Näktergal blog

The opportunity in transforming SME lending.

April 27, 2021 - 4 min read

For the last two decades, the banking landscape has undergone a seismic shift thanks to innovations and disruptions from Fintechs. This new age of innovation and digital transformation has been driven by meeting the needs and expectations of modern consumers. The successful fintechs, such as the likes of Klarna, Monzo, Stripe have targeted what consumers perceive as the failings of banks to capture significant market shares.

The business lending sector is no different. With changing customer expectations, EBA regulations and the effects of the pandemic, business lending over the next decade is set to look substantially different. Answering the question “Is there a better way to do this?” may entail a painful rethinking of how things are currently done. To compete successfully, banks must take the opportunity to:

Redesign lending processes to take advantage of new technologies, which refresh and strengthen customer relationships by digitising front- and back-office functions.
Automate lending processes not only for efficiency, but to release valuable human time. Underwriting managers will have more time to focus upon complex and riskier transactions. Relationship managers will have more time to cultivate customer relationships, as well as identify cross–selling and new business opportunities.
Leverage big data analytics to offer substantially richer and more up-to-date insights about the creditworthiness of loan applicants, customer performance, while providing a more personalised and customised experience.
Explore technology partnerships with fintechs and accelerate the digitisation effort as a strategy to overcome obstacles to transformation such as legacy IT systems and scarcity of digital talent. Technology partnerships help a bank develop new capabilities, shorten product development times, and bring new products to market quicker.
Develop ecosystems through an application programming interface (API) based digital banking platform that supports connectivity to third parties, allowing the bank to share information with partners in the ecosystem.

More accurate lending decisions

By moving to a customer-centric platform-based model, incumbent banks will be better placed to defend against the inevitable margin erosion and increase in contestability in banking markets that will accompany new entrants. The more obvious benefits include:

Improved customer experience. Digitisation offers quicker access to credit, eliminates paper documentation, provides convenient channels for disbursement and repayment, while delivering a more personalised and customised experience.
Speed to market. Digital platforms allow for rapid product development at high speed, bringing new ideas to fruition quickly in defence of the bank and ever-increasing competitive pressures.
Scalability. Automated underwriting overcomes the bottlenecks and inefficiencies that are an inevitable consequence of the manual and human component of detailed credit analysis.
Boosted operational efficiency. Digitisation eliminates manual paper-based tasks, freeing up team members for redeployment in areas they can more efficiently meet the needs of customers and the bank.
Consistent credit decisions. Digitisation of credit policies expressed as rules in a data-driven environment contribute to minimising human error and reducing the variability in underwriting decisions.

SME lending winners and losers

Uncomfortable as the analogy may be, banks and non-bank lenders are in a race to meet customer expectations and gain trust. Banks have a natural advantage over the fintechs based on a long established relationship that earns them trust. At the same time, incumbent banks might view newer digital offerings and regulations as a threat, since it makes things much easier for their newer, more nimble rivals. But there are significant advantages if they think and act positively.

In challenges also lies opportunities. SME lenders have the opportunity to change the course of their organizations to better suit the post COVID-19 business landscape. Settling for second place is not an option when the first prize is richer, deeper customer relationships, secured through a more personalised and bespoke experience.

TL;DR:

There is opportunity in any challenge. The question “is there a better way to do this” must continually be asked to make progress both in terms of tech and customer service. Moreover, moving towards a customer centric approach is essential to seizing opportunities that are beginning to open up again.