Componentised banking: A vital step in banks transformation journey

As SMEs struggle to recover from the pandemic, many are handicapped by a shortage of suitable credit due to commercial lending being 30 years behind the times, says Roger Vincent, managing director for UK and Ireland of specialist business lender Trade Ledger.

In the UK, the SMEs typically wait 90 days for approval of a loan application, according to Vincent, who argues that this is due to banks lacking efficient, data-rich methods for assessing the quality of applicants.

“[SMEs] are underpinned mostly by intangible assets like invoices, contracts and recurring revenue streams – yet the funding methods haven’t caught up,” he says.

The solution could be a specialised data-driven lending platform that allows banks to access more powerful data sources, assess risk in new ways and offer products that previously didn’t fit into their business model, according to Vincent.

Known as componentised banking, the data-driven lending he advocates would not only make life much easier for treasurers, who usually negotiate loans – and often in a hurry, but also create a much better-informed loan market that is of benefit to corporates and lenders.

“Componentised banking supports all businesses, especially the myriad of smaller businesses that are part of the supply-chain for the big corporates,” he says.

“If the SME lending market becomes better and faster, then it will have a positive and beneficial effect for corporate treasurers, improving the flow of cash overall.”

According to Trade Ledger, more agile credit goes straight to the bottom line. The lending-as-a-service specialist has found clients realise on average a reduction in origination costs of 60% and a 50% reduction in dropouts.

Consolidation of data

Componentised banking provide the ability for a lender to rapidly understand the opportunity and risk of service-based businesses.

“It’s moving the business banking market on by about 30 years,” Vincent says. “And that means the wider financial ecosystem is better equipped to sustain the interconnection of all the different business relationships.”

It’s all about packaging data such as KYC and AML into components that fit together like a jigsaw, he says.

“In this way a lender is able to quickly understand the network of information flowing between the different but related entities and assets, putting it in a position to serve up the right solution at the right time over the right channel.”

The automotive industry provides a parallel example. It is based on assembly lines that put together components such as engines and tyres which are delivered by suppliers according to the specifications of the industry. “The cost advantages have been huge as each part of the supply chain has optimised its output and costs,” he says.

Similarly, componentised banking enables the consolidation of data from every aspect of the supply chain so it is held on one platform from which everyone in the supply chain can benefit.

“Having the ability to access real-time, forward-looking indicators as part of the risk assessment makes the decision process more effective,” Vincent says. “Moreover, this real-time data can be used to monitor any risks that appear over the term of the loan and whether a payment is at risk of not being paid.”

In another example, a microbrewery might win a big supply deal from a large pub chain and require the funds to scale up quickly.

“That’s where componentised banking fits in,” he says. “A bank that componentises can address markets it couldn’t before.”

Asked whether componentised banking is a response to frustrations by corporate treasurers about the slow pace and uncertainty of bank credit, Vincent says: “Although it’s not directly designed to benefit corporate treasurers, the reality is that no part of the financial ecosystem should be seen in isolation. The advantages that this innovation brings to SMEs has a knock-on effect for corporate treasurers.”