In recent years, SMEs, particularly those at the smaller end of the market, have faced well-documented struggles to access credit. Banks and financial institutions have significantly cut back on business lending due to the high costs of acquisition, delivery and servicing, and the limitations of legacy technology and processes.
These pressures have been exacerbated by more stringent regulations in the post-financial crisis world. Supranational regulation such as Basel III & CRD IV have resulted in banks further reducing loans to small businesses as they seek to strengthen their capital requirements and decrease leverage. This is a major problem because both the UK and European economies do rely heavily upon SMEs.
Breaking new ground
The good news is that digital transformation in lending is well underway. Partnerships with innovative, agile fintechs are playing an increasing role in lending by banks and other financial institutions.
Incumbent lenders are turning to the nascent ‘lending as a service’ (LaaS) sector, which has now witnessed dozens of implementations, such as ezbob’s work with RBS, CYBG and American Express. LaaS packages cutting-edge lending software, operated in the cloud by the vendor, with expertise and often managed services included too.
A recent whitepaper by LendIt revealed that the lending software market was valued at US$2.6bn in 2017, with this figure expected to surpass US$5.5bn by 2024. It’s an increasingly global game. LaaS solutions are currently concentrated in the UK and the US, but Europe is now opening up to the possibilities on offer.
By replacing legacy software with natively-digital LaaS platforms, loan approvals are completed inside a working day rather than weeks, with funds disbursed the same day. According to LendIt research, LaaS impact studies have found that costs of acquisition, decisioning and servicing of loans can be reduced by up to 80%. There’s no doubt that this changes the future of lending for the better.
LaaS is a robust solution for SME lending because the size of the loans doesn’t traditionally sit well with the cost and time to process them, and in order to justify the cost of investment in legacy platforms, it requires high volumes of loans with their concomitant revenue streams for the lender.
Mortgages and consumer loans are expected to showcase strong LaaS growth in the coming years, aligned with the rise of digital mortgage platforms. Further partnerships may emerge with the ‘big tech’ companies as they move into the financial services space, a shift highlighted by Apple’s recent announcement that they are moving into lending.
Here are the five main reasons why digital lending is transforming the landscape and increasing accessibility:
- Lower cost of acquisition. With no branches, no salespeople and very limited fixed asset servicing costs, LaaS helps to contribute to boosting profitability for banks and other financial institutions.
- The right decision at the right speed. The ability to perform straight-through-processing and make decisions very quickly (even if they require multiple approvals) means that borrowers can access funds when they need them, adding much-needed working capital and liquidity to their businesses. The advanced technology involved in LaaS, including data capture using facial ID, means no more having to upload a passport or drivers licence to provide identity.
- Objective decisions. LaaS has prompted significant reductions in decisions that are based on a ‘maybe’ or ‘gut feeling’ of an underwriter: algorithms in most non-edge cases outperform underwriters. Ezbob’s platform, for example, integrates with external risk engines, provides automatic affordability calculations and draws on the full range of data sources available following the introduction of Open Banking.
- Better allocation. Underwriters of course will still have a part to play in the process, but they can be better allocated to those tasks that genuinely require their skills. The ezbob advanced underwriting (UW) platform presents customer profiles in a single page summary, the intuitive UW dashboard, which facilitates a fast decision based on the most important elements that require clarification.
- Improved customer experience. LaaS providers leverage the latest user interface (UI) trends, including responsive design, minimal clicks and an intuitive user journey. Asking applicants fewer questions, whilst enabling them to give their informed consent to data collection, results in much-reduced risk of inaccuracy or misinterpretation.
At ezbob, we’re proud to be a pioneer in the LaaS space, working with some of the biggest players in financial services. We look forward to working with more financial institutions, as well as those from adjacent sectors as LaaS continues to mature.