved over time.
The ’S’ of ESG includes provision for SMEs, and the communities and livelihoods that they support. Many mid-size and smaller firms still struggle to access capital — the International Finance Corporation estimated there’s a credit gap for SMEs, micro and informal enterprises globally nearing US$10 trillion, restricting firms’ ability to grow. SMEs account for 70% of all jobs worldwide, contribute 50-70% of GDP in OECD countries, and are more likely to hire from groups with lower chances of finding employment such as young people, older workers and less-skilled workers, according to the International Labour Organization. There are significant social impacts from providing better financial stability to SMEs.
The Trade Ledger platform can bring in sustainability data and apply your risk policies, using the Credit Decision Engine that scores applicants, to drive automated or assisted lending journeys. New data sources, such as Doconomy, which analyses transactional and financial data to assess the carbon impact of corporations, are emerging all the time.
The platform is cloud-based. A staggering 78% reduction in carbon footprint is possible by moving compute workloads to the cloud, says research cited in our Predictions report (see page 10). Shifting lending processes to Trade Ledger’s cloud-based platform could help you to improve your organisation’s environmental impact.
The richer datasets that the Trade Ledger platform can draw on for decisioning, along with the automation of lending processes that we touched on at the beginning of this article, means lenders can take a much broader and more real-world view of risk and avoid unnecessary bias against sound smaller businesses – and so gain the confidence to lend to broader markets, potentially bridging the credit gap that SMEs encounter. And, of course, it’s a vast un-taken opportunity for lenders.
See it in action. Book a demo of the Trade Ledger platform by contacting us today and we can show you how all these things work in practice, or contact us to talk over any of these topics.