How ‘Componentised Banking’ will revolutionise business lending

By Puja Sharma

Business leaders will no longer spend days researching the right borrowing product for their firm. Instead, new data sources, better decisioning systems, and deeper insights will mean the headache of a loan application will become an altogether more positive experience.

Global technology provider for the commercial banking and financial services industry, Trade Ledger, published its Business Finance Predictions 2022 report, bringing insight from a wide variety of industry experts on business lending.

Faster, easier application processes, personalised loan products, and embedded finance will benefit customers. This can be described as an ‘instant gratification’ opportunity by some experts. This can only be achieved through more sophisticated use of data. Rather than relying on historical data to assess risk, lenders must use near-term and forward-looking indicators.

Data from Open Banking will be a key part of this, and the new data ecosystems and partnerships it enables will provide lenders and borrowers with greater insights into business health. Microsoft’s Janet Jones noted dynamic segmentation will help evaluate borrowers better. The true impact of the pandemic will become apparent.

The government is winding down its loan program. According to Conrad Ford of Allica Bank, the major banks will be faced with unwinding these loans and dealing with a wave of defaults and insolvencies. As a result of tightening credit and rising interest rates, Lucy Hasson of Esme Loans said SMEs will face a significant human cost along with higher prices, affordability, and availability of money. Meanwhile, she also notes that many debt-averse SMEs took on finance for the first time – and found its benefits.

Banks could start monetizing open banking in 2022, when the first premium API services are used to provide variable recurring payments (VRPs), according to Ghela Boskovich of the Financial Data and Technology Association.

Leading the predictions, Trade Ledger believes that business banking is playing a serious catch-up game and he anticipates that within the next three years the business model will be up-ended using componentized banking.

“Business banking isn’t a cost-sensitive market – it’s an experience-sensitive market. Yet, currently, the experience isn’t fit for purpose. A typical commercial loan takes 90 days to process today, and that’s if the firm even qualifies to apply. What we need to happen is for the banks to stop thinking about products, and start thinking about the customer. To do that they need to componentise each aspect of their operation – from KYC and AML to CTF – and build an ecosystem of specialists to deliver those components,”  Martin McCann, Co-founder and Chief Executive Officer of Trade Ledger said.

“Think about the automotive industry: carmakers don’t make cars, they assemble them with the engine coming from one supplier, the gearbox from another. The carmakers differentiate what they sell by how they specify the sub-assemblies to the sub-assembly providers. The cost advantages have been huge as each part of the supply chain has optimised its output and costs,” he added.

The business banking industry needs to do the same. Specialist capabilities can be created by the people who do it best, and then supplied to the business banking ecosystem. Add to this a more data-driven service: a borrower simply connects their data to a bank or third party where it is analysed, coming back with recommended actions and even connecting them directly to the application process.

Business leaders will no longer spend days researching the right borrowing product for their firm. Instead, new data sources, better decisioning systems, and deeper insights will mean the headache of a loan application will become an altogether more positive experience.

Leading FinTech figures agree.“In 2022 banks will own or invest in working-capital FinTech to support an advanced user experience for their clients.”Anna Jones, Chief of Product, Managing Director, Financial Supply Chain Strategic Advisory said. While Halvor Lande, Chief Executive Officer, Aprila Bank, commented: “Instant gratification is a great value proposition. Data-driven, digital, automated business lending, using machine learning to predict risk, is a massive opportunity and need because the SME sector is very much underserved.”

“Banks have historically been fairly slow at innovating. In the past, the risk of relying on third parties was too much. But digitisation has changed that, and there are now deeper engagements, with specific tasks being taken on by specialist suppliers.” said James Varga, Founder, and Chief Executive Officer, DirectID.