How integrated finance simplifies borrowing
When Jet’s Pizza store owner Nick Woods finished renovating his new restaurant in Hartland, Michigan, he was strapped for cash. Fearing that he would not be able to pay for emergencies, like an oven failure, for example, he noticed that his Worldpay credit card processor was offering him a working capital loan through his online portal.
The loan was actually made by small business lender Liberis. This was an example of integrated finance, a way for companies to seamlessly integrate financial service products into their own platforms as if they were delivering the products themselves.
“We provide trade finance to our partners by integrating into their ecosystems, so we integrate clients through their own platform, under their own brand, and we do underwriting and we also provide loans,” says Rob Straathof, Chief Executive Officer of Liberis.
In Jet’s Pizza’s case, the loan covered an emergency, the coronavirus pandemic, giving Woods a financial cushion to keep his business afloat until he received a COVID loan from the US government.
Liberis provides so-called revenue-based financing for small businesses like Jet’s Pizza, pre-approving borrowers for short-term loans based on their transaction data and allowing that money to be repaid as a percentage of future cash flows. .
“Because you are pre-approved, you don’t need to go through a full cycle of subscription, because we have already done this based on all the data we get from our partners like Worldpay and, in addition little than ten minutes the money hits your bank account. It is therefore fully integrated and frictionless, ”says Straathof.
Buy it now, finance to pay later
These integrated financing tools could potentially reshape the way small and medium-sized enterprises (SMEs) access short-term financing, for example by replacing the need for overdrafts.
“Overdrafts are a brutal instrument that lends money short term at a fixed rate, but if you really know what someone needs that money for – buying machines or computers or paying salaries – it’s all have specific financing needs with different risk profiles. Says Nigel Verdon, co-founder and CEO of Railsbank, which provides the technology that enables companies to integrate financial products into their own platforms.
“Buying a computer can be an asset-backed loan, so why use an overdraft that is priced at unsecured loan rates when it could be valued as a secured loan?”
By working with merchants and adopting integrated finance, lenders can obtain real-time data on these transactions and offer credit that is priced accordingly at the point of purchase, allowing SMEs to borrow from more flexible rates.
But it’s not just SMEs that can benefit from in-built financing, other platforms also offer buy-now and pay-later products to consumers. Kuba Zmuda, chief strategy officer at Modulr, says a good example is Butter, an app that allows buyers to buy from major retail brands using a virtual card and then spread the cost. of the purchase via an installment plan.
“For consumers, this offers a new and convenient way to access credit, while for lenders, it increases their understanding of their customers and their needs,” he says.
Miriam Wohlfarth, co-founder of Banxware, a German integrated finance platform that serves as a bridge between banks and e-commerce and payment platforms, says integrated finance could mean banks will have a less customer-centric role. in the future, rather acting as an infrastructure and funding provider behind the scenes. It could also change the traditional discourse on fintechs in competition with banks.
“In the past, a lot of the press talked about fintechs versus banks, but integrated finance is much more about banks and fintechs working together,” Wohlfarth says.
Make sure borrowers can afford to repay
This context creates opportunities for banks wishing to innovate. Silvia Mensdorff-Pouilly, Head of Banking Solutions for Europe at FIS, says banks could use integrated finance to develop smarter budgeting tools that will help clients make more informed credit decisions when they need it. purchase.
“As a consumer or an SME, it is not that useful to see my current balance; I may have a direct debit tomorrow that will erase my balance, but my bank knows that and they also know what’s happening, ”she says. “If you’re a forward-thinking bank, you can provide your customers with a budgeting tool to help them decide if they can buy something with the funds available and, if the answer is no, offer them another way to buy. ‘buy. “
However, developing simpler ways to borrow money makes regulators uncomfortable. Currently, while the borrowed funds are repayable within 12 months and are free of interest and charges to the consumer, they are currently outside the regulatory jurisdiction of the Financial Conduct Authority, says Nikki Worden, partner at the firm. of attorneys Osborne Clarke.
“Because these products are unregulated, these lenders were able to fit in and make those customer journeys really smooth and frictionless,” she says.
As a result, these products will likely be regulated in the future. “The Financial Conduct Authority is concerned that if you make it too easy to apply for credit, people will. The FCA therefore wants friction to be introduced into these trips, ”says Worden.
These concerns could have become more acute during the coronavirus pandemic given the strain on consumer finances and the ease with which these platforms can provide credit, but lenders, whether for consumers or SMEs , are still determined to lend responsibly, adds Wohlfarth. “We don’t offer loans where business is down; we only want good loans, ”she said.