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The coronavirus pandemic has put the SME lending market under the microscope with extensive debate on how to deliver the right financial support to SMEs at speed. Traditional retail banks usurped fintechs and were gifted the golden CBILs and BBLs ticket, but many of these traditional lending models came under fire for bottlenecking vital funds.
What due diligence?
In the rush to connect oxygen to struggling SMEs, due diligence was also pushed to one side. Traditional lenders normally require numerous forms and lengthy ‘processing’ times to make a decision, but time was of the essence. The Government stepped in as a guarantor to enable the banks to write instant BBL cheques, blind to the ‘bouncebackability’ of the recipient regardless of COVID-19. Whilst a welcome and necessary lifebuoy for the SME community during turbulent times, within months these substitute products will no longer exist leaving a gaping hole in the SME-lending landscape. In addition, without the right checks and balances in place, there will no doubt be a Sisyphean mountain of bad debt to rationalise.
The alternative way
The Revised Payment Services Directive (PSD2) introduced in 2018 to level the playing field between traditional incumbents and new entrants now seems long forgotten. Despite promising forecasts highlighting the £7.2bn Open Banking opportunity, in the face of adversity the Government reneged on its promise. Hundreds of innovative fintechs were and are ready to lean in and aid economic recovery but despite extensive lobbying by industry bodies and influential players in the SME finance ecosystem, the Government failed to take advantage of a new, agile, insight-rich market and reverted to type.
According to Infosys, in normal times, SMEs spend over 25 hours gathering the paperwork for applications and approach several banks with their application. Successful loan applicants then have to wait for weeks, or even months for the funds to hit their accounts.
Bounce Back Loans (BBLs) were introduced to the market in response to the backlash the Government faced over the slow and restrictive CBILS initiative. BBLs promised a less complex process and minimal eligibility criteria so funds could be delivered within 24 hours. However, whilst the Government turned its attention to solving the problem on speed of loans, due diligence became compromised.
Speed can be the Achilles heel of any lending process, if it means neglecting due diligence. Credit checks, reviewing bank transaction data and confirming proof of income/financials are key steps in the underwriting process to ensure viable loans as much as possible. The reality is the Government could have hit both targets by tapping into an ecosystem that has the data and systems to make both quick and smart decisions. Alternative lenders and fintechs have the infrastructure, technology and expertise to drive high approval rates by pulling real-time data from Open Banking APIs and other data points - innovations critical to making well-informed lending decisions and shifting the industry towards automatic approvals.
Lenders assess how ‘good’ an SME is for a loan by analysing balance sheets and transaction history as an indicator of the health of the business. Instead of taking days to analyse three months of bank statements, digital lenders can do it in seconds and pull-in multiple additional data feeds to give a better, more real picture of that business today and in the future.
Although effective deployment of a digital strategy is critical in today’s business landscape, human interactions remain key to meeting customer expectations. Next-generation technologies such as data analytics and automation remove administrative headaches for introducers and increase their capacity to nurture customer loyalty and trust. Armed with data-rich insights, introducers can better gauge customer conversations and tailor products to borrower needs. It’s through this hybrid (human & digital) relationship between the borrower and introducer which enables lenders to deliver a seamless experience.
However, critical to the success of automated lending platforms is the underwriting process and the accuracy of data that lenders use to make decisions. Inaccurate data could easily undermine the performance of systems and corrupt decisions related to credit assessment and loan requests. To reduce risk, introducers need to ensure the lending criteria submitted to lending platforms is 100% accurate. In general, better data leads to better decisions and fewer defaults, meaning better rates for all.
The Government has worked hard over the last decade to drive competition into the financial services landscape through both legislation and wider initiatives. These efforts along with smart minds and deep investor pockets have encouraged a thriving alt-fi market to spring up, offering more choice for both consumers and small businesses. Rather than continuing its 180-degree turn on the fintech market, the Government should be doubling down and leveraging the efficiencies that new innovations bring. By backing innovative lending models and technologies, the Government can preserve this sector and strengthen economic recovery. We need to ensure small businesses still have funding options in the years ahead and good, data-driven lending delivered at speed becomes the norm. Anything else just isn’t good enough.