Corporate lending: Creating, delivering, and realising value

This piece has been co-authored by Ram Devanarayanan, associate vice president, senior industry principal at Infosys Finacle.

Between 2015 and 2019, while the gap in bank lending to small and medium enterprises in the Eurozone shrank from 6% of GDP to 3%, a quarter of European SMEs still faced great difficulty in accessing finance. In 2022, amid a slowdown in bond and lending markets, European corporations turned to direct lenders for their large cap financing needs.

Businesses are not just asking for loans from their banks; they are also demanding digital accessibility, customised solutions, and online productivity tools, mirroring retail lending experiences.  Other expectations of European companies – governed by the strictest data protection and ESG regulations in the world – include transparent pricing, risk management advisory, and environmentally and socially responsible lending practices.

In addition, fintech and other non-bank financial providers are taking expectations higher by automating customer verification, document population, and more.

How are banks responding to these challenges? 

We observe that banks trapped inside legacy systems and processes tend to struggle, unsure of where to begin. In contrast, progressive banks are thinking clearly and are going back to “first principles” to introspect what their customers really want. In other words, what are the jobs they want done.

With the jobs to be done as the starting point, these banks are systematically – and with the help of technology – improving the way they create, deliver and realise value for their customers.

Case studies: Lending products, services, and capabilities for creating value

A great example of value creation with the embedded banking model is the partnership between Goldman Sachs and Amazon. By tapping SME sellers’ data from the Amazon platform, Goldman Sachs is able to better under the businesses’ performance, sales cycles, product ratings and more,. and proactively offer the right credit to worthy SMEs on Amazon’s Seller Central site itself.

The bank invites the customers to apply for a loan on the site: because underwriting has already happened to some extent even before a business applies for a loan, the approval is faster; also, lending becomes a seamless part of the customers’ primary journey (selling).

Instabiz fom ICICI Bank is creating value with an aggregator model that serves all the financing needs of MSMEs through a single portal. Recognising that when an enterprise seeks financing its primary need is not the loan per se but rather to run its business, Instabiz offers various services to meet that (primary) need, such as loans, payment processing, accounting and tax support, in one place.

Another way of creating customer value in lending is by reducing the friction in the loan application and underwriting process. Cross River, in partnership with a fintech firm, offers a suite of tools that mine, classify, and analyse unstructured data, often pulled from printed documents, enabling lenders to verify and process loan documents in minutes or hours, rather than days.

U.S. fintech, Capchase, innovated a niche lending product aimed at SaaS startups, which were unable to meet their upfront financing needs because their customers paid according to a flexible schedule. Sensing an opportunity, Capchase created a revenue-based financing model where the businesses repaid loans not with interest, but with a share of the revenue earned during the agreed period.

New ways of delivering value 

Progressive banks are digitising as many lending processes as possible, enabling everything from loan application to disbursement to happen online. Towards this, they are embedding corporate loans within their customers’ primary journeys and also offering them on various ERP, ecommerce, and accounting platforms, with the clear understanding that regulatory compliance remains their (the banks’) responsibility.

After creating a number of successful marketplaces for retail customers, DBS Bank has built DBS BusinessClass, a platform offering resources and support for SMEs and startups. Another example of the marketplace business model is EquipmentConnect where various lenders come together to offer financing for SMEs’ heavy equipment and machinery purchases.

Realising value through better business models

Digitally advanced institutions are realising greater value for their customers and their own organisations by lowering costs, improving experiences and adopting new business models.

For instance, they are leveraging cloud and APIs to automate, and lower the cost of, customer onboarding, and artificial intelligence for improving various processes – KYC and AML checks, credit scoring etc.

Some lenders, like Capchase, are innovating lending models based on outcomes, while others like DBS Bank are using a marketplace model to realise value for all parties.

Corporate banks that are still exploring ways to maximise value for customers could benefit by following an eight-step process: 

1. Understand customers and the jobs they need done
2. Identify gaps and new opportunities
3. Run design sprints
4. Design the customer experience
5. Find the right partners
6. Develop the business models for creating, delivering, and realising value
7. Run beta tests to scale the service
8. Iterate with customers to improve continuously

In conclusion, the landscape of corporate lending is evolving rapidly, driven by shifting customer demands and technological advancements. While challenges persist, forward-thinking banks are embracing innovation to create, deliver, and realise value for their customers.

By reimagining lending processes, leveraging data insights, and adopting new business models, these banks are better positioned to meet the diverse needs of businesses in the digital age. Moving forward, a customer-centric approach coupled with agile methodologies will be paramount in driving continued success and delivering meaningful outcomes in the corporate lending space.