The evolution of Lending as a Service and what it means for business banking

Will Tumulty, CEO, Rapid Finance

As the banking industry continues to see new variations on the “anything as a service” concept — usually as a way to more quickly and cost-effectively go to market with new services and capabilities — some variants, like Lending as a Service (LaaS), are now well-established with a proven track record of success.

For many financial institutions, LaaS offerings have enabled them to better meet customer expectations in terms of speed and convenience regardless of delivery channel, to quickly enter new lending sectors without having to add staff or infrastructure, and to better leverage alternative data sets to expand availability of credit to a larger pool of borrowers – all while gaining operational efficiencies.

As a result, most bankers tend to think of LaaS only in terms of automating borrower applications and onboarding, credit decisioning and loan processing, i.e. loan origination. The next phase in LaaS for origination is integrating new services like automated KYC/KYB, real-time connectivity to third-party enhanced data, and employing systems that can identify specific applicant insights based on all of the data available at origination.

Properly deployed, these systems can put these insights in front of loan officers and underwriters in real time, enabling a faster and better applicant experience while also reducing the potential for fraud.

Banks will need to go beyond onboarding and origination to help nurture relationships with business banking customers to better predict if they may be encountering financial trouble as economic conditions change.

Today, LaaS is evolving to represent much more than simply automating origination capabilities, particularly as it relates to SMB, SBA and commercial lending. Increasingly, LaaS is being leveraged to improve banks’ servicing and portfolio management capabilities as well, including:

• State-by-state disclosure capabilities: Many state legislatures have passed or are considering laws defining disclosure requirements for SMB financing offers. Specific requirements vary by state, but most require very descriptive details associated with disclosure of the financial product terms, calculations, fonts and formats. While many banking activities are exempt from state regulations outside of their home state, there are some SMB financing business lines that may not be.
• Ongoing monitoring of borrower business financial health after financing: The use of cash flow analysis, debt-to-income (DTI) ratios and analytics to monitor financial wellness and any changes to the business that might negatively impact ongoing ability to pay or, conversely, reflect positive growth for the business to support an increase in funding.
• Full integrations with banks' existing servicing systems of record across product relationships.
• Active monitoring of loan servicing and borrower business payment patterns, and alerts for bankers if patterns change over time.
• Applying rule-based decisioning to the loan renewal process to support more efficient credit risk management and streamline the customer experience.

Particularly in a recessionary economic environment, bankers will need to be able to more closely monitor the health of their business banking customers, and better position themselves to be proactive allies and advisors to those customers, rather than simply operate in a reactive fashion.

For bankers, selecting the right LaaS partner starts with assessing the company’s objective in bringing a capital program to its customers, as well as understanding the capabilities and assets that can be leveraged. For example, if the objective of a retailer is to facilitate increased sales for certain in-demand items, their banker should be able to provide inventory financing to help ensure the SMB has access to those products.

In addition, it is important for the bank to understand the LaaS partner’s capabilities and assets that are relevant to the lending process. Does the LaaS partner already provide SMB services like payment processing or accounting software that gives them access to data relevant to the underwriting process? Beyond the technology component, do they have pools of capital to deploy seeking to generate a return on financial assets like banks and insurance companies?

Considerations like these help bankers to better understand what their successful SMB capital program should look like, and use that information to select the best LaaS partner for their institution.

More tightly integrated partnerships between financial institutions and fintechs represent the future evolution of LaaS offerings, as platforms architected with modular systems and business processes allow banks and fintechs to each leverage their comparative strengths. Banks bring in loyal SMB customers and a stable source of low-cost capital. Meanwhile, fintechs bring speed and reduced costs through technology automation and data-driven credit and servicing expertise specific to the small business segment.

A value-chain partnership with the bank focusing on front-end acquisition and providing the balance sheet for assets – and their LaaS partner providing technology-enabled origination and servicing functions – represents the ideal relationship structure to help ensure a positive ROI for banks and their business customers over time.

Will Tumulty serves as CEO of Rapid Finance, a financial technology company and one of the largest providers of working capital to small businesses in the United States.