The holidays are over, we’ve made our New Year’s resolutions and our minds are still fresh and clear. Let’s take this opportunity to reflect on the future of asset-based lending; asking ourselves a few key questions as we enter a new year:
What are the forces that will shape the industry over the next five to ten years? How can banks and traditional lenders harness these forces?
Creating and maintaining a competitive advantage will be essential more than ever to survive and thrive. Having met dozens of lenders — large and small — there are three particular factors that stand out in order to be competitive: Efficiency, Borrower Delight and Risk Management.
To begin, asset-based lenders must ask themselves:
- How can we increase our accounts per collateral analyst?
- How can we win and grow borrower loyalty?
- How can we better detect and interpret default risk?
The winners in asset-based lending will pursue these questions aggressively, while those who do not will fall behind. Technology and intelligent systems will become the key differentiators. Winners will experiment and adapt; testing and shaping their tools with the greatest effect. In the distance, laggards will watch the victors attract market share like magnets. What’s your future?
Fintech: Embrace the Frenemy
In banking, fintechs elicit a wide range of reactions: amusement, annoyance, mistrust, even joy. One thing is for sure, fintechs can disrupt, for the better or worse for incumbents.
Stripe and merchant services; Ripple undermining SWIFT; SoFi gnawing at mortgages; Brex reinventing corporate cards; Robinhood peeling away future savers; Plaid — connecting all the disparate nodes of the ecosystem — the list goes on and on.
For years, commercial lending has trailed the consumer segment, but as with all true innovation (automobiles, PCs), these waves will crash on all shores. Fintech will force diffusion through two main paths: a) direct competition and b) platform enablement. Some rare incumbents will proactively prepare for the competition — but most will wait and watch. The real opportunity (for all lenders) will be “platform enablement.”
Geoffrey Moore described “Early Adopters” in his legendary Crossing the Chasm. These pioneers constantly scan the landscape, seeking new ways to differentiate their product or service. They innovate through others’ inventions. This doesn’t require cutting-edge R&D or hiring rocket scientists. Rather, it requires a shift in mindset and culture starting from the top. Executives need to cultivate receptivity, divergence and controlled experimentation. They need to grow an entrepreneurial culture, where not trying is worse than failure.
Watching the Waves
Let’s return to competitive advantage: Efficiency, Borrower Delight and Risk Management. To thrive, organizations need to monitor, spot and ride these incoming waves. The challenge is knowing where to look. What are the meaningful opportunities and signs?
Each success factor will glimmer differently:
Inefficiency blocks growth. Even if Sales closes deals, can the back-office keep up with the volume? With tight budgets, more headcount won’t be the answer. Lenders need to empower their analysts with the right tools to do more with less.
The primary culprit is dysfunctional data flows (inputs, transformations, outputs). Merely customizing spreadsheets, chasing down borrowing base certificates and keying in values from PDF files is not scalable. Data needs to flow seamlessly, with only minor interventions from analysts.
The secret is integrations — connecting disparate systems and formats. Pulling clients’ borrowing base directly from their QuickBooks or Sage; transforming dreadful PDFs into automated availability calculation; and approving and paying out advances in one click. All of this is possible today — and will get easier in the near future.
Fintechs have excelled at winning loyalty with simple and inspired design. They understand that the user experience matters. Borrowers will rejoice at lenders that minimize confusion and painful processes, providing the same delight we provided by some of our favorite apps such as Uber, Venmo and the like. The key is not being forced to compete on price or terms; compete with convenience and empathy.
Don’t be hobbled by outdated third-party software. Seek and leverage APIs (application program interfaces) and build out your own integrated borrower experience. With APIs, you can harness core third-party functionality, but with absolute freedom on front-end design. Become “the Apple” of ABL, exceed expectations and watch client word-of-mouth soar.
Successful ABL requires an intricate understanding of borrowers’ collateral positions. Ensuring borrowing base accuracy and detecting changes is fundamental. But, as humans, analysts will not catch every risk signal. That’s where Advanced Analytics comes in.
The first step is adopting rules-based alerts for monitoring loan compliance. It’s as simple as setting the right thresholds and getting notified when they’re met.
The next level, one that is just emerging, is machine learning and AI risk discovery. The ability to identify meaningful risk signals from previously unknown or undefined rules. AI will continue to advance as data-sets become larger, more granular and consistent. To start preparing, lenders need to ensure borrowers’ data is centralized and consistent — otherwise, you’ll miss the opportunity.
An extension of the above will be dynamic adjustment. Getting tailored and continuous recommendations on how to manage higher-risk accounts will be essential. Everything from advance rates, borrowing base frequency and inventory audit controls. Over time, lenders and analysts will come to rely more on these insights as results are proven.
Make the Jump
If we distil the competitive opportunity, it comes down to seamlessly moving, presenting and actioning meaningful information. At ABLSoft, we call this “intelligent automation” Future winners will cultivate an early adopter mentality — identifying and testing emerging solutions. Where gaps exist, the ambitious will create their own proprietary technology.
The waves are approaching the horizon. Make 2020 a year of exploration. Start steering your team and organization towards its long-term advantage.