SME lending: “Application to funding must be digital”

By William Wagner | 7 August 2018

Traditional lenders have steered clear of the SME market in recent years – but that’s changing. What was once considered an unprofitable sector, incumbents and new market participants have started to look to SME funding as the next big growth area. But the market has high expectations. Bobsguide spoke with William Wagner, vice president of marketing at Cloud Lending Solutions, to find out more.

How have traditional lenders (such as the established banks) advanced their services over the past few years?

Traditional lenders are adopting fintech-like solutions into divisions of their banks, so they can digitize their borrowers lending experience from loan application to funding, being 100% online and digital.

There’s been a lot more demand for capital across business and consumer markets over the past couple of years. Are these traditional lenders able to take that business on?

Absolutely, but not if they continue to lend with the same workflows, same scoring methods, and same non-digital engagement behaviours that forced consumers to visit banks 20 years ago. Most borrowers no longer see the need to visit a physical bank branch, why should they, its not necessary to obtain funding. Just because you throw up a website for an application then give the borrower a 1-800 number to call with a 3-5 business days for a response, does not mean you have a digital presence. The entire application-to-funding engagement must be digital, transparent, and omni-channel based.

We’ve seen a lot more alternative finance firms popping up during that period. What do they offer that the incumbents don’t?

Speed of lending process and the time for funds to get into the borrowers account. The price of the loans is almost never better than a bank’s cost of funds, but if the funds are for short-term loans or the business lender is tired of the banks dictating the relationships, then there is no reason to go to banks - there are hundreds of alternative finance lenders that will gladly fund your business and come to you. There is a commercial on television where bank managers are in the borrowers home, making coffee and fighting for the attention of the borrower and while it may seem like a silly commercial, its message is true: when banks compete for your business, on your terms, from wherever you may be (home, office, mobile, web, etc.), then the borrower wins – it is one of the reasons why alternative finance companies message to borrowers resonates so well, it’s about simplicity, speed, and choice. Why go to a bank when the bank can come to you? We are seeing a major shift in the borrower behaviour.

Specifically, within the SME market, what are the benefits to using an altfi provider?

SMEs have a business to run, they want someone who can fund them where they are, fund them without having to visit a branch and by using fintech platforms, be able to configure loan payments that met the demands of the SME. Altfi's are very flexible in what types of loans they can offer because they are not held hostage to older lending models and scorecards that are difficult to adjust and modify as the market fluctuates, they can be flexible.

As with any market – and particularly within financial services – people are reluctant to change their providers. How much of a challenge is that for altfi providers?

That may be true within specific age demographics, specifically the older demographics but borrowers under 45 have no issue changing banks or seeking loans provided by non-traditional lenders. They have, for the last decade, been taught to seek out options and look for the best experience hence they switch cell phone, cars, cable tv, airlines, hotels, frequently, it's about their experience. Between 45-65 it is more subjective based on technology adoption comfort and relationships with financial institutions. What we are finding is that once the borrower is over 65, change isn’t going to occur, then again, that isn’t the target market for borrowing. But below 45 is where traditional brand loyalty has been challenged, its why branches are closing at an astonishing rate YOY. Those 25-35-year-old university grads will be buying homes and cars over the next 10 years, it’s about looking and hooking to the younger audience because in 20-30 years the vast amount of wealth will transfer to the younger generation as the older generation passes and then the 20-30-year olds will be the target audience with decades of expectations around what an exceptional lending experience is like.

How has Open Banking helped AltFi become more established?

It is a very hot topic and one watch but in essence, it has freed up the ability to obtain data and information to make decisions at a rapid pace and do so with high security so the advantages that banks traditionally held onto as their "Black-Box" decision engine are now reduced. If everyone is using the same APIs for data and vendors give lenders access to the same information, the consumer ultimately wins.  

Is there still a threat from established banks, to this new and growing marketplace?

Yes and no, I don't think it is as black and white; rather it depends on the lending needed and the type of consumer. I think there is always a way for banks to create a fantastic borrower experience, but their margin of error has been reduced to “once”.  Consumers know that they have a choice so if a borrower experience is terrible, there is a choice - lots of choices. For certain types of lending - SME or Consumer lending - that could mean an entire lending vertical could be severely challenged by incumbents and non-traditional lenders, but for other lending types (i.e. commercial lending, mortgage), the process is so difficult, nobody has nailed it.  If a consumer needs a quick $12,000 personal loan, they can get it from anyone, anywhere, and almost be guaranteed funding in 24-72 hours with no human intervention. Or if an SME needs a $75k capital good improvement loan, business owners have a business to run, if they can go through the process after hours, say 7pm to 10pm and not 9-5, an AltFi lender can support that need if the process is digitized and transparent. For commercial or home lending, having a local understanding of regulations, laws and regional market trends is critical. If banks can combine local knowledge and experience with technical acumen and a fintech-like borrower experience, it can be a very power combination.

There’s a perception that AltFi goes after only below-par customers. It could be argued that is reminiscent of the shapings of the subprime mortgage crisis. Would you agree?

I think credit quality is always a risk for any lender, and I would agree with the perception that only below-par borrower go to AltFi but data and research has shown us the opposite. That the perception is wrong. Borrowing trends continue to showcase how SME and Consumer Lending is trending away from banks, especially as younger generations get age. I think that the 2008 banking crisis is still fresh in many lenders minds, but banks are very well positioned to accept additional risk on the books, question is, do they have the appetite too. I think assuming that AltFi lenders are only interested in or lending to below-par customers is a very unhealthy view of the lending landscape, I would be very concerned if an executive held that perception.

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