Bank-FinTech collaboration blends commercial credit landscape

As monolithic commercial credit transforms into something new, as strengths from legacy and FinTech combine into something more scalable and efficient in the face of changes in the payments ecosystem.

For decades, business and consumer credit have been staggered and have operated in different product-centric ways. But the digital shift accelerated changes that already altered the stable model, bringing us to the brink of a new era of commercial credit forms and functions.

In a recent conversation with PYMNTS, i2c General Manager, UK and EU, Jonathan Vaux portrayed a credit sector in transition, saying that application programming interfaces (APIs) have sparked the use of virtual cards for a wide range of services, and embedded use cases are a big part of the value proposition.

Vaux said a boom in small business credit has been fueled by “a huge democratization” in acceptance that has occurred in recent years via players like Square. And it has given issuers a much better picture of what the general use of credit looks like – and insight into how they can optimize for it.

“Credit card as a product” is giving way to “credit as a feature along with virtual cards or wallets or multi-currency features,” he said. “All of these services have been kind of decoupled, and we’re seeing some really exciting reinventions of these capabilities to offer a wide range of new services.”

The key drivers in this new credit paradigm are ease of use and personalization, and businesses increasingly expect services that are tailored to their specific needs. After all, the needs of a business just starting up look a lot different than an established business looking to expand. What they all have in common, however, is a desire for what Vaux described as a credit ecosystem – where credit cards “talk” to companies’ accounting software and APIs giving them easy, seamless access to a range of financial services.

“What we’ve seen is that many providers, by having a much better view of the small business’s spend or receivables, have taken advantage of this to offer commercial credit options as well,” he said. “We’ve seen more new proposition types start to emerge,” from B2B buy now, pay later to greater integration of virtual cards.

See also: Embedded financial experiences should be as ‘easy as an iPhone’

Blurred boundaries

Even if inflation causes banks to tighten lending, data can help lenders make informed decisions about specific businesses that allow viable businesses to borrow in tough times.

Saying that banks and traditional issuers have made it “relatively challenging for new businesses to access financial services” in any climate, Vaux said PYMNTS FinTechs disrupted the older opening credit more tailored to individual business needs.

Noting that larger corporate purchases may require longer payment periods and better terms than historically offered, Vaux said he expects “we’ll see much larger specific areas and segments targeted and probably smarter credit models based on how certain industries are performing or how certain segments perform.”

Increasingly sophisticated algorithms are already helping lenders create more nuanced credit models, which in turn open up new opportunities for businesses. And that is blurring, and in some cases erasing, old lines around credit cards, lines of credit, the payment terms offered, all driven by better data insights now available to issuers.

Using the example of an expensive business purchase, he said: “If I’m buying something that has a resale value and you can actually tie that line of credit to that purchase, as you can now with things like virtual cards and checks, then I’m probably going to to take a different credit risk approach than I would if it was something that has no resale value whatsoever.”

Saying that banks have struggled with commercial credit cards as neither fish nor bird in the traditional view, Vaux said adapting consumer cards for business use will no longer fly, and that fact is driving a move towards more feature-centric and embedded models. .

“There is going to be increasing competition and attrition away from traditional issuer programs with less [banks] adapt, he said. “Most commercial physical cards probably have far fewer digital capabilities than the services I get from my consumer debit or credit card and all the digital bells and whistles I get almost as a matter of course now.”

See also: i2c, Marygold & Co. Team on contactless debit Mastercard and savings platform

Partnerships and Predictions

As part of the trend in the consumerization of corporate finance that has been hot for three years, Vaux expects the old distinctions to “disappear because these new players have a much more holistic customer-centric view where it is based on me, my business and my different needs, whether it’s acceptance, accounting, line of credit, as opposed to very product-centric cards, overdraft, line of credit, merchant relationships. They need to have a completely different view of how they interact with these customers going forward.”

Making this happen requires organizational changes, as many (if not most) legacy players do not have the in-house skills to create and manage native B2B finance. Partnerships are critical now to bring specialized fintech capabilities together with legacy banking scale.

“The ability to scale and raise that kind of capital are things that banks do very, very well,” he said. “I’m not sure they’re as good at user experience or some of the digital initiatives we’re seeing. I’m not trying to bash the traditional issuers. I think it’s just a question of can they move fast enough to keep up without some of those partnerships?”

It’s a moot point as these partnerships happen more and more in the post-pandemic environment as commercial credit undergoes its own shift during a shift. It will take some work, especially in the EU and the UK, where trade finance is more tightly regulated than in other markets.

Vaux acknowledged that, saying “because of the enormous regulatory pressure they’re under [in Europe], it makes it very difficult (for banks) to either share their services through APIs or consume third-party services through APIs. A lot of progress is being made, but they probably need to increase the pace of change.”

A leading use case for this in cross-border payments, which is difficult in the EU and other markets that tend to be dominated by local payment systems, which require integrations to make an increasing number of cross-border payments faster and less frictional.

In response, Vaux said that i2c sees “many of our key customers creating wallets that will have virtual cards in nominated currencies, whether it’s pounds, euros, US dollars, so on and so forth, and that it’s a very effective way of ensuring that foreign suppliers are paid quickly and easily.”

It all leads to the diversification of payments in general, led by the embedding of payments into digital platforms, digital software connected to receivables and payment systems, and more interconnected ecosystems where expenses are updated seamlessly in accounting software.

Not everyone will make it, and Vaux said: “I think you’ll probably see some consolidation and acquisitions going on, as maybe some of the bigger players will buy into some of the smaller players, because they have a pre-existing niche segment, they have a UX that does it very well,” and will be incorporated into more feature-centric offerings.