Mainstream banks are notorious for their IT. The situation is improving, but many are still struggling to advance from systems from the last century — quite literally. They maintain their own servers because of (arguably misplaced) security concerns; they’re stuck with legacy mainframes that are very difficult to move on from.
In the US, the situation has got so bad that many banks develop on top of the Yodlee bank account aggregator platform; scraping their own customer data with such third-party software has become simpler than interrogating bloated core systems. So banking has some of the worst IT going — or at least, that’s the common narrative.
At the same time though, there’s incredible investment in banking infrastructure. For instance, high frequency trading and the ‘race to zero’ involve some phenomenal technological heavy lifting. Some trading firms have even gone as far as placing their own servers as geographically close to the stock exchange as possible, to minimise latency and gain an edge over the competition.
We are also seeing the emergence of challenger banks like Mondo, Starling, and Atom, who have mobile-first technology at the centre of their approach, and Metro bank, who intentionally shunned this angle in favour of a traditional high-street customer service model built on a modern banking platform. At this early stage, it’s tough to say which approach will win out (perhaps both?), but it’s clear that ‘banking technology’ is developing different connotations.
For now though, the old cliché about banks and their outdated technology holds true. While both the consumer market and the business market wait for the established banks to catch up with increasingly digital lifestyles, what role is technology playing in alternative finance?
One of the better-established technology innovations in alternative finance is eCommerce lending, which uses live data from online marketplaces such as Amazon and eBay to drive lending decisions. Lenders like Kabbage have shown that elegant technology can entirely replace human intervention under the right conditions. Businesses that trade online can get quotes extremely quickly, and if they decide to accept the online offer they can draw down more or less whenever they want (up to the agreed maximum).
This agility is the result of some clever tech that looks at seller status, ratings data, payment accounts, and even social media following, to come up with a basis for lending without needing a traditional credit history. In some cases, it’s possible to have the money in the account within minutes — a timeframe unheard of in business banking.
Another great example of alternative finance technology helping a previously hard-to-lend-to industry is the Merchant Cash Advance. Not a catchy name, but undoubtedly a brilliant way to open up access to lending for retail businesses. Working with the card services provider, Merchant Cash Advance lenders can look at recent sales data from card payment terminals in high street shops and restaurants to advance cash, usually up to the value of a month’s turnover.
Even better, the same technology allows repayments to be flexibly adjusted based on future revenues — so the borrower pays less in lean months and makes it up in good ones. Merchant cash advances really are a blessing for the retail and hospitality sectors, which have had a particularly hard time getting finance post–2008.
Similar to merchant cash advances but open to a wider variety of sectors, revenue loans (or ‘turnover loans’) are repaid as a percentage of revenues, offering a less risky proposition for unpredictable businesses. They’re very useful for firms that can’t commit to a set amount to repay every month — and because they’re often automated, businesses can get the funding they need much more quickly. In our experience, that’s a good thing for any business owner.
Speaking of speed, technology has enabled it in more ways than one. These days, firms like trunomi facilitate quick decisions by satisfying restrictions like Anti Money Laundering checks and Know Your Customer. And with HM Treasury pushing for banking application programming interfaces (APIs) in the UK, we’re well on the way to a future where access to lending is quicker and easier than ever.
Alternative Finance is normally presented as the enemy of the mainstream banks — upstarts and startups challenging the status quo. And while it’s true that it started to emerge as a movement in order to fill the lending gaps left by the banks, alternative finance now serves more than just the companies that the banks can’t help.
It’s becoming clearer in the UK that rather than being at odds, banks and alternative finance providers have to work together if SME access to lending is truly going to improve. The government is already on board with this sentiment, and has legislated to ensure that banks will soon be required to refer firms they can’t help to alternative finance — and technology could be a key to its successful implementation.
More broadly, technology is going to play a big part in joining the dots between mainstream and alternative sources of finance — with APIs between banks and alternative lenders, it would be faster and easier for companies seeking finance to know their options from the entire market.
This future is perhaps some way off. But the technological lessons from alternative finance are already filtering across into the mainstream banking world. And who knows? Maybe one day the traditional banks will be up in the cloud, and the challengers will dominate the high street.
Conrad Ford, Chief Executive of Funding Options