Why digital lending is the future for banks and SMEs

European Banks can better serve and understand SMEs through a digital credit process, that is data-led and can deliver funds fast.

In brief

• As SMEs look to invest after the pandemic, 66% want access to faster credit. If banks can’t provide this, then businesses will turn to FinTech or specialists.
  
• Banks can revolutionize their credit offering using automation, enhanced data and analytics to simplify and speed up lending decisions.
  
• Getting lending “right” will also be a critical springboard as banks look to develop more financial and non-financial ecosystem services.

Banks have never been so diverse in the range and scope of products and services they offer customers. Yet they must not lose sight that lending is central to their profitability and relevance, and is a foundation to attract and start deeper relationships with customers. Lending can then act as a springboard and allow a bank to offer a wider ecosystem of financial and non-financial services. Banks need to get the “basics” right before investing in non-core services.

Lending is an area ripe for banks to rethink and retool how they serve their customers. Borrowers want change. The EY Global SME survey found that the most requested service was guaranteed access to faster credit. This includes fast approval processes and the certainty that funds are available when needed.

While retail banks embraced digitalization some time ago, corporate banks are only now coming to terms with the power of digital. While we focus on small and medium-sized enterprises (SMEs) lending in this article, banks need to act across their entire credit offering. They have the opportunity to pivot to truly digital lending that serves borrowers better while increasing revenues.

Nigel Moden, EY EMEIA Financial Services Banking and Capital Markets Leader says, “digital lending is a key opportunity for competitive differentiation. This is not just about speed of decisioning and fulfilment (the important basics) but also about delivering personalized customer journeys on a scale never seen before.”

Several drivers are changing the lending picture

As well as evolving customer requirements, the SME lending landscape is being disrupted by several other factors, accelerated by disruptive technology:

Demanding customers

As in most areas of banking, SME customers value speed and convenience. They want a seamless, end-to-end, consistent lending experience that delivers instant decisions and immediate availability of funds.

Disruptive technologies

Banks need flexible, open, real-time, and easy-to-integrate solutions. They now have access to application programming interface (API) enablement and the use of external data sources to streamline front, middle and back-office activities. We would then expect data analytics, artificial intelligence (AI), machine learning (ML) and automation to enhance the offering.

Competitive environment

Small businesses have a wide range of credit options, from FinTech to BigTechs, as well as specialist SME niche lenders. These “challengers” are acquiring SME customers through fast credit scoring and offering loans directly via digital platforms. They can then expand products and services beyond lending to capture other revenue streams.

While banks remain the preferred choice for many SMEs, the COVID-19 pandemic has changed expectations, with SMEs increasingly looking for digital-led, simpler and faster lending. An increasing number of SMEs are looking to FinTechs if their bank cannot meet this demand.

63% of SMEs still prefer traditional banks for their financial needs. But the use of competitors is increasing – 56% of SMEs use a banking and payments FinTech service. (Source: EY Global SME Survey)

Enhanced information 

Banks can enrich the data that sits behind the credit scoring model. Lenders can integrate internal customer data with broader and more innovative information retrieved from external sources (local socio-demographic data, web data, PSD2, etc.). This allows the bank to unlock financing for creditworthy but rejected SMEs and offers predictive, tailored solutions (using AI, ML and data analytics).

Scalable and open-banking technology

Leveraging APIs and the cloud allows banks to offer more complex and targeted services and be faster and cheaper to run.

If banks really want to digitally transform their lending, they must look at changing not only the customer journey but the underlining processes. Many digital enablers, applications and systems can accelerate digitalization, all through the credit process. The challenge for banks is finding a combination that most efficiently replicates their credit life cycle, making integration easier.

Leveraging the full power of the bank

Lenders should work with all business units across their products and services and tap into distribution channels and after-sales services. This helps build an agile operating model with clear governance to operate across the bank at high speed.

Customer experience first

Ensuring customers have a seamless journey across different products and services, with a clear end-to-end journey, builds satisfaction and loyalty, as well as lower drop-out rates as banks become more relevant.

Best in class

Working with third-party solution providers ensures a wide, deep and up-to-date offering in line with the banks’ long-term vision.

Working with organizations, EY teams have also seen some common problems they have faced on this journey. For example, many SMEs want to apply for credit on their phones, so any solution needs to be designed to be mobile-friendly. Also, given that loans are often negotiations (around term length, amount borrowed and rate), any system needs to be flexible enough to adapt without forcing customers to restart the entire process.

Digital lending – a revolutionary change for SMEs and banks

The pandemic showed SMEs the advantages and potential of digital banking services. How banks respond to that demand is key. While there are many interesting non-core services they can develop, they must not lose sight of getting lending right. A fully digitalized lending offer can allow banks to make fast decisions while giving a frictionless and easy process for time-busy SMEs. Critically, it also means banks can obtain rich, real-time data that can help them better understand SMEs’ needs and design new products accordingly. It can also be a step towards hyper-personalization that can create bespoke offers for each SME.

EY teams have seen several lenders (and even digital banks) look to enhance their digital lending and run into problems. The key to success is ensuring the underlying systems and the customer journey are changed. That means using the right digital tools at the right stage of the credit cycle, such as a credit decision engine.

Banks will need to understand where they can stand alone and where they may need to partner or use white label solutions. We are already seeing several banks partner with FinTechs to accelerate their digital transformation in this space.

It is a crucial time for banks to land their SME lending proposition. Many SMEs are looking to invest post-lockdown to either digitalize further or use their enhanced digital presence to expand overseas. At the same time, rising interest rates make lending more profitable and will attract non-bank lenders to serve this sector. With branches closing, those banks that can deliver digital lending for SMEs will have a clear competitive advantage.