We interview Tomer Guriel (CEO and Founder, ezbob) and Yaron Shoshani (CTO, ezbob) on key questions around digitising SME lending.
Guriel is the founder of ezbob and Shoshoni has been with the business since its inception when ezbob was a direct lender to small businesses in the UK from 2011 to 2016. Having built a digital lender from the ground up processing over £1 billion applications issuing funds same day, we were intrigued to draw out their experience and provide a helpful article for institutions embarking on a similar journey.
Tomer Guriel, ezbob CEO and Founder
Yaron Shoshani, ezbob CTO
What criteria should lenders consider from a technology standpoint?
[YS] The scope of what the lender wants to do itself and what it chooses to outsource will determine the type of technology that is necessary. Very basic technology can be used to lend manually to businesses but, for example, to incorporate third-party data on a real-time basis for automated lending decisions requires integrations into third-party data services. The type of technology required therefore depends completely on the requirements of the lender itself.
[TG] It’s easier and less costly in the long-run to start with technologies in place that can allow you to scale-up. To migrate from manual processes to digital whilst you are already lending is a lot more challenging and ultimately, costly. It’s better to be prepared for scaling-up early on and use the initial low volumes for testing and optimisation purposes. For example, with lending technologies that can allow automated decisions, running a proof of concept and fine-tuning the engine so it’s ready for higher volumes is a smart play.
Who are the digital SME lenders out there that have scaled fast and offer a seamless customer journey?
[TG] Esme Loans (part of NatWest) is a good example of a digital lender that has proven itself in the marketplace regarding these criteria. It has scaled up its lending volumes from zero to tens of millions of pounds a month in less than two years. The customer journey is completely digital requiring no paperwork and so allows small business owners fast access to capital without them needing to visit a branch, post documents or speak to an agent on the phone. Esme Loans has even lent money outside of working hours over the weekend such is the level of automation in place.
[YS] Metro Bank is another example of how moving to digital processes can allow for a much faster and satisfactory customer journey. Its migration to digital lending to small businesses occurred during the COVID-19 pandemic and has proven a lifeline to many businesses in need of capital due to the economic impact of government lockdowns. Whereas before customers needed to enter a branch to apply for a loan, the entire process can now be carried out digitally from the comfort and safety of their own homes.
How fast can a lender digitise and start lending to small businesses?
[TG] It can be as quick as a few weeks, but it really depends on the scope of the project, for example whether the lender wishes to integrate into core systems or run independent in the cloud. To enable as fast a go-to-market as possible, a lender needs to take the decision to start simple. For example, by not requiring core system integration and not being ‘afraid’ of the cloud (i.e. no reliance upon existing IT systems), the process of setting up and starting lending can be done in weeks.
[YS] Using a proof of concept approach is a good method to get up and running quickly. By testing the water on small volumes, a lender can optimise and enhance their processes and technology using real-time data to back their decisions.
As an SME Lender, what are the critical questions to ask of suppliers of lending solutions?
[YS] Questions around compliance with existing regulations around data and lending are key. Can the vendor demonstrate that their solution meets all necessary regulations regarding business lending in your jurisdiction?
Lenders will benefit by finding a solution that is flexible enough to accommodate legacy systems, to be able to run on or off the cloud and with modular elements which can be swapped and changed easily. Be sure to probe around these key issues, it is no help if the installation of the system is so difficult and complex to install that it becomes difficult to cost justify.
[TG] Vendors of lending solutions can help by offering out-of-the-box customer journeys that have been proven and so require no time spent on imagining what a customer journey would look like. Questions aimed at understanding what they have delivered to clients previously will highlight if they can provide this.
Lenders who turn to third-party vendors can benefit by engaging those that have prior experience in lending – thus, are not only a technology provider but also have real expertise in lending to small businesses. Ask the vendor what experience they have internally as lenders. Have any of their staff worked for direct lenders before?
What are the challenges that institutions face when embarking on the journey to digitise their SME Lending proposition?
[YS] Ironically, digital technologies are only one piece of the puzzle on the journey to digitising SME lending. Banks cannot simply invest into new technology and expect spectacular results. Build it and they will just come! Banks must also invest in customer acquisition both in terms of expanding their customer channels and in promoting their new offering.
A digital lender has multiple marketing channels when compared to a traditional, non-digital lender. Many of these may be new to the bank and so require education and ultimately, inclusion into their go-to-market strategy. This can be a challenge for a bank that is not used to working with channels such as aggregators, affiliates and brokers.
Using more data sources is another challenge for banks as their legacy systems are often not setup for this. Digital lenders pull in a ton of data from third parties via APIs. Legacy banking systems are unable to achieve this nimble integration without time consuming and costly development. In some cases, this process can take years, at which point technology has moved on.
[TG] Real-time decisioning is a challenge for banks to adopt having been reliant upon manual underwriting previously. Straight Through Processing (STP) of loan applications through to decision is a powerful feature that banks are unable to act on with legacy systems. There is also an eco-system challenge in that a digital lender relies upon many different types of technologies provided by multiple third-party vendors. Having to procure, manage and implement all these technologies without prior experience of doing it before is exceptionally challenging.
Culture can be a challenge for banks digitising their SME lending. Brands and internal cultures cannot suddenly be changed to behave and act differently. New digital outfits like Esme Loans and Marcus are good examples of how established banks (NatWest and Goldman Sachs) have launched new brands inline with the new technology and underlying culture behind their new digital products.
How important is it for lenders to digitise their SME lending?
[TG] Today, we see an unprecedented need for digital SME lending due to Coronavirus. Remote banking due to the pandemic is accelerating the migration to digital SME lending. The benefits of digitisation include a faster and seamless customer journey which requires no paperwork. The whole journey of applying for and receiving a loan can be done in minutes through a smartphone.
Marketing channels are diverse now and those traditional lenders are missing out on the volume of business owners preferring to find lending deals through aggregators and digital brokers. With multiple products and credit scorecards, digitisation is a way to handle the complexity effectively and extract better results allowing for enhanced profitability on lending.
[YS] Business owners want and need decisions on funding fast. This is not possible for manual underwriting to scale to a point where thousands of daily applicants can be screened out for credit and fraud reasons, and payments transferred same day. Digitisation is the only way lenders can provide real-time decisions for business owners in turn improving the customer journey and satisfaction as a result.
Where can Artificial Intelligence (AI) and Machine Learning (ML) add value to SME lending?
[YS] Artificial Intelligence and Machine Learning have the capacity to add greatly to the automation of SME customer interactions. This starts with pre-origination such as deciding who to market to, based on their propensity to purchase. It continues through origination i.e. lending responsibly and sustainably to those with the capacity and willingness to meet their contractual obligations. Of course, in-life management is important such as determining optimal time to re-market and re-finance the customer or amend conditions. Finally it concludes with, for the small number who are at risk of delinquency and default, the decision on which customers should be subject to which treatment strategies.