by Roger Vincent, Chief Innovation Officer, Trade Ledger™
Lending as a service (LaaS), sometimes referred to as “Marketplace Lending”, is a trend in the banking and financial services sector where banks and lenders are leveraging new technology to surface their products and services on platforms outside of their traditional banking channels (i.e. in a branch, online banking, etc.).
LaaS is a sub-category of Banking-as-a-Service (BaaS), which refers to cloud-based infrastructures and Application Programming Interfaces (APIs) being used to allow businesses to build, configure and manage their own financial services, breaking the stranglehold of traditional transaction banking models.
At Trade Ledger™, we believe that the future of commercial lending will be componentised and integrated into the engagement model a business executive is most comfortable with. It doesn’t matter if they prefer alerts directly through their finance system or interacting with an intelligent chatbot in iMessage. Such convenience and integration are not science fiction.
The proliferation of technology across the banking landscape will increase significantly over the coming years and open banking triggers a decoupling of services distribution from production. Banks & lenders who do not react and start to lay the technological foundations for a fundamentally different financial service business model risk becoming a commodity.
In recent years, we’ve witnessed new partnerships in the lending sector, where Banks, FinTech’s and the wider marketplace eco-system (often big tech giants) have started to collaborate in the sector of LaaS. These partnerships are aiming to squarely address the current friction that exists in the commercial loan application process, creating paperless journeys which occur early in the buying process, providing an improved banking experience and empowering the business prior to any cash flow issues.
At Trade Ledger™, we believe that LaaS will continue to grow, moving corporate lending towards a more integrated, customer-centric and data-driven experience for businesses globally. Some of the key drivers stimulating the evolution of the LaaS market include:
Businesses are increasingly demanding the convenience that consumers have enjoyed for some time. Why does a mid-sized company executive need a consultation with experts or to prepare custom integrations or financial data if they already know the cash flow gap, how long they need cash for and how much they are willing to pay for it?
Our objective is to help traditional incumbent banks, who still serve the majority of the world’s corporate businesses, to participate in this value chain extension by delivering our technology in two ways. Firstly, by digitising the end-to-end process of traditional commercial loan products available at banks currently and; Secondly, by helping banks to place these products (via API) into the wider marketplace eco-system and better servicing their customer base with seamless financial service experiences.
We’ve witnessed a number of partnerships spring up where LaaS is becoming increasingly well recognised as a strategy to succeed in the new era of open banking. One notable partnership in the commercial lending sector was Alibaba selecting Kabbage, a large alternative lender in the US, to offer loans to the merchants using the Alibaba platform to trade.
Alibaba is one of the largest marketplaces in the world, but they have been largely constrained to the Asian markets given the dominance of Amazon in the Western world. This partnership planned to provide up to $150K of financing at the point of sale on Alibaba.com as part of a new program called ‘Pay Later’. The huge benefit to Alibaba is the opportunity to serve a new market of businesses in the US market who might be looking to finance their purchases on the website giant’s marketplace, and for Kabbage this gives them the ideal platform to penetrate new business with targeted working capital at the real point of need (purchasing materials and equipment online).
This partnership demonstrates that despite a strong affiliation with Ant Financial, one of the world’s most advanced LaaS platforms and a lender in China, Alibaba recognises the continued need to leverage eco-systems in other markets to put working capital at the point of need for their customers.
The Alibaba example demonstrates the real threat that big tech partnerships can pose to incumbent banks in the SME lending space. For many years, the fintech world has been anticipating the entrance of Amazon into banking whilst quietly they have lent over $4bn to their own consumers (within the Amazon eco-system). Luckily for the large incumbent banks, the likes of Amazon have yet to penetrate the eco-system outside of their own marketplace (where they control the flow of goods) and Ant Financial has been largely confined to Asia, however, with the emergence of Open Banking and a global trend towards consumer empowerment of data, this is simply a question of time!
The questions for incumbent banks is not one of protectionism anymore and “ownership of banks” is no longer a strategic or important consideration, in fact, it’s quite the opposite – Uber, Airbnb and Amazon didn’t think about owning cars, houses or shops when they launched so how does a bank need to start thinking?
For new entrants, this is relatively easy, build specialist digital propositions fast and plug your services into the marketplace eco-system to increase distribution. For banks, however, this isn’t such an easy option and they have millions of existing customers to keep happy and a stack of legacy technology to overcome, all before you compete with the political & operational challenges.
Various models have been explored in this sector covering the range of typical build, partner, buy strategies but the emerging trend of platform banking (i.e. BaaS) has only been possible in the last few years as a result of the maturation of enterprise technology in this space. Large incumbent banks now have a viable way of fighting back and creating digital propositions which rival the newcomers. According to a report from McKinsey, banks & lenders looking to respond to this new environment must:
Trade Ledger™ is a technology firm. We have deep enterprise technology expertise. The founders alone have more than 40 years of experience developing the world’s best technology for businesses. Our approach is a highly componentised model, utilising the latest technology to make a platform which not only provides you with a range of alternative data sources to better underwrite risk but also provides you with the capability to plug these into the new range of origination channels via out API marketplace.
We have been building our technology for the last 3 years in preparation for this exact moment in the market when banks are under significant threat from big tech and new entrants and need a fast and effective way of competing in the new open financial eco-system.
Once you’ve decided as a bank to adopt the platform approach and build out the technical foundations of a future LaaS model, you must then start to consider something much more important – what your consumers want. At Trade Ledger we are constantly thinking about our customer’s customer, this way we never lose sight of what our LaaS is trying to achieve and can constantly re-assess whether it is truly able to fulfil the needs of businesses looking to get working capital.
In an Accenture paper, five consumer needs are called out which need to be fulfilled to succeed in this new environment, all of which can be achieved with a LaaS platform approach.
We believe that new consumer attitudes towards SME lending will drive a transformation in the way corporate finance is delivered to market in future. The emergence of API accessible, consumer consented data, advanced analytics and robotic process automation are enough to re-imagine credit through LaaS for all businesses requiring working capital from their bank.
We believe that transforming your Lending operation through our Lending Platform is first and foremost the single biggest area of opportunity for banks and financial services organisations to benefit from Open Banking in the near future. By leveraging open APIs alongside new enabling technologies, you can drive significant operational efficiencies within your internal operation and dramatically increase your speed to market – But why stop there?
The Trade Ledger LaaS Platform provides you with a divergent innovation layer within your corporate lending business; helping you to comply with regulatory requirements; embrace the wider monetisation of open data; adopt new business models, and generate new revenue streams. We provide an opportunity to fully embrace the path towards Open & Ecosystem-based banking business models.