How Embedded Banking Drives Better Lending Decisions

Robert Fillmore, FISPAN’s VP Europe discusses his vision of Embedded Banking. On April 28, 2022, Robert spoke at Finovate Edge: Lendtech on how embedded banking technology can drive quicker and more secure lending decisions.

When the Bank (Literally) Goes To You

Bringing the Bank to Customers - Martins Bank

Embedded Banking is nothing new. FISPAN has been working in this area for the last six years. I recently came across this photograph and was really interested in the great story behind it. In the 1950’s, Martin’s bank took their branch on the move to, quite literally, bring the bank to its customers. The bank had to go where the customers were, in this case in a truck outside a factory. This bank eventually became part of Barclays

Luckily, processes and customer experiences have improved a lot since then. Over the last couple of decades, the concept of Open Banking has continued to grow as banks began offering file transfer and host-to-host services, and developed APIs for their larger corporate customers. 

The evolution of Open Banking and establishment of regulations such as the Payments Services Directive 2 (PSD2) in Europe have helped transform customer expectations. In the consumer banking area, neo banks like Revolut and Starling led the charge and development of more engaging consumer apps, closely followed by the traditional banks. My blog post, “How PSD2 Significantly Changed an Industry for the Better,” goes into more depth on how PSD2 has influenced consumer expectations. 

The last five years have seen some transformational technology introduced, and the pandemic has stimulated adoption of this at an unprecedented level. Amidst the development of greater user experiences, customers have come to expect streamlined onboarding, quick account setup, and simple logins. Customers now feel more secure in sharing their intimate financial data through banking platforms. In providing consistent and reliable banking experiences, banks and FinTechs alike have built greater consumer trust. 

However, this is not yet so evident in business banking, where tech adoption has been a little slower. But, of course, all of your business customers, as individual people, are consumers. They expect to have the familiar banking experiences from their personal lives, in their professional lives.

How Embedded Banking Should Look in the 2020’s…

How Embedded Banking Should Look in the 2020s

A finance professional in a corporate business will spend much of their day in their financial business system or ERP. From this ERP, they can manage all aspects of their business, from financials to logistics. So, why not their banking? 

When finance professionals need to access banking data, they may have to open a banking portal and log in, manually reviewing between two, three, or more browser windows alongside the ERP app. 

Why not bring all these capabilities directly to where they spend much of their business life, directly into their ERP? This creates an immersive, embedded banking experience for finance professionals, improving accuracy and efficiency, and bringing similar experiences from their personal banking lives. 

 
Creating a Two-Way Street: Delivering Banking Services into the ERP
 
A two-way street is created by delivering banking services directly into your client’s ERPs with APIs. On one hand, business customers have greater visibility to your services right from the apps where they spend their time. On the other hand, you, (the financial institution), get access to a vast array of important consumer-authorised data. 

The enablement of consumer-authorised data delivers insights extending beyond Accounts Receivable and Accounts Payable: 

  • From Profit & Loss (P&L) Statements: 
    • Cost of Goods Sold (COGS) 
    • Depreciation/Amortisation
    • Net income/Loss 
    • Purchases
    • Total Sales 
    • Dividends 
  • From Income Statements:
    • Income Tax Expense 
  • From the Balance Sheet: 
    • Accounts Payable 
      • Average days to pay
    • Accounts Receivable 
      • DSO, days sales outstanding
    • Current Assets 
    • Current Liabilities 
    • Inventory 
      • Age of inventory/stock
    • Total Assets 
    • Total Liabilities 
    • Total Shareholder’s Equity 
    • Current portion of term debt 

With access to customer-permissioned data, we can see numerous insights: 

  • View if your customer's customers are paying on time, or slower than usual 
  • Understand if your customer is paying their bills on time, or later than usual 
  • See what your customer's stockturn is compared to usual, while taking into account seasonal variances 
  • Gain visibility into a company’s financial health and credit risk 

Lending & Payables

Last month, on April 28th, 2022, I presented at Finovate Edge: Lendtech on the topic of how embedded banking technology can drive quicker and more secure lending decisions. I want to dive into that more now.
 

When FISPAN started in 2016, we assumed lending would be a leading use case. Quickly, our bank partners redirected us towards payables. Fast forward to 2022, we have nailed down payables and have started looking back more strongly at lending. In fact, most of the banks FISPAN now speaks with highlight lending as a key focus. 

Back in 2016, lending decisions were based on simple credit scores. Looking at Accounts Receivable and Accounts Payable were the norm. In effect, a good company can look bad in a snapshot based on data from six weeks (or even six months) in the past. This reality is even more evident throughout events like the pandemic, which have forced rapid transformation and distorted the idea of “Business as Usual”. 

The use of diverse data points collected over extended periods of time, coupled with today’s data can give a more holistic view into a company’s standing. To achieve this, banks in the midmarket and large enterprise sectors can turn to ERP integration. 

Getting to the Root of SME’s Needs

I’ve wondered if the ERP is the single source of underwriting manna, especially for small businesses. From some analyses we worked on last year, we identified that the needs for SMEs boiled down to three key priorities: 
  1. Get paid faster 
  2. Get better access to capital 
  3. Go digital 

Getting paid faster is always front-of-mind for an SME and going digital is a must-have in today’s business environment. This being said, we regularly hear from entrepreneurs that they could double, or even triple their sales if they could get a bigger inventory line from their bank. Lenders who do not have an intimate understanding of their customers may decline what is actually a secure loan for a strong business. 

As lenders, you invest a lot of money to acquire customers—don’t lose them through insufficient data. 

Enriching Facts with Alternative Data 

While ERP systems are great for detailed financial data, the addition of sentiment-based data can lead to smarter lending decisions. Obtaining smarter lending decisions can be achieved by collecting data from alternative sources such as Facebook, Twitter, Trustpilot, or Instagram that are paired together with AI or machine learning for algorithmic underwriting. For example, positive business or product reviews on Trustpilot and Twitter can be a strong indicator of potential sales growth. 
 
We see many new lending platforms taking this approach, some even thinking that alternative or sentiment data can become the primary data (I don’t; for me, facts matter). 
 

Interestingly enough, a glance at traditional banks’ capabilities reveal that they have some of the best AI capabilities in aspects such as quantitative trading platforms. Opportunities exist in reusing the skills that banks have to develop functions like risk assessment for loans. 

Mining for New Insights: Customer Intimacy 

Mining all these data sources, new levels of insights are achieved. Moving past just Know Your Customer (KYC), lenders can evolve to a level of customer intimacy. The relationship gained from customer intimacy helps you understand the customer’s business at a contextual level. By gaining insight into forward-looking data such as their predicted inventory and stock requirement, banks will be able to better anticipate their client’s needs. In turn, this enables financial institutions to proactively make ongoing credit decisions in real time—perhaps, even before the customer knows that they need it. 

In parallel, while a lot of effort is placed on loan origination and risk assessment, we can see a future in which ongoing risk assessments could be run. Essentially, the automation of manual account reviews for processes which regularly occur at banks could alert to signposts of potential default in the future—all with an eye to reducing the bank’s loan loss provisions. 

Parallels in Tech and Telecoms 

Having worked extensively in Telecoms earlier in my career, I see parallels in where we are today and where we were with Telecoms 15, 16 years ago. Rewind to 2007 : the dominant phone vendor was Nokia, and (if you were really cool), you would have a Blackberry for business and emails. If you wanted music, videos, sports, news, TV… any kind of content really, this was only available from the mobile network operator. With bill payments and mobile bank services developing and coming online, network operators saw a future where they would be able to have an intimate understanding of their customers’ financial health and product preferences. In turn, network operators would be able to target specific offerings to their customers. The future was bright.

Then—the game changer: Apple. Followed by Android. After a few years, all of the content and services mobile operators had focused and built their vision on became available via an App store. Without these, the mobile operator became a simple pipe, delivering data as a commodity. 

Open Banking and PSD2 have created a game changer too.

Enter Neo Banks and New Lenders 

In the last five years, we have seen a significant growth in neo banks and new lenders. Businesses have begun to move away from traditional banks and into the new platforms that these lenders offer. This being said, we are still at the early stages; the game still has a long way to go. 

So far, most of the new players are focused on the SME market, where the demands for financial services are less complex. The traditional banks have a deeper and broader range of products and services that differentiate them from the new players, particularly in the larger SME, mid market, and large enterprise sectors. Within this space, I see increased enthusiasm from traditional banks to embrace the new technologies being used, and, more importantly, implement them quickly. 

No Winners or Losers

This is not a game where there needs to be a winner, or a loser. I think that the pie lenders are looking at could be larger, and they are not fighting over the same pie as before. With the right data, it’s possible to see that many of the business loans previously declined were, in fact, a more secure risk—the pie is bigger! 

Both traditional banks and new players have access to the same tools—or weapons—and the ability to use them. With the right tools, both can deliver good and well-evaluated lending decisions, quickly and securely. The traditional banks, new lenders, and the customer can all be winners. 

Embedded banking and lending have moved a long way from the days of driving a truck to your customer. 

With the right technology, you can be right beside your customer, working with them within their ERP. That is where you need to be. 

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Contact sales@fispan.com for more information on how FISPAN can help you enable embedded banking for your customers.

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