by Matthias Born, CTO and Co-founder at Trade Ledger
I can’t remember the last time I paid in cash for something. From big and small shops to street performers, essentially everyone provides virtual payment options here.
I’ve been living in Australia for almost 6 years and it’s been clear since the beginning that this market made a headstart in digitising finance. It’s also currently on a good path to realizing its promise on Open Banking.
How did it do it? And why does it matter?
I’ll dig into the details next, but let me start with this: observing the Aussie market reveals a powerful undercurrent pulling the future forward for fintech companies. It reveals how banks’ approach to data shapes the type of issues they're solving - today’s or tomorrow’s - and the vastly different outlook each approach shapes.
In many market segments, data already is a primary driver. We envision that data will be a powerful fuel for the corporate lending market as well. To unlock this growth, a shift in perspective is required.
The financial industry is a large part of the country’s economy and it’s a magnet for talented problem-solvers, employing almost half a million people and contributing around $140 billion to Australia’s GDP.
As well as being large enough to pull in great talent, the financial services industry has two other strong catalysts for innovation.
The first is customer adoption. 58% of Australians have adopted at least one fintech solution, up from 13% in 2017, a massive increase that has seen Australia catch up with other leading countries like the UK and Hong Kong.
The second is the regulatory environment. Through gradual but decisive steps, the Australian government is opening access to financial consumer data to a range of organizations, including fintechs, accelerating the internet-driven push to open finance.
And so, in effect, Australia represents a great sandbox for financial services innovation: a country where the regulatory environment and customer appetite make it easy to introduce change quickly and find a market for it. What’s more, it’s also a country with a big enough population and volume of transactions to test these innovations at scale.
However, this adds pressure on the traditional players. While fintechs are maturing, becoming increasingly profitable, and expanding globally, incumbents need to find the levers to withstand the change the entire world is undergoing.
Data-driven lending is a key vector for that.
Source: 2019 EY Fintech Australia Census
Stretching between $1.5 trillion and $5.4 trillion, the SME funding gap is a global problem with far-reaching consequences. Everyone in the financial industry has a hand in this and everyone’s contribution is necessary to start closing it.
While digitization is invariably part of the solution, how it happens is just as important as making it happen.
Here’s a clarifying distinction that helps pinpoint a core issue: the problems lenders have today are not the problems they’ll have tomorrow.
Many financial players focus on digitizing their current processes, solving today’s problems. Yet many of these processes are not designed to sustain the organization and its customers through deep transformations - which it’ll invariably go through. As a result, digitization gets limited to firefighting, simply bringing the organization up to speed with current standards but not preparing it for evolving customer expectations.
There are clear signs that current models used in business lending have many breaking points, from accessing to dispensing loan capital and beyond.
That’s why, at Trade Ledger, we’re giving financial institutions a platform that ensures they have the flexibility to tackle both today and tomorrow’s challenges, however they may turn up. Here’s what looks like.
The SME funding gap became painfully obvious in 2020. Even though USD$3 trillion invoice finance is now supporting SMEs worldwide, the challenge of auditing customers remotely was a huge challenge for lenders.
To this day, almost 1/3 of SMEs say late payments are a problem and still often wait up to 90 days to get their initial funds.
In spite of this clear-cut reality, credit managers claim it’s entirely viable to use the existing auditing models for the next 10-20-30 years. In reality, lending audits will be done by machines in the near future. We’re talking just a few years, not decades.
At the same time, banks are losing millions as you’re reading this because numbers in Excel are filled in incorrectly. Many large financial players have incomplete oversight of their real risk exposure because of that. These issues happen every day. Technology can and will solve them and, not just to create efficiencies but also to allow the free flow of information while leveraging it for better, more comprehensive decision-making.
Data-driven lending provides clarity over stakeholders, assets, the borrowers’ (up to date) financial standing, and many more instrumental factors. The time has come for financial institutions to put their trust in data, not process. In doing so, they will transform the customer experience as well.
For example, data-driven lending automates auditing with layers of integrated technology, including live data management. Because machines handle the audit, it becomes a constant process that runs 24/7, in the background, instead of it being a monthly or yearly task on someone’s agenda. Auditing will become a real-time pulse check for any borrower at any moment in time. It can also be used proactively, to predict if a borrower actually needs an influx of capital.
The way we see it at Trade Ledger a business finance platform must ensure flexibility and make it easy for the lender to add new products. Just as importantly, the capital provider has to be able to use the same assessment models across its entire product range.
If you focus on solving today’s problems, you might build a system just for invoice financing and end up creating rigid processes that make it operational. A data-driven system like the Trade Ledger platform makes it easy to remain flexible and accommodate new products.
Whether you call it invoice finance, receivables finance, open account trade finance, or factoring, our goal is to give lenders a straightforward solution to overcome the challenges they and their customers face getting the finance they need, whenthey need it.
Going from untapped potential to unlocked opportunity doesn’t have to be a convoluted process. It doesn’t have to take a disproportionate amount of resources to pull off and overwhelm the organization.
That’s why we work with our customers as innovation partners. Instead of starting with the entire feature set, we build it gradually, adding layers of technology without creating overhead. We take care of the technology so our customers can focus on creating and experimenting with new financial products and reduce their time-to-market.
We strongly believe lenders shouldn’t have to develop tech expertise because they’d benefit more from amplifying their strengths: using different assessment models, making loans quicker without taking on more risk, and more.
With a keen focus on flexibility, we’ve designed the Trade Ledger platform to look at all the generic elements that different types of assets and customers have in common. This way, we can ensure:
When using Trade Ledger, lenders can use the same assessment process for their full offering because it works the same across all products, no matter how they change.
As a result, business capital providers can simplify their offerings, which are currently positioned as very complex. We enable lenders to satisfy borrowers’ growing appetite for digital solutions with offers that don’t waste their time and energy but provide a rewarding, helpful experience - along with the cash influx they need.
Lending used to be a personal business, where the applicant knew the lending manager personally. As banks got bigger, uncoordinated data sources and decision layers undermined the customer experience. The resulting process became congested with long bureaucratic applications and even longer wait times for funds.
Annoying in normal times, this became a systemic issue during the lockdown, where the years of IT underinvestment were laid bare in the huge backlog of unprocessed emergency loans.
But, happily, we are entering a new phase. Digitization brings us full circle. Data makes it possible to offer lending products just as if the lender knew the borrower personally - but at scale. It enables the relationship element to retain its role in the process no matter the number of customers who need onboarding or monitoring.
This is possible because we enable customers to look at their clients’ entire context at a glance and zoom into details updated in real time. Data is now the powerful fuel for the corporate lending market.
To make it clear, I don't believe that machines will fully replace humans in the lending process. However, I do believe that technology has a great capacity to support lending decisions. Machines simplify these choices with data-driven confidence and act as a gatekeeper and support utility for humans.
It’s up to us humans to take that first step and tap into that vast potential.