How technology can save relationships amid uncertainty & increased competition
Lenders across EMEA have typically approached credit with trepidation for a number of reasons, from political conflict to economic uncertainties or changing regulations. From high-risk borrowers to unstable markets, many lenders have shied away from new technology or process innovations. This has led them to fall behind fintechs and market disruptors, losing valuable customers and market share.
The impact of COVID-19
With the ongoing impact of COVID-19, the lending industry is more complicated than ever for both lenders and borrowers. The European Central Bank’s July 2020 euro area bank lending survey (BLS) shows a continued upward impact of the COVID-19 pandemic on firms’ loan demand. In the second quarter of 2020, firms’ demand for loans or drawing of credit lines surged further, reaching the highest net balance since the survey was launched in 2003.
However, as we move into a higher risk economy, we also move into a higher risk asset class, particularly with the threat of defaults rising, coupled with the concept of negative interest rates. Deloitte’s recent report on banking in the age of Covid has shown that with a large share of small businesses expected to shutter, there will be reservations around opening new businesses or pursuing entrepreneurial ventures. Consequently, banks will need to shift the focus of their messaging to prioritising cashflow advice ahead of long-term saving and investing.
Further, market disruptors are coming in and challenging the status quo, and consumer behaviour has changed. According to a recent consumer behavior survey from Capgemini, 34% of banking users said they preferred social media as an interaction channel during the pandemic versus 28% before the virus. Responses for chatbots and automated voice assistance revealed a similar pattern, with 19% of consumers saying they prefer automated communication tools now compared with 15% before the crisis. There is a clear trend driving change in how banks are lending.
A shift in equilibrium
COVID-19 has brought to light the importance of relationships. Whether personal or professional, there has been a forced shift in how we maintain our relationships.
While some businesses have adapted to this “new normal”, others have struggled a bit more. We’ve seen this ring true in the SME market.
A traditionally underserved and orphaned industry, this sector makes up more than half of the gross national product (BCRS, 2019). To give you an idea of the impact SMEs have on the UK market alone, The Federation of Small Businesses (FSB, 2019) released some telling stats:
- SMEs account for 99.9% of the business population (5.9 million businesses).
- SMEs account for three fifths of the employment and around half of turnover in the UK private sector
- Total employment in SMEs was 16.6 million (60% of the total)
Unfortunately, the SME market doesn't have a lot of people shouting for it, even though it’s such a critical part of our economy. Traditional financial institutions tend to see a deployment of capital in SMEs as less productive than retail or corporate. So while SMEs struggled to access funding from these institutions, the alternative finance sector gained momentum.
Technology has been the catalyst needed to change the equilibrium of traditional lending and drive disruption. With the rise of SaaS and cloud banking, you can see where alternative finance is blending technology with a people based proposition that values relationships.
From video calls to online chats, technology has been the frontrunner in helping us continue having meaningful interactions with one another. This is especially true in banking, where the relationship between the banker and the banked is sacred.
You can even start to see evidence of the challenger bank sector making headlines. According to proprietary market research conducted by Recognise involving 423 SME businesses, a quarter of the respondents mentioned they have a main bank outside of the Big 4. When you have the right synthesis of cloud native, cloud by SaaS and people led, you can offer a service that opens up doors for SMEs again.Recognise success story
A new breed of lenders
Enabled by technology, the alternative finance sector is winning the market with innovative service models and customer-centric propositions. This new breed of lenders are embracing innovation to drive growth. This has led major lenders to look for technology that works seamlessly with current systems, while getting the competitive advantage of a digital approach.
A lot of the innovation is coming from non-bank lenders, which has brought into sharper focus the relationship with banking. In 1994, Bill Gates declared that “banking is necessary, banks are not.” This was thought to not only be ahead of its time, but also the motto for finance’s new movement, now called fintech.
Fast forward almost three decades and it’s incredible to see how accurate Mr. Gates was. We’ve always thought that banks were built to last, but thanks to technology and the rise of fintech, they’re now built to change.
We know that technology enables business models, and these business models are here because of a changing mindset to be active and agile. It's a choice between innovating or staying behind and eventually disappearing.
What we will inevitably see is financial institutions taking their experiences during Covid-19 and the necessitated acclimation of digital interactions to break the inertia of transformation.
What the industry needs to realise is that there is no going back to the “old way” of working. COVID-19 and its impact aren’t a point-in-time, but rather the new normal. We are no longer wondering what the unknown future is, because we’re living in it today, and it’s here to stay.
Despite a landscape of uncertainty, complications and increased competition, bringing lenders and borrowers together has never been easier thanks to the adoption of new technology bringing life to these relationships.
Lenders run the risk of having legacy technology constraints that undermine even the best innovation strategy. Many financial institutions are crippled by system complexity and are unable to take advantage of new tools, and therefore are quickly losing their competitive advantage and, as a consequence, their customers.
To thrive in this period of change, lenders must embrace an agile approach in order to keep pace with the market developments, shifting customer expectations and innovative ways to maintain relationships. When you have the right technology platform, you have a distinct differentiation.