By Martin McCann, Co-founder and CEO, Trade Ledger
Creative destruction is the essence of our economic system. Changes, both inside and outside an industry, continuously revolutionise the industry, destroying the old and creating the new. Think about music: in the last 60 years we have had six different ways to play music, starting with records, through the 8-track tape, on to cassettes then CDs, before moving over to MP3 files, and now online streaming. With each of these changes, companies have risen, become market leaders, and then fallen away again, their customer base taken by newer, more innovative rivals. Those that have survived have repeatedly adapted to stay relevant.
Those that don’t adapt find their value chains disaggregated as they become stale. Competitors attack bits of them, the chains start to break apart, and they reconstitute around different suppliers. This is what’s happening in the business lending market. New lenders and Big Tech have re-thought business lending, and of course they’re targeting the most profitable customers first. The value chain is on the move, and creative destruction is under way. It’s enabled by technologies including standardised software interfacing and cloud-computing resources, and the ongoing commodification of the internet.
Creative destruction of the value chain of the broader finance industry began more than three decades ago. In 1989 First Direct launched a phone and postal bank in the UK – with no physical branches. Internet banking in the UK began in 1997 with services launched by Nationwide Building Society and Royal Bank of Scotland; apps appeared when the smartphone was born 10 years later; and now as many as three-quarters of consumers use online banking in the UK, US and Australia.
Remarkably, the proposition to customers remains pretty much the same as it’s been for a hundred years or more: current or checking accounts, savings accounts, and secured and unsecured lending.
It’s the technology that has been changing – and particularly the way it’s used.
Yet few banks are using even a fraction of what the technology can offer for commercial lending.
They’re still using spreadsheets, email, manual storage, research reports assembled individually, and duplicated and mismatched customer data. Lenders who offer more than one product usually have completely separate systems and processes for each, despite this making it harder to cross-sell. They’re not using readily available data that could make their risk assessments more realistic. And they’re not taking advantage of automation, which could make it cost-effective to offer more complex products such as invoice finance.
The old systems are comfortable and familiar. They tick the regulatory compliance boxes. And to move away from them means investment and business disruption, even if the rollout goes smoothly. But they’re well past their sell-by date.
Why? Because of what they mean for customers: lengthy customer journeys, lots of errors and data mismatches, duplicated effort, and a lack of flexibility in dealing with the variety of risk that customers present. Typically it takes 30 hours for a customer to apply for a loan – if they even qualify to apply for one; error rates during processing of over 80%; and 90 days until initial draw-down. More than half of applications are abandoned.
These numbers are shocking. Why are banks willing to put up with offering this level of service?
New entrants are taking chunks out of the SME lending market, targeting the most profitable business. The Pareto Principle points to a loss of the most profitable 20% of customers translating to an 80% loss of value. Banks must do something different if they’re to remain relevant. If you don’t decide to be a winner, you’ll lose the profitable business.
Specialist newcomers have taken whole markets away from banks several times in the past. Merchant cash advance (where a cash advance is paid off from a percentage of card payments) is one; foreign exchange is another. There are parallels in other industries – for example specialist insurers have taken segments of business, such as cover for domestic appliances and technology, from the general insurance giants; and in transport, ride-hailing has taken business from taxis.
Big Tech thinks it can do better. Just a couple of examples: you can apply for a business credit card when you get to the checkout on Amazon, as part of the purchase journey – this is embedded finance. PayPal’s Pay in 3 is another embedded finance service where credit is offered at the checkout.
To see more clearly where value could be added, we’ll look at the value chain for bank business borrowers.
A typical customer journey is something like this.
The value that’s added (or deducted) at each point for the borrower comes largely from three factors:
Price sensitivity is not in the list. SMEs tend to value time-to-cash more highly than low prices. The risk they face is of their viable business going bust while they’re waiting for a loan.
Every aspect of the value chain can be tuned, bringing competitive advantage and enlarging the addressable market for banks. It’s straightforward, and can be started now, at the pace that’s right for the individual bank – whether it’s a traditional bank that’s currently using 40 systems to support business lending, or a startup creating a bank from scratch.
As mentioned above, it’s about using technology effectively. The key is to have a platform that can organise and analyse information about borrowers – their borrowing requirements, evidence for how risky they are, what they're borrowing, and adherence to the repayments schedule.
This can all be done with a good business lending platform.
A platform brings together all the data needed throughout the customer lifecycle, provides analysis, automates processes, and shows at a glance the information that teams need to make good decisions. It supports all the bank’s processes, as well as applying its risk policies. It is flexible enough to support multiple products such as asset finance, invoice finance, term loans and embedded finance, enabling banks to launch new products quickly and profitably – and then cross-sell and upsell.
This is what the Trade Ledger platform does. It gathers all the information needed for business lending and takes it through your workflows. It provides support to your sales, business development, underwriting, legal and operations teams. The platform is modular and can be configured in many different ways, according to the products, processes, policies and preferences of your bank.
Migrating to a lending platform requires change, but it’s necessary to remain competitive against Big Tech and new lenders. Banks will be faced with the option of purposefully destroying their old to create their new, or eventually succumbing to new entrants who provide better service at lower prices. Trade Ledger can guide you through these changes. We’ve done it for several big names (which is how we know how quick and easy loan origination can be in practice).
Do you know what your business borrowers are up to?
A single customer view (SCV) shows you all the key information about a borrower, in one place. There’s no need to check, say, your overdraft system and then your mortgage system to find out if a borrower has both. The SCV shows which of your products they have, and other information that’s useful such as how much they’ve borrowed and their repayment history.
The SCV also enables cross-sell and upsell. It’s common for business borrowers to get an overdraft, then a credit card, then invoice finance. Insights like this that can be gained from a SCV enable business development managers (BDMs) to target their market efficiently.
It enables continuous assessment of the quality of your lending. There’s no need to run annual reviews.
To find out more about what we can do for you, or to talk in more detail about lending products, security, technical details or anything else, drop us a line – we’d love to talk.