Lending-as-a-Service - Next generation Marketplace Loans

Providing business loans at the real point of need – not just at your bank!

What is LaaS?

LaaS, sometimes referred to as the “Marketplace Lending” is an emerging trend in the banking and financial services sector where banks and lenders are leveraging new technology to surface their products and services on platforms outside of their traditional banking channels (i.e. in a branch, online banking, etc.).

LaaS is a sub-category of Banking-as-a-Service (BaaS), which refers to the new wave of cloud-based infrastructures and Application Programming Interfaces (APIs) being used to allow businesses to build, configure and manage their own financial services, breaking the stranglehold of traditional transaction banking models.

The future of commercial lending will be componentised and integrated into the engagement model a business executive is most comfortable with. It doesn’t matter if they prefer alerts directly through their finance system or interacting with an intelligent chatbot in imessage. Such convenience and integration are not science fiction.

The proliferation of technology across the banking landscape will increase significantly over the coming years and open banking triggers a decoupling of services distribution from production. Banks & lenders who do not react and start to lay the technological foundations for a fundamentally different financial service business model risk becoming a commodity.

The rise of the Eco-Systems

In the last year, we’ve started to witness a wave of new partnerships in the lending sector, where Banks, FinTech’s and the wider marketplace eco-system (often big tech giants) have started to collaborate in the sector of LaaS. These partnerships are aiming to address the current friction that exists in the commercial loan application process, creating paperless journeys which occur early in the buying process, providing an improved banking experience and empowering the business prior to any cash flow issues.

LaaS is due to experience an even greater explosion in 2019, moving corporate lending towards a more integrated, customer-centric and data-driven experience for businesses globally. Some of the key drivers stimulating the evolution of the LaaS market include:

• Businesses:- Want choice, transparency & a Great Experience
• Banks:- Want to drive customer engagement
• Regulators:- Want Competition, Fairness & Suitability
• Marketplaces:- Want Innovation, Collaboration & Growth

Businesses are increasingly demanding the convenience that consumers have enjoyed for some time. Why does a mid-sized company executive need a consultation with experts or to prepare custom integrations or financial data if they already know the cash flow gap, how long they need cash for and how much they are willing to pay for it?

LaaS aims to help traditional incumbent banks, who still serve the majority of the world’s corporate businesses, to participate in this value chain extension by delivering our technology in two ways. Firstly, by digitising the end-to-end process of traditional commercial loan products available at banks currently and; Secondly, by helping banks to place these products (via API) into the wider marketplace eco-system and better servicing their customer base with seamless financial service experiences.

Banks vs Big Tech

Alibaba & Kabbage

We’ve witnessed a number of partnerships spring up over the last 2-3 years where LaaS is becoming increasingly well recognised as a strategy to succeed in the new era of open banking. One notable partnership in the commercial lending sector was the recent announcement from Alibaba that they had selected Kabbage, a large alternative lender in the US to offer loans to the merchants using the Alibaba platform to trade.

Alibaba is one of the largest marketplaces in the world, but they have been largely constrained to the Asian markets given the dominance of Amazon in the Western world. This new partnership will provide up to $150K of financing at the point of sale on Alibaba.com as part of a new program called ‘Pay Later’. The huge benefit to Alibaba is the opportunity to serve a new market of businesses in the US market who might be looking to finance their purchases on the website giant’s marketplace, and for Kabbage this gives them the ideal platform to penetrate new business with targeted working capital at the real point of need (purchasing materials and equipment online).

This partnership demonstrates that despite a strong affiliation with Ant Financial, one of the world’s most advanced LaaS platforms and a lender in China, Alibaba recognises the continued need to leverage eco-systems in other markets to put working capital at the point of need for their customers.

The real threat of big tech

The Alibaba example demonstrates the real threat that big tech partnerships can pose to incumbent banks in the SME lending space. For many years, the fintech world has been anticipating the entrance of Amazon into banking whilst quietly they have lent over $4bn to their own consumers (within the Amazon eco-system). Luckily for the large incumbent banks, the likes of Amazon have yet to penetrate the eco-system outside of their own marketplace (where they control the flow of goods) and Ant Financial has been largely confined to Asia, however, with the emergence of Open Banking and a global trend towards consumer empowerment of data, this is simply a question of time!

The questions for incumbent banks is not one of protectionism anymore and “ownership of banks” is no longer a strategic or important consideration, in fact, it’s quite the opposite – Uber, Airbnb and Amazon didn’t think about owning cars, houses or shops when they launched so how does a bank need to start thinking?

For new entrants, this is relatively easy, build specialist digital propositions fast and plug your services into the marketplace eco-system to increase distribution. For banks, however, this isn’t such an easy option and they have millions of existing customers to keep happy and a stack of legacy technology to overcome, all before you compete with the political & operational challenges.

Banks fighting back

Various models have been explored in this sector covering the range of typical build, partner, buy strategies but the emerging trend of platform banking (i.e. BaaS) has only been possible in the last few years as a result of the maturation of enterprise technology in this space. Large incumbent banks now have a viable way of fighting back and creating digital propositions which rival the newcomers. According to a report from McKinsey titled "The lending revolution: How digital credit is changing banks from the inside", banks & lenders looking to respond to this new environment must:

1. Embrace full platform capability and data feeds for end-to-end journeys in new markets
2. Create new digital products, by automating SME credit decisions through the use of alternative data sources (such as ecommerce transaction data from Amazon, PayPal, and eBay; cloud-accounting data from Xero; and banking-transaction data via application programming interfaces from Open Banking) 
3. Create individual process components, which can be integrated (via API) into existing bank processes or external origination channels (broker portals, point of sale, ecommerce, accounting platforms etc.)
   
   

LaaS providers employ a highly componentised model, utilising the latest technology to make a platform which not only provides banks & lenders with a range of alternative data sources to better underwrite risk but also provides the capability to plug these into the new range of origination channels via API marketplaces.

2019 is the year when banks will come under significant threat from big tech and new entrants and need a fast and effective way of competing in the new open financial eco-system.

Putting Customers first

Once you’ve decided as a bank to adopt the platform approach and build out the technical foundations of a future LaaS model, you must then start to consider something much more important – what your consumers want. LaaS platforms should constantly be thinking about their customer’s customer, this way they never lose sight of what the LaaS proposition is trying to achieve and they can constantly re-assess whether it is truly able to fulfil the needs of businesses looking to access working capital.

In a recent Accenture paper titled "Driving Customer Growth In The Point-Of-Sale Lending Market", they call out five consumer needs which need to be fulfilled to succeed in this new environment, all of which can be achieved with a LaaS platform approach:

• "Make it fast and smooth" - Create and Deliver new digital loan products which have straight through processing (STP) capability
• "Have my needs at heart" - Perform bespoke needs analysis using traditional & alternative data sources
• "Make credit available wherever I am" - Integrate your new LaaS APIs into Lending Marketplaces (Accounting Packages, Brokers, Merchants, e-marketplaces etc.) or on your own website
• "Make it appealing to me" - Create new products and pricing specifically for this new market. Incentivise business to share more data by adjusting rates to risk
• "Make me want to come back" - Give the customer more than just credit (give them real-time alerts about their cash flow) via digital channels (iMessage, WhatsApp)

New consumer attitudes towards SME lending will drive a transformation in the way corporate finance is delivered to the market in future. The emergence of API accessible, consumer consented data, advanced analytics and robotic process automation are enough to re-imagine credit through LaaS for all businesses requiring working capital from their bank.