By Martin McCann, Co-founder and CEO of Trade Ledger
Being a commercial lender has been tough for years. Lenders and their borrowers have faced recessions, globalisation, the 2007-8 financial crisis, regulatory changes and now the covid pandemic. They’ve re-engineered, right-sized, merged and de-merged, to increase efficiency and reduce costs.
Lenders to small and medium businesses (SMEs) are facing challenges that have been brewing for some time. A 2016 study by Moody’s Analytics said “emerging technology, innovative use of data, and expectations of an enhanced borrower experience will drive significant change in small business lending in the coming years”. Those changes are still unfolding. We’ve seen mobile, cloud and data becoming the norm. And the richness and ease of consumer experiences online have driven demand for similar services in business.
"The latest generation of business owners are digital natives; their expectations are shaped by the ecosystem economies and customer experience that they demand in their personal lives. This involves expecting faster transactions, on demand service, greater business intelligence and more flexible ways to access liquidity from within their businesses, 24 hours a day, through any device.”
- Jonathan Andrew, Global CEO at Bibby Financial Services, Corporate Banking Predictions 2021 Report
Just tackling efficiency and cost savings won’t help here. These challenges are more fundamental. They imply a change of business model.
Is it really that serious? And if it is, which bits do you really need to pay attention to? Nobody wants to see their business under threat, but there are 6 key aspects of commercial lending that are worth addressing, as we will see below. They will help you to:
Efficiencies and cost savings will result.
And you’ll also get greater control of data, which is the source of Big Tech’s competitive threat. We’ll come to that after looking at six ways you can improve your business model.
If a business wants asset finance one month, and then invoice finance the next month, they’ll probably need to apply for each separately – even if they’re applying to the same lender. The customer applies using channels that reflect the lender’s internal business model: one department for asset finance, one for invoice finance, one for international finance with foreign exchange (FX) facilities, and so on. Each department has its own systems and processes that customers must negotiate.
It’s more appealing for customers if they can ask you for a loan and receive a recommendation about what sort of loan would suit them, based on their assets, accounts and invoices right now. As consumers, we’re familiar with being offered a pre-approved credit card; the same convenient journey could be made available to business borrowers across term loans, debtor finance, overdrafts and more.
You could also offer advice about how to improve their credit score. Boston Consulting Group says that corporate banking customers “are looking for their banking partners to act as trusted advisors who can provide tailored advice, reduce complexity, and smooth execution”.
This is all perfectly possible today. The data is available right now, as is the analytics to assess the financial health of the borrower within the lender’s risk appetite from the Trade Ledger platform. Lending as a service (LaaS), handling data acquisition, cleansing, processing, origination, onboarding and loan management are all amenable to this approach.
Lending processes that involve paper or electronic documents – statements, invoices and so on – get only static, historical evidence of a borrower’s situation. As soon as the ‘save’ button is clicked on a document or spreadsheet, it’s out of date. If it’s forwarded by email and the recipient makes changes, the information in the various versions of the documents can diverge rapidly, making it a poor basis for decision making.
Data is now available on demand, in near real time, so you can check it when you need to make a decision, and it’s always up to date. Your systems can access information from borrowers’ online banking and accounting systems; from credit reference agencies; and official sources such as the national register of companies and directors. This information is delivered via API feeds, which are like gateways for the exchange of data.
Obtaining your data in this way enables you to receive a wide range of information for analysis, risk assessment and lending decisions. You can check it as often as you like, giving greater control over risk. The data is more accurate and consistent compared to manually entered data, which is subject to mis-typing and divergence. Customers hate errors and rework, so reducing them can have a significant effect on customer satisfaction. And customers don’t need to spend as much time assembling documentation.
Once you have the data you need for lending decisions, how do your different departments process it? Traditional lenders employ vertical processing, with the data passing through a succession of teams such as operations and underwriting. They may re-enter data or use it in different formats, which leads to divergence. If you have data referring to Acme Brewery in Balham High Road, London, and to Acme Brewery in Balham High Road, Balham, London, is that one business or two?
The alternative is straight-through processing (STP) which harmonises the use of data across departments and accelerates the processing of loans – no more inefficient departmental silos. It also makes reporting and analytics easier, enabling lenders to check their KPIs and identify bottlenecks.
Acme Brewery is a small, traditional beer producer. Last year it needed extra working capital and Jane, the owner, applied for a loan.
She logged in to her account with her lender, and uploaded scans of her paper invoices. She waited while the lender checked the scans and released them into the origination system for the loan to be processed.
This year she needs a further loan. She’s upgraded to an online accounting package. Her lender has changed business model too: now when Jane applies, she can simply enter the details of her accounting package, and the lender’s system accesses her accounts directly. Jane can get on with running her business. Instead of inspecting every invoice, the lender can manage by exception – checking information that falls outside its definition of ‘normal’ and ‘acceptable risk’.
The more fragmented and siloed your lending business is, with different departments and processes, the harder it is to offer flexible products to customers, and to give them a dashboard or overview of their accounts.
The right business model gives you much more freedom to respond to market pull, offering product variants and configurable products to your customers. You might offer a choice over the assets used as security, or some self service. With greater control over the data, you could display the status of accounts to your customers in more versatile ways (such as with dashboards), and increase transparency.
Asset finance is relatively straightforward, since it’s secured against something tangible that has a residual value. But for the service sector, which now makes up 80% of the Australian and UK economies, tangible assets don’t give a true reflection of their soundness to borrow. The health of their business is shown by what they’ve sold, and the evidence is in their invoices. Invoices are assets and can be sold, or used as loan collateral, either individually or as a whole sales ledger.
There’s a vast unserved market for invoice finance. We estimate that 200 million businesses worldwide are unable to get the credit they need – a £1.2 trillion un-served segment in a £7 trillion under-served market. Invoice finance is one way these businesses can unlock working capital. Lenders whose business model includes invoice finance are in a good position to grow their loan book and margins.
How should lenders respond to the changing market?
The future holds the promise of supply-chain transaction services, and services built around customers.
"With the advances seen in technology and the acceleration of consented data sharing models, supported by the Open Banking framework, the industry will respond with propositions that are better suited to customer needs and that reduce the complexity in accessing this type of financing.”
- Joana Negrao, Customer Propositions, Trade and Receivables Finance, HSBC UK, Corporate Banking Predictions 2021 Report
“Supply-chain transaction services” refers to digital contracts that serve a whole supply chain. Suppose Jan, a delivery driver with Acme Brewing, has an accident on the way back from a delivery. The van can detect that it’s come to a sudden stop, using the accelerometer that decides whether to deploy the airbags. It places a call to the emergency services, and Jan’s smart watch sends the health data it’s been collecting to the medics. The van also supplies Acme’s insurance company with details including the time, date, location, extent of damage, dashcam footage, and so on. The insurance company’s system exchanges data with any other interested parties, and they calculate how to settle up between them. It takes a vast amount of effort away from Jan and Jane in the aftermath of the accident.
All of this is, or will soon be, possible. Services like these take advantage of the available data to make life considerably easier for the people involved. The service is built around the customer – which takes us back to our improvement number 1, on loan recommendations. Instead of telling potential customers which hoops they must jump through to qualify for a loan, lenders could come up with some recommended options, based on accounting and banking data. They could add further value by highlighting warning signs from the data, such as the strength and quality of their customers’ customers.
Big tech companies are increasingly regarded as competitors in financial services. They have access to vast proprietary data resources, enabling them to assess the risk of potential business borrowers in different ways that aren’t available to banks and other lenders – it’s not a level playing field. Many of them offer credit at the point of sale and are becoming intermediaries, if not lenders in their own right. As Boston Consulting Group says, “Banks used to be the primary gateway for customers. Digitisation, however, has opened up the value chain”. Traditional lenders can make full use of the data that is available to them, to expand their product range and improve the customer experience.
These changes to the lending business model form a virtuous circle. Asking borrowers to do less work to get their loans improves the customer experience and should increase your competitive position. Obtaining more and better-quality data, and making better use of it, enables you to offer more innovative and complex products at the same or lower risk levels, thereby expanding your market offering and improving margins.
If you’re convinced, how do you bring about this shift in business model? The key to it is the data – acquiring, processing, analysing and managing it, as customer needs dictate, and with the support of a really effective lending platform.
The prize is huge reduction in the cost to serve customers.
We can help you get there. Drop us a line – we’d love to talk.