Updated on 29/09/2020
The basic notion of lending has been around for thousands of years, but only in the last hundred has it started to really evolve. Driven by technology, change in the lending landscape of today is about accessibility for borrowers, while for lenders it’s about using tech integrations, partnerships and data to make smart lending decisions.
This article will provide insights into the lending landscape of today and explore the idea of Lending 3.0; a description of modern lending which is being driven by the global modern card issuing platform Marqeta. For an in-depth dive into the most innovative elements of Lending 3.0, visit Marqeta’s whitepaper.
Or stick with us as we explain the practical impact of Lending 3.0 on business owners.
Cutting out a few thousand years since lending was invented in Ancient Greece, the main evolutions of lending are:
Lending 1.0 was characterised by the somewhat tedious manual process of making lending agreements which was commonplace from the inception of business finance to the late 2000’s. It primarily involved filling out forms with your high street bank and was often relationship based.
With a lack of complex risk assessment processes to determine whether businesses were worth lending to, businesses may have found their lending applications declined. If you did get approved, though, the chances were that you could receive competitive rates - if you managed to endure through the application process, that is. In fact, the time taken by lenders in deciding to offer you a financing agreement could often take months.
This meant that long term planning was required to make the most out of additional funding, which left some businesses unable to react quickly to sudden growth opportunities.
The main catalyst for Lending 2.0 was the 2008 global financial crisis. It saw the rise of alternative lenders as opposed to just your traditional high street banks and brought about digital application processes in which decisions could be made significantly faster.
Suddenly, lenders were able to give small businesses decisions within days of their application - better equipping them to use business finance reactively when needed and capitalise on time-sensitive growth opportunities. With wider credit appetites, alternative lenders could therefore lend to more SME’s... Sounds good, right?
Well, the main downside of Lending 2.0 was that the cost of lending from alternative lenders was typically higher than traditional banks, as most of these lenders either couldn’t access cheap enough capital or were willing to lending to riskier businesses.
Lending 3.0, at its core, involves borrowers using open banking and accountancy platforms to input data from their businesses in real time. By doing so, lenders can see exactly how money is flowing through a business - enabling them to make quicker decisions on lending more money, and smarter risk assessments based on business behaviour.
So, lenders can offer benefits such as speed, flexibility, and competitive rates - with long application processes and heaps of paperwork being cut out by innovative technologies. The aim here is to take the complexity out of the lending experience and shift decisions towards being made in real time.
Consequently, in today’s world an SME business owner or their accountant may be more likely to expect a simple, frictionless lending experience that is easy to access. The number of steps required to apply is also reduced, and money may be accessed quicker - at times when it is most needed.
So, lending 3.0 is a welcomed change to lending. But does it bring any new challenges?
Having complete transparency over your financial activity with a lender could unlock some or all of the benefits that we’ve touched on, however it requires a degree of trust between both parties.
Giving a lender access to your real-time banking data falls into the bracket of ‘open banking’. In open banking, borrowers use open APIs that allow third-party developers to build applications and services around them. In layman’s terms, it’s a secure way of giving financial institutions access and the permission to share to your financial information across other financial institutions to build a picture of your business, without you having to manually input it yourself, which could save you time and result in quicker decisions from lenders.
In a practical sense, this could mean your alternative lender builds an app which analyses the data from your business’ bank account when you make a borrowing request; using algorithms to check that your finances are healthy. Having that instant access to data is why lenders may then approve your request for additional funds quicker.
For a borrower, the potential benefits of open banking are widespread. Read Finextra’s list of open banking benefits to get an insight into exactly how businesses can benefit from this exciting new banking method. The only challenge is that lenders must build trust amongst borrowers; assuring them that financial data or any insights into a business’ finances will be used in the right way and remain secure.
The application process during Lending 1.0 could have taken weeks or months, but now, with Lending 3.0 technology in place, we could potentially see automated decisions being made within 10 minutes, with money landing in a business owner’s account within an hour. That’s a substantial difference to Lending 1.0 and gives a clear competitive advantage to 3.0 lenders over more traditional lenders.
For the businesses who are borrowing, though, it’s becoming more important than ever to ensure that they’re picking the right lending partner that will support them with flexible terms throughout the life of the loan. As a 3.0 lender ourselves, we understand our customers want instant decisions that are simple to apply for, easy to access, fast, flexible, transparent, and affordable, all within a few clicks.
That being said, it may also be wise for businesses to spend a little more time getting to know the lenders they consider using; researching the company background, accreditations and eligibility criteria’s to be certain that they are choosing a reliable lender who can offer them the finance they need, when they need it.
Lending 3.0 can save borrowers the time and headaches associated with historical loan agreement processes. Due to the introduction of open banking, it may cut out the need to upload documents, consult with management accounts, manually share cashflow forecasts, submit VAT returns and a host of other complex elements of current application processes that may be required.
If lenders are able to build trust with SMEs; giving business owners confidence in the knowledge that their data is protected, secure and only used and accessed for a small moment in time during the application process to assess affordability, then we may see Lending 3.0 revolutionise the lending landscape.
You can read more insights into Lending 3.0 on Marqeta’s website, including the thoughts and opinions of a range of 3.0 lenders. That also includes our Head of Partnerships David Beer’s own thoughts on why open banking and Lending 3.0 is exciting for SMEs.