Incumbent lenders urged to embrace ‘niche ecosystems’ to tackle marketplace lender threat – EY

Business Lending EY

Business specialist banks must make full use of big data and new digital ecosystems to secure their place as “trusted advisers” in a post-Covid economy or risk losing ground to up and coming marketplace lenders, a recent EY report predicts.

The NextWave Corporate, Commercial & SME Banking (CCSB) report urges the business banking community to pursue “relentless client-centricity” to counteract the increasing cost pressures and low cash rates of the Covid-stricken economy that are benefitting marketplace lenders, including P2P offerings.

Marketplace lenders typically use online platforms to directly connect borrowers with individual investors, often lending at more affordable rates than traditional banks – a prospect bound to appeal to businesses in today’s sluggish economy.

As “unified experiences or [the] single interface” become baseline expectations for clients, the report also urges banks to take advantage of Open Banking, APIs, or other specialised software such as blockchain to build connected ecosystems and aggregate services.

One means to “own” customer relationships, the report suggests, is for banks to create multiple ecosystems that provide “profitable niche leadership” or even specialise in financial services for specific industries.

For instance, EY’s report revealed how more than 1,000 suppliers within a logistics supply chain ecosystem have connected via APIs to a blockchain platform called Rong-E Lian, developed by DBS China – where the bank also oversees supplier onboarding and credential verification – yielding Chinese SMEs faster access to trade financing.

To date, DBS has launched several blockchain-powered trade platforms, including HeveaConnect, a marketplace for sustainable rubber, a commodity trading platform in partnership with Singapore’s Agrocorp, and YunLiangMeng, a digital trade platform for China’s automotive industry.

Banks were also advised to invest in the right “infrastructure and digital channels” to enable subscription-based fee model, upon which they will be able to offer transparent pricing and prorated applications.

Subscription models, the report argues, will democratise access to sophisticated financial products once reserved for larger corporations or high net-worth individuals, while allowing for greater customisation of client service offerings.

The report cited UK-based challenger Starling Bank’s digital ‘Business Toolkit’ as a prime example of this subscription model, offering customers deposit and transaction facilities, as well as accounting, tax, and foreign exchange services, for a flat monthly fee.

Client relationships, the report authors said, are also strengthened by the offer of seamless ancillary services, including legal or risk management, thus freeing up businesses to focus on core activities – again, by harnessing the power of connected ecosystems.

Business banks are in a unique position to help their clients as “advisers”, EY argues, not only by connecting them to growth opportunities, but also using advanced analytics to help make informed decisions based on insights drawn from their data assets.

There is, however, also value to be sought beyond bank data, report authors stressed.

Taking cues from Open Banking, lenders can integrate into clients’ ecosystems and tap into their data flows, enabling further analysis of business performance, inventory and operational data, enabling them to proactively offer tailored services, EY said.

While opportunities for client relationship-building are aplenty, the report warns that disruption has already begun in the form of alliances formed between tech giants, who have access to real-time client data (including supply chain data), and logistics and retail businesses that embrace marketplace lending.

For instance, Goldman Sachs’ online-only bank, Marcus, is partnering with Amazon to offer revolving credit lines to small businesses.

Here, Amazon shares data about merchants that use its online marketplace, while Goldman’s Marcus, which has ambitions to become a ‘banking-as-a-service’ provider for large corporates, uses that data to make underwriting decisions.

EY also found banks’ adoption of emerging technologies – namely, machine learning, intelligent automation, and blockchain – has been “siloed” with minimal “fit-for-purpose use cases” across corporate and institutional portfolios, potentially stymying enterprise transformation.

While urging for broadscale uptake of emerging tech among business lenders, EY also stressed that transformation is unique for every organisation.

“In many cases, [transformation] requires uprooting processes and structures which are built around a model that has been largely unchanged for 100 years,” the report said.

“The way forward starts with a strong purpose and vision, a clear and client-focused strategy, a strong and flexible operating model, and sophisticated technology.”