SMEs, especially the smaller ones, have struggled to access sufficient credit in recent times. The COVID-19 pandemic has certainly exacerbated the situation, but let’s not forget that this battle has been going on for years now.
Many banks and other financial institutions have cut back on business lending as a result of the high costs of acquisition, delivery and servicing, combined with the numerous limitations of legacy technology. Extensive regulation, such as Basel III and CRD IV, has also prompted banks to further reduce business loans as they look to strengthen their capital requirements and decrease leverage.
A lifeline for cash-strapped SMEs
In response, ‘Lending-as-a-Service’ (LaaS) is an area of fintech that’s growing rapidly and helping the banks to re-engage with their small business customers.
Banks around the world are turning to LaaS providers, building new partnerships to help them embrace digital transformation and enhance the lending experience. Last year, LendIt released a whitepaper on the LaaS sector, which highlighted that the lending software market was valued at $2.6 billion in 2017. This is expected to surpass $5.5 billion by 2024. Most LaaS solutions are concentrated in the UK and US at present, but Europe is expected to grow.
Outdated legacy systems are being swept away, replaced by innovative, cloud-based managed services. By replacing existing technology with natively-digital LaaS platforms, banks can complete loan approvals inside of a day rather than in weeks, with funds disbursed the same day. According to the landmark LendIt research, LaaS impact studies have found that costs of acquisition, decisioning and servicing of loans can be reduced by up to 80%.
One of the leaders in the space, ezbob, is able to significantly cut loan servicing costs for its banking clients, including Esme Loans, whilst allowing their SME customers to receive a lending decision in just seven minutes. ezbob’s modular and end-to-end digital lending solution comprises the entire loan flow as well as management tools. It enables banks and other financial institutions to transform their entire lending infrastructure, ushering in improved customer experience, faster lending, automation, reduced cost per loan, and increased profitability.
Such relationships are a great example of the new bank-fintech dynamic, which is steadily shifting from disruption to collaboration. Agile fintechs like ezbob, Iwoca and Kabbage are now seen more as partners rather than troublesome disruptors. Another LaaS firm making waves in nCino, a cloud banking provider that offers its Bank Operating System to support employee efficiency and the onboarding, lending, and deposit-making processes across all lines of business. nCino’s growing client base includes Santander and TD Bank.
The right mix
What makes these LaaS platforms the ideal partner for under-pressure banks is their mix of lending knowledge and technology expertise. ezbob, for example, was founded in 2011 and first operated as on online lending platform, processing more than £1 billon of loan applications from SMEs. So lending is in its DNA, you could say. After signing a deal with RBS in 2016, ezbob made the transition from lender to technology provider. Iwoca, meanwhile, is now known more for being a lender, but has a strong foundation as a technology vendor.
The wider financial services industry is beginning to take note. In August 2019, ezbob was awarded ‘Best Fintech Partnership’ in The Banker’s Tech Projects Award in recognition of services rendered to banks and other lenders. Expect more banks to turn to the LaaS sector as they seek an answer to the unprecedented spike in loan applications created by the COVID-19 pandemic.
