Adapt to survive – how traditional banks must change their approach to lending

By, Béla Vér , Founder & CEO of ApPello

With an unprecedented response by governments across the world to co-ordinate mass lockdowns due to the global Coronavirus pandemic, companies have taken drastic action to protect their staff and keep businesses afloat – implementing home working, furloughing, and seeking financial support.

COVID-19 has left the economies of this world extremely weak and businesses have responded by focusing their efforts on remaining resilient.

To weather the storm of COVID-19, resilient companies need to ensure they have access to the appropriate level of funding, and funding that is available in a timely manner.

A limited time to lend

As a way of helping businesses in this time of crisis, governments have led from the front by provisioning for government-backed loans. Indeed, in the UK, the Business Bounce Back Loan Scheme allows small businesses to receive a loan worth a quarter of their turnover, up to £50,000, within as little as 24 hours.

However, despite the government support businesses are still finding it extremely difficult to access loans, especially those that are start-ups and scale-ups, with the approval rate for the UK still lingering at 50 per cent.

Sadly, we will continue to see businesses not being able to survive the COVID-19 crisis and the fall out that follows if no changes are made to the way in which traditional banks lend. When approvals are finally made for a loan it will be too little, too late.

A survey of UK SMEs conducted by McKinsey (2020) shows that as a result of COVID-19 more than half of SMEs view the country’s economy as very or extremely weak, and half expect market stagnation or recession. 80 percent of SMEs say their revenues are declining.

So why are banks failing to address the demand for lending among start-ups and scale-ups, and what can be done before these businesses run out of time and go bust?

Responding to lending requirements

It is clearly not an act of callousness that is causing a delay in traditional banks and financial institutions responding to lending requirements among SMEs. They just aren’t set up to support these businesses effectively due to their existing IT infrastructure.

The barrier that they must overcome is not a cultural one but rather a technological one. Banks’ IT architecture is currently not fit for purpose to approve lending for SMEs in a timely manner, due to a high level of dependency on technology vendors; also known as ‘vendor lock-in.’

Within the context of a global pandemic, businesses need to be able access funds quickly to keep themselves future fit. COVID-19 has accelerated the need for banks to rethink their digital processes, and many still lack the flexibility and technology to be able to adapt their products and services at speed – especially if they are to protect themselves from being outpaced by the challenger banks of this world.

Provisioning for the future with micro-services

Banks need to tailor their lending offerings for each and every customer. They can only do so with an infrastructure that is built on micro-services – the highest level of flexibility to respond to the changing lending expectations of end-users.

Micro-services; the creation of bespoke products and services tailored to each request, can only be activated by opening up of banks’ APIs, connecting their core banking platform to third parties via ‘Open Banking.’ This will enable banks to plug in a core banking platform that can increase their product and services offering.

Rather than a ‘rip and replace,’ or adding more processes onto already overloaded legacy systems, traditional banks need to utilise a core banking platform in the cloud. If a bank attempts to add on new processes or re-build its entire architecture, it could have serious consequences to the bank – impacting adversely on customer experience and resulting in a failure to provision for lending needs.

Stay in control of your lending processes

Don’t let the efficiency of your lending process be at the mercy of your technology vendors. A ready-to-use, highly flexible cloud-native platform can modify existing processes and deploy new ones, while having the ability to be configured and understood by people with a non-technical background. This removes the need for an external agency or vendor – speeding up the banks’ lending processes to provision for SMEs.

At the same time, a digital lending platform that operates on a micro-services principle will enable banks to provision for any requirement – connecting the dots between ecosystem partners rather than having to re-invent the wheel every time a bank has a new product or service request.

Survival of the quickest

For banks and financial institutions to survive in a post-COVID-19 world, they must adapt their approach to lending by embracing innovation and digital adoption. This will enable them to be highly responsive when provisioning for the lending needs of SME customers: generating loans in days rather than weeks.

A next-generation Core Banking System (CBS) platform in the cloud will enable banks to harness emerging technologies with great ease via Open Banking, accelerating the end-to-end lending process from approval and onboarding, all the way to loan execution.