Profitability can be a significant challenge in the field of secured finance. New business acquisition costs are high, and there is normally a pronounced gap between a customer coming on board and becoming profitable – as long as three years in some cases. Combined with the thought that the average tenure of a secured finance customer typically sits around the 18-month mark, many simply move away from a lender before they start generating a return.
Naturally, it is therefore in a secured finance provider’s best interests to ensure that their customers stay with them for as long as possible. Finding ways to extend the lifetime value of clients is an imperative – and that means delivering an exceptional customer experience.
However, this can create significant challenges. While they don’t necessarily conflict, the parties involved are not always particularly well aligned. For instance:
- From the borrower’s perspective, simplicity and certainty are both paramount. Not only do they want access to working capital to be as easy and frictionless as possible, they also want to know that money will be available when they need it.
- For lenders, the primary objective is risk/security. Above all else, banks and financial institutions need to know what they’re lending against, and have the assurance that the security put forward has genuine value should it be called into play.
- Finally, we have the lawyers to think about. From a legal perspective, the goal is to ensure that any contracts leave no room for interpretation when it comes to the rights around assets and receivables if the borrowing business falters.
The disconnect here is easy to see: the simplicity that borrowers want is often undermined by the complexity and rigour that lenders and their legal representatives need. Moreover, should an invoice end up being disputed, become overdue or in some other way become ineligible, the amount of funding available can reduce rapidly – jeopardising a borrower’s cashflows. Neither of those situations speak to the idea of a particularly “compelling” customer experience and is one of the main reasons current approaches to secured finance require reinvention – something that is best achieved via technological innovation.
Delivering transparency, enabling flexibility
Outside of improvements to a customer's collective experience interacting with various touchpoints, there are two very specific ways in which technology can be used to reshape secured finance: transparency and flexibility. Let’s look at each in turn.
Greater transparency is a benefit that should need little explanation. As secured finance is largely detached from the day-to-day operations of a business, when advancing money against receivables, the lender may have little insight into how the funds will be used. The borrower could use the money to pay suppliers, wages, or something else entirely – even repaying other lenders.
This lack of visibility is an issue, particularly for lenders that wish to deliver the frictionless and reliable offerings that customers want. If they can’t “see” what a customer is doing, then a finance provider also can’t lend to that client with any degree of confidence, inherently undermining the overall experience. That’s why data, analytics, and principles like open banking are so vital, providing the kind of consistent insight required to lend with certainty.
Customer insight is equally vital when it comes to flexibility, albeit in a slightly different way. In secured finance, as in many other types of lending, the focus is typically on generalised products rather than those that are specifically tailored to different industries and sectors. That introduces its own set of challenges, because those products often fail to reflect the diverse needs and behaviours of those who use them.
The operating practices of a large enterprise, for example, are likely to be very different to those of a micro-SME; the purchasing patterns of a construction firm will contrast dramatically with those of a retailer. Creating products that embrace those differences might be hard work, but it also likely to be far more rewarding than expecting every customer to fit into your own parameters.
Again, technology provides the vehicle here. Modular architectures and open ecosystems now give finance providers the ability to build highly specific products and value-adds that are tailored to unique customer and sector needs. What’s more, testing and iteration can be done in weeks, rather than months, minimising risk and ensuring that products can adapt as those needs change or new opportunities emerge.
Trust is integral to the concept of secured finance. Lenders must trust that their customers are who they say they are, and that they are behaving correctly. Borrowers must trust that lenders will continue to provide them with the credit they need.
For finance providers, this starts the very first time a prospective business engages with their Know Your Customer (KYC) and Anti-Money Laundering (AML) checks to onboarding, personalised communications and verification.
Technology helps to underpin that trust – meaning that rather than planning for the worst and hoping for the best, both parties can enjoy an open, honest, and mutually beneficial relationship.
It's vital to recognise that not all data is static, and neither are your insights. When technology is applied in the right way, lenders can develop a deep understanding of their customers, and respond with agility and flexibility to their needs. Not only does that encourage longer and more productive relationships, but it also helps to ensure that those relationships do not falter based on questioning of character, ability, or authenticity of the finance provider.
In closing, data is critical to many of the decisions which finance providers make daily. Technology gives lenders access to a wide variety of data and information, from score calculations to ledger analysis - and more. However, we should never assume that "data speaks for itself", as it is essentially worthless if one cannot communicate its value. Whether a quick health check on a client or aggregating your most important business metrics on a dashboard, cleanly and concisely communicating insights that are easy to understand and visually informative is as crucial as the quality of the data itself.
The world of secured finance faces significant challenges - profitability and customer retention are chief among them – and the key to success lies in exceptional customer experiences and finding ways to extend the lifetime value of clients. However, there are inherent disconnects between the simplicity borrowers desire, the risk/security focus of finance providers, and the legal considerations - and this is where technological innovation comes into play.
By leveraging technology, secured finance providers can reshape the industry through transparency and flexibility. Greater transparency allows finance providers a clearer understanding of how funds are used, enabling them to provide loans with confidence, and flexibility will be crucial to tailoring products to meet the diverse needs of different industries and sectors.
Article written by:
Xavier Lang-Claes & Iain Gomersall
First appeared on: BCR