Until recently most technological investment has gone toward consumer lending, or specifically the small business sector, rather than commercial lending. The lack of investment, as well as the continuous reduction of bank branches, meant that the borrowing experience for businesses became slower, more impersonal and less informed by credit (Wintermeyer, 2020).
The pandemic changed this. It halted the proliferation of traditional paper-driven, face to face loans and forced commercial lenders to move toward digitalisation (O'Malley, 2021). Not only this - fintech companies addressing the same issues are on the rise and are giving traditional consumer lenders a run for their money.
Business lending is changing
E-signing and paperless transactions have transformed the lending experience. The Electronic Commerce Act initiated an EU Directive on e-signatures over 20 years ago. Despite this, using them for commercial loan transactions has only recently gained traction (Haniver & Bolger, 2020). Thanks to the pandemic, e-signing has become not just the norm, but an expectation from customers (Polinsky, 2020).
Manual processes associated with reviewing, servicing, tracking and maintaining commercial loan transactions have become automated (Polinsky, 2020). For example, the financial documents that need to be provided to institutions. Instead of manually entering the requirements into a spreadsheet and creating calendar reminders, institutions are using technology to automate reports and reminders (Polinsky, 2020).
Technological advancements have allowed for more reliable and simpler application processes. The use of credit policy data in digital applications and automated public data retrieval have reduced how much data customers need to enter and also improved data accuracy(Polinsky, 2020). Other changes, such as compliance solutions that minimise duplicated data entry, have also improved the speed and efficiency of loan document formation (Polinsky, 2020).
What is open banking?
Open banking is a banking practice that securely shares financial information, such as consumer banking transactions and other financial data, to third-party financial service providers (Estevez, 2020). Sharing data is done through the use of application programming interfaces (APIs) and only with the consent of customers (The Balance, 2020). Open banking is the driver behind both innovation and competition in the financial industry (Cahill, n.d.).
Why does business lending use open banking?
Business lenders require account data to make decisions on which businesses are eligible for loans. Open banking means lending companies can build a process that increases conversion rates and approval rates for creditworthy customers.
Open banking allows for automated bank statement collection. It also provides data on the debit and cash flow profile of a business that enables business lenders to understand the financial health of a business.
Some business lending companies you should know about
Funding Circle is a peer-to-peer lending marketplace that allows the public to lend money directly to small and medium-sized businesses. The company uses rich open banking data to help with its credit assessment processes (Neuwirth, 2020).
MarketFinance is a British business finance lender, specialising in invoice finance, business loans and corporate finance. They use open banking to improve the customer experience by making it easy to connect bank accounts and seamless to receive and transfer funds (Openbankingusecases, n.d.). Open banking allows MarketFinance to make informed decisions about their customers and business activity.
Capital on Tap is a lender that provides working capital such as loans and credit cards to small businesses. They use open banking to speed up SME loan access and monitor businesses that may be financially more risky (Finn, 2020).
What’s to come?
Banks are finally moving towards digitalisation and with this will come even more advancements in business lending throughout the decade. Outside of the development of new fintech companies, the number of fintechs that partner with banks and credit unions will increase in order to perpetuate the rate of advancement (O'Malley, 2021). Banks will harness the technological innovations made possible by fintechs, while fintechs will be able to leverage historical customer data available from banks and their large customer base (O'Malley, 2021).
The Balance. (2020, October 11). What Open Banking Is and How It Will Affect You. https://www.thebalance.com/what-is-open-banking-and-how-will-it-affect-you-4173727
Birlasoft. (n.d.). Commercial Lending and the Future of Open Banking: Connecting the Dots. Birlasoft. https://www.birlasoft.com/articles/commercial-lending-and-future-open-banking-connecting-dots
Cahill, H. (n.d.). InvoiceFair. The Evolution of Open Banking: Connectivity breeds digital competition. https://invoicefair.com/the-evolution-of-open-banking-connectivity-breeds-digital-competition-081118/
Estevez, E. (2020, August 27). Open Banking. Investopedia. https://www.investopedia.com/terms/o/open-banking.asp
Finn, A. (2020, April 24). Capital on Tap and TrueLayer join forces to speed up SME loan access through open banking. AltFi. https://www.altfi.com/article/6490_capital-on-tap-and-truelayer-join-forces-to-speed-up-sme-loan-access-through-open-banking
Haniver, R., & Bolger, P. (2020, April 15). Remote working: eSignatures for contracts and other documents. LK Shields Solicitors. https://www.lkshields.ie/news-insights/publication/remote-working-esignatures-for-contracts-and-other-documents
Neuwirth, S. (2020, August 7). Funding Circle looks again at open banking. Peer2Peer Finance News. https://www.p2pfinancenews.co.uk/2020/08/07/funding-circle-looks-again-at-open-banking/
O'Malley, D. (2021, April 14). The Pandemic Changed Commercial Lending Almost Overnight. What the Future Holds. Barron's. https://www.barrons.com/articles/the-pandemic-changed-commercial-lending-almost-overnight-what-the-future-holds-51618407570
Openbankingusecases. (n.d.). MarketFinance. Openbakingusecases. https://openbankingusecases.com/apps/marketfinance-invoice-financing
Polinsky, K. (2020, September 22). The Digitalization of Commercial Lending. Bank Director. https://www.bankdirector.com/committees/lending/the-digitalization-of-commercial-lending/
Wintermeyer, L. (2020, June 19). Is Covid-19 Bringing Welcome Change To The Commercial Lending Sector? Forbes. https://www.forbes.com/sites/lawrencewintermeyer/2020/06/19/is-covid-19-bringing-welcome-change-to-the-commercial-lending-sector/?sh=47418745d793