Traditionally lending and payments have always had some crossover, but outside of larger banks or finance houses they have generally remained separate – at its core, the focus is on one or the other.
But lending and payments are going through an evolution - and are slowly but surely merging to fill the gaps for end-users.
The fusion of lending and payments has come about thanks to a multitude of factors:
- Most of those who require lending will, at some level, be processing and collecting payments in some form
- Thanks to a transition to more online/digital services and online marketplaces, businesses can suddenly reach more customers and buy from further afield to access better prices/new products
- Open banking means that lenders have greater access to accurate payments data for credit and risk assessment purposes
- Lenders are beginning to expand offerings to deliver more of what borrowers need in one place to access and use their funds
what does merging of payments and lending mean?
Lenders, or more specifically LendTechs, are fast evolving, using more detailed data than ever and providing increasingly wider and better services to their customers. One important part of this is payments.
The ability to ‘own’ the customer’s transactional data allows for a huge increase in reliability and visibility when it comes to making decisions. This has been seen with the launch of open banking and more API-led integrations to payment gateways and now lenders are increasingly offering more payments-related services in-house through partnerships.
This can be anything, from paying out to third parties directly, to offering named customer accounts and allowing them to pay out from borrowed funds directly. Or in some cases even receive payments (the collections dream!).
If a lender can offer the ability to hold a business’s income and pay out as much as a bank would, given the growth of Banking as a Service (BaaS), why wouldn’t they? It makes the lender’s proposition more sticky and delivers a much slicker user experience for the business. The traditional benefits that a bank offers: interest rates, overdraft facilities and lending, are fast dwindling.
These solutions are closing the gap between the two sectors and in turn are creating huge advances in LendTech, both internally and for end-users.
On the one hand, lenders have far more visibility and access to real-time data, better reconciliation and better reporting functions, delivering the ability to create new revenue streams and new ways to reliably pay out and collect funds.
But for borrowers it also means a whole new host of functionality such as access to better FX rates for their own purchasing needs, easier access to funds and increased possibilities on how they utilize those funds effectively.
The benefits of open banking explained
Open banking provides a digital boost to lending, giving access to real-time financial data directly from banks worldwide via a single API. This has significant advantages, including streamlining the application and onboarding process, with reduced friction, fewer errors and an improved customer experience.
It also allows instant decision-making, reducing the time taken for approval from days to minutes. With data coming directly from bank accounts and into software, there is no need for time-consuming form filling and document approval.
Payments are also much simpler, with customers able to make payments directly from their bank without even leaving your website, making the whole process far more convenient, and with no hidden fees.
Why digital lending is here to stay
Banks are now able to understand their customers far better through a digital credit process that is more data-led. In short, this allows them to deliver funds faster. But how does it work, and why is it better?
Banks now offer a huge range of services to customers. Yet they should not lose sight of the fact that lending is at the heart of what they do. Lending is the engine that drives profitability, fostering deeper relationships with a bank’s customers. It can also help banks create a wider ecosystem of both financial and non-financial services.
Since the pandemic, borrowers have been looking for a change in how banks work. The most common request is access to faster credit, with an improved approval process and assurance that funds are available when needed. As we’ve seen above, the advent of open banking is providing this for customers, which means the major banks need to follow suit if they’re to keep pace. This applies both to SMEs and across all their other core services.
Digital lending can also help to create personalized customer journeys, moving away from the one-size-fits-all approach banks have taken in the past. The combination of more demanding customers, disruptive technologies such as data analytics and AI, and a more competitive environment (with open banking being the main threat) means that digital lending is here to stay.
Lenders and payment providers will continue to work together more effectively in the coming years, and we’ll continue to see an evolution in how LendTechs work with their borrowers. Bringing together of two fast-growing and innovative sectors will only result in more efficiency and better customer experiences right at the point customers are beginning to trust ‘alternative’ and digital solutions more and more themselves.
The development of open banking and better international payment solutions, combined with the fact that the AI and machine learning genies are out of the bottle, mean that lending and payments will continue to move closer together. Assisted by a more data-led approach, customers will be able to get more of what they need from banks, and banks in turn will be able to deliver a more personalised approach and build better customer relationships.