By Chartered Banker Institute, UK

At the height of the pandemic, fintechs and challengers in the banking space saw an opportunity to support businesses in need – and demonstrate their own credentials.

Iwoca, for example, launched its OpenLending platform with a clutch of partners, claiming it would provide micro-businesses with “fast and digital access to finance at a crucial time”. And Trade Ledger forged a ‘taskforce’ with fintech peers Wiserfunding, Nimbla and NorthRow, with a similar mission to channel funds to struggling small- and medium-sized enterprises (SMEs).

The bottleneck was to be at least partly eased by the Chancellor’s introduction of bounce back loans. But Trade Ledger Founder and CEO, Martin McCann, says now: “There was a huge issue with cash flow liquidity, and we could see a need in the market that wasn’t being fulfilled to solve the short-term needs of SMEs.

“In terms of sheer scale of need, this was wartime – and peacetime capacity just wasn’t working.”

Race to the Cloud

Now that the war is abating, who is best placed to serve the banking needs of battle-scarred businesses?

Business-facing banks have come into their own in the sense of supporting businesses to forge useful connections, review their supply chains and adapt their business models to the new reality. Their deep knowledge of clients and the sectors they operate in is now more valuable than ever.

Where corporate banks have fallen behind the challengers – and even their own retail operations – is in the deployment of open application programming interfaces (APIs) to serve clients more efficiently. That gap was mercilessly exposed by borrowing experiences during the pandemic.

As a result, digital investment programmes that might have been expected to stall amid a major crisis are instead being stepped up, according to Sankar Krishnan, Executive Vice President of Capital Markets and Banking, Capgemini. “There is increased spend at the banks as they pursue digital at a pace faster than anyone thought,” he says.

One priority is the replacement of the creaking payments infrastructure: “What is coming out of the pandemic clearly is the need for a faster compute. Our number one business now is the move to the cloud – every bank is asking how they can do this.”

Tech Poachers

Cloud migration is a good start. But in the face of competition, incumbents may finally need to embrace single-platform partnerships if they are to retain their share of the business market.

One route is via Big Tech. This summer, Goldman Sachs led the way by teaming up with Amazon to introduce lending facilities for sellers using the tech giant’s marketplace. With sellers’ consent, Goldman will be able to use the businesses’ revenue data from the platform to support credit approvals, according to initial reports on the deal.

The move follows last year’s deal in the retail current account space involving Citi and Google. At the same time, tech has begun to poach senior banking figures – Bank of America CTO Howard Boville now heads IBM’s cloud division, while in June, Google Cloud hired Citi Fintech CEO Yolande Piazza.

“We are going to see a lot of experienced bankers move to Big Tech over the next few years,” Krishnan predicts. “They bring good knowledge of financial regulations and how real-time payments work.”

Banks: The New Intel?

He sees the Goldman/Amazon deal as a win for all concerned: “By partnering with financial brands and being the liquidity provider, they can provide a better deal for their SME sellers. It creates more stickiness and a new revenue stream for Amazon. And for the bank, it makes it a lot easier to access borrowers.”

The fear in partnerships such as this is that the brand loses its importance as a differentiator, leading to the loss of bank ownership of the customer relationship. But in its latest World FinTech Report, Capgemini argues that banks need to embrace platform models if they are to avoid being reduced to the status of ‘data pipes’, transferring data from one point to another without any input.

Krishnan believes banks can afford to play to their strengths within new joint ventures. He cites the ‘Intel Inside’ marketing campaign for microprocessors that became ubiquitous in the 1990s: “The competition now is going to be, which of the banks will be the ‘Intel Inside’ of your marketplace?”

McCann agrees: “The banks that get on top of this trend can be the providers of better credit and business banking through an omni-channel infrastructure. They will still have their own branded services, but they will also be able to provide those within an embedded proposition.

“The banks that get to that point first will see massive service shifts in their favour. Those that miss out will become utilities.”

Collaboration Wave

The other obvious route for banks is to create platforms in collaboration with fintechs. They have the appeal of innovative capabilities, but without the threat that Big Tech poses of disintermediation of the banking sector.

If banks are keener than ever to collaborate to ride the digital wave, the time may also be ripe for fintechs. Investor confidence in fintechs fell during the pandemic, resulting in a drop of over a third in investments in the first half of 2020 compared with the same period last year. While still upbeat about the sector’s prospects, Innovate Finance, the industry body, says three-quarters of smaller fintechs are concerned about their next funding round.

McCann predicts a rush of new collaborations. He says banks in dialogue with Trade Ledger, and which previously saw digitisation of business lending as a three-year project, are now looking to deploy this within nine months.

He says fintechs will be able to equip the banks to deal better with origination and onboarding of new SME clients, as well as streamlining credit decision models. New platforms will also require a new offering: “The traditional products are not going to cut it for large sectors of the market that need recapitalisation.”

Seamless Lending

For McCann, the time has come for Open Finance – a ‘banking-as-a-service’ model centred around ecosystems rather than institutions. Trade Ledger’s vision is of digitised lending as an infrastructure layer that is available seamlessly when businesses need it – at the point of reconciling their monthly accounts on Xero, or while buying inventory on the Amazon Marketplace.

He discounts concerns about business’ reluctance to open up their data, which would be required for such systems: “There needs to be a packaging and proposition effort to explain why it’s in the business’ interest.

“Smaller businesses tend to have a lower level of financial literacy. They don’t necessarily understand where they are in terms of creditworthiness or even their cash flow position. If you can build a proposition that helps the business to solve these problems, that would encourage them to connect to more data sources.”

Krishnan hopes the gloomy statistics of the Capgemini World FinTech Report, published in April, are already out of date. In that snapshot, only 21% of banks said their systems were agile enough for collaboration, while 70% of fintechs didn’t see eye to eye with their bank partner in a cultural or organisational sense. The next report, Krishnan predicts, will reveal a transformed picture: “My hope is that we will see a lot of activity in the first quarter of next year.”

McCann sees an even faster shift: “By the end of this year, I think we’ll see a number of UK banks announcing significant new digital products to help with credit, liquidity, treasury and other transactional banking requirements, particularly at the smaller end of the market. There’s no way we’re going back to normal after this.”

This article previously appeared in the Chartered Banker magazine, UK, Autumn 2020 edition.