The carrot and stick of data driven lending
Post pandemic, data-driven lending has evolved from a nice-to-have option to an inevitability.
Instead of the roaring 20s, we got the opposite. As turbulent as the start of the decade has been, forces have conspired towards accelerated disruption in the lending space. There has been greater rate of technology adoption, economic slowdown of large swathes of the economy, and a tightening of the belt amongst lenders. The appetite for mobilizing a data-driven operating model has grown significantly, unlocking opportunities previously blocked by inertia and a lack of trust between parties. The paradigm is shifting in lending as the space moves towards a data-sharing convention.
These forces emerged out of the desperate times we are in. In economic booms, the value of data privacy and general skepticism over why lenders need continuous access to business data reigned supreme. But today, that concern is secondary to the goal of remaining solvent and surviving this period. History suggests that economic crises leave surviving businesses more resilient to shocks; no doubt the accelerated adoption of data-driven financial services will contribute to this eventuality.
The Promise of Financial Relief
Where customers agree to share their data for the loan origination process, lenders will be better able to reduce the risk and uncertainty in credit-decisions, and thus be able to offer more financial relief to SMBs. In September 2019, SMB loan approval rates were 27.9% in the US; a year later in September 2020, the rate was 13.5% (Biz2Credit, 2020).
More data means that the lender is better equipped to serve customers as a wholly individual business. Without data-sharing, a lender’s service approach is far less personalized because they simply don’t have the information to tailor the experience. This hyper-personalization is commonplace in consumer-facing services like Netflix or Amazon, and yet invites caution as opposed to delight in B2B contexts.
The growing prominence of data privacy, with the enactment of GDPR (General Data Protection Regulation) in 2018, could explain this. But signs are pointing towards a shift in attitudes. SMB’s are consciously becoming digital forward (Salesforce, 2020). More realize that data-driven lending gives their business a better opportunity to stay open and thriving.
The Threat of Insolvency
Cashflow has been difficult for large sectors of the economy as business closes for lockdown. If lenders are unable to access customer’s data to feed into their origination engine, it’s challenging to approve loans and offer a brief respite to working capital issues. Missing data requires those lenders to make assumptions or omit useful data requirements entirely. The result is increased uncertainty and risk. This reduces the likelihood that the customer’s loan request to be approved. Even if approved, it won’t be as favorable compared to a customer who provides data.
What customers may soon realize is that without access to their business data, they undermine a lender’s ability to provide counsel. As much as the responsibility is on a lender do what they can to serve their customers well, sometimes they are limited without full co-operation from everyone involved.
Prior to 2020, Fintech’s the world over were trying to capitalize on SMB’s growing appetite for technology. 2020 provided the spark for lenders, especially the bigger and less-agile institutions, to break from the inertia of legacy systems and processes. As data-sharing between customers and institutions in lending and other contexts normalizes, expect these forces to grow in strength.
What can lenders do to improve today? Aside from ensuring they are on track to developing a data-driven lending model, they can invest in education opportunities for their customers so momentum can build alongside the infrastructure’s growth.
Are you ready for the future of lending?
We are here to help. 9Spokes has developed a solution that can streamline the lending experience and mitigate default risk by keeping you connected to your business customer's data. Interested?