YCS NV Brussels
During the last three years, we developed a Fintech business concept that meets the conditions as pointed out by Moody’s, and that answers to the analysis of Santander concerning their view on Fintech 2.0. Two articles that were written by their expert teams do connect beautyful to our Fintech business case with regard to their view of the shape of the Fintech future. We hold that the YCS business concept is in many ways the perfect answer to the requirements of the future, focussed on but not limited to invoice based lending.
Below we summarize our view on the Fintech future and our role in it with reference to the two cited outstanding articles that analyse the relevant conditions for future success and the recent developments of the Fintech market.
The article “The Future of Small Business Lending” as posted in December 2016 by the Moody’s Analytics team in “Risk Perspectives” (April 2017) .
The article “The Fintech 2.0 Paper: rebooting financial services” by Santander InnoVentures, in collaboration with its partners Oliver Wyman and Anthemis Group (June 2017.
Below is a point-by-step introduction of the arguments mentioned in the articles and how the potential of the YCS initiative can be explained and understood. Quotes of the articles are mostly 1:1 copied from the original articles.
- Streamline the collection of borrower information. Lenders commonly complain that small business information does not provide sufficient detail to make a lending decision.
The YCS application is precisely the kind of advanced software-as-a-service (SaaS) system that provides a single, integrated solution for managing the entire credit life cycle, enabling easy and quick processing of data. The design of our application facilitates the extension of the “IHF-credit”. The IHF-credit, short for “In-house Financing Credit”, is an Asset-Based Financing concept remotely echoing old-school invoice financing concepts. The necessary borrower information is indeed streamlined up to the smallest detail and processed in a fully automated way in order to prepare for lending decisions.
The answer to the following considerations of Santander:
(the YCS application incorporates…)
- Fintechs have two unique selling points: better use of data and frictionless customer experience
- Collaboration is the key: the strengths and weaknesses of both banks and fintechs mean that both will often do better by cooperating rather than by competing. New digital businesses must either grow quickly or die. Banks can offer fintechs immediate scale and critical mass through access to demand.
- Risk management and pricing: Collateral management is a key element of risk management. Better data on the quality and condition of collateral provides more accurate assessment and pricing of risk.
- Leverage proven rating models for standard loans.
To confront this challenge, our business concept was designed differently from suggested by the Moody’s team. The Moody’s article focuses (implicitly) on the conditions for a general lending practise, not differentiating between the different asset categories that may serve as collateral. In fact, asset-based finance has been the increasing focus of development in business lending since the 1950’s. Starting out with mortgage based finance, the first mature segmented asset based lending market came into existence. Leasing of cars and machinery followed, after its segmented asset status was unambiguously secured by relevant regulation. Invoice financing was a logical next step in the development. However, the development of this segment suffered from the lack of concrete possibilities to track and (legally) collateralize the invoices, resulting in a compromised status and high pricing.
Based on current digital possibilities, automation and an ingenious structure, the IHF-credit invoice financing concept overcomes the suggested need of a “substantial and reliable dataset reflecting
historical small business defaults”. Instead, the (learning) data set of the SaaS system itself provides for a wide range of cross-sectoral and longitudinal confrontations that allows to focus on the specific risk assessment of the lending exposure. Furthermore, it is independent of arbitrary sector categorizations and subjective interpretations like the state of the business cycle, sector developments and other. Rather, the system statistically predicts a specific business default, based on its idiosyncratic data instead of deriving the default chance from the subjective and ponderously (man-processed) application of general historic data to the specific client base.
The answer to the following considerations of Santander:
(YCS aims to be…) “Being smarter with smart data”
- Digital technology has greatly increased the volume of data available. However, the banks have found it difficult to use this new data to create value for their customers and themselves. In contrast, online retailers and social media firms have found ways to create value from data.
- Banks are not nearly creative or enterprising enough in their attempts to use data to offer better products or cut operating costs.
- Banks could take advantage of the specialised expertise at fintech companies by engaging these firms to perform the required work or by acquiring them. Partnerships between banks and fintechs would create a powerful combination of information, supplied by the bank, and innovative analytical tools, supplied by the fintech.
- Update processes. The key issue here is the time it takes for a lender to process a loan application and disburse funds – the time-to-money.
Since the IHF-credit is based on the flow of invoices on a fully automated basis, the time-to-money is determined by the technical process of connecting the systems and standard administrative procedures. The initial (quantative) risk-assessment process is standardized and is accompanied by a short procedure of qualitative assessment of the SME’s management. The structure simultaneously guarantees a fully automated monitoring activity allowing for a learning early-warning algorithm that may serve just as well as a basis for monitoring and risk assessment of financing that is related to other asset based financing segments.
The concept comprises the credit activities to be developed on a local basis, presuming that the information available within the local community will contribute implicitly and explicitly to the qualitative (initial and monitoring) assessment.
- Upgrade infrastructure. Systems-related efforts should focus on removing duplicate tasks (e.g., multiple instances of keying in the same data)
Since the system is fully integrated, duplicate tasks are non-existent. In fact, the overall cost of ownership is reduced to the level that pricing of the IHF-credit will be very attractive considering the actual conditions of (invoice) financing, especially in the SME segment.
- Learn from the data. High-performing organizations will extract meaningful data to understand key performance indicators and meet audit and reporting requirements.
The Saas platform will incorporate the information flow on a continuous basis. Specific tools for analysis make use of the most meaningful data and allow for a learning system. Strict discipline and well-defined processes are guaranteed by the fully automated processing of the data and ensure that the data is accurately captured and maintained.
The answer to the following considerations of Santander:
(YCS realises the condition of…) “Embedding distributed ledger technology (a distributed ledger is a network that records ownership through a shared registry)”
- In contrast to today’s transaction networks, distributed ledgers eliminate the need for central authorities to certify ownership and clear transactions.
- Transactions can be made to be irrevocable, and clearing and settlement can be programmed to be near-instantaneous, allowing distributed ledger operators to increase the accuracy of trade data and reduce settlement risk.
- Systems operate on a peer-to-peer basis and transactions are near-certain to be correctly executed, allowing distributed ledger operators to eliminate supervision and IT infrastructure, and their associated costs.
- Each transaction in the ledger is openly verified by a community of networked users rather than by a central authority, making the distributed ledger tamper-resistant; and each transaction is automatically administered in such a way as to render the transaction history difficult to reverse.
- Almost any intangible document or asset can be expressed in code which can be programmed into or referenced by a distributed ledger.
- A publicly accessible historical record of all transactions is created, enabling effective monitoring and auditing by participants, supervisors and regulators. It is only a matter of time before distributed ledgers become a trusted alternative for managing large volumes of transactions.
- Distributed ledgers can increase investor confidence in products whose underlying assets are now opaque (such as securitisations) or where property rights are made uncertain by the role of central authorities.
Conclusion: Our view of the future of SME financing
We enthusiastically agree with the main conclusions of the reference articles The Future of Small Business Lending” and “The Fintech 2.0 Paper. We pointed out that our business concept deals effectively with the challenges as formulated in the articles.
Whilst Fintech 1.0 has brought only minor disruptions to the banking market, mainly in the areas of payments, credit and personal financial advice, advances in technology and growing investment in fintech set the scene for more radical change like in the case of the YCS business concept.
It appears from the literature that a huge percentage of the SME financing need, ranging from 25% to 50%, is related to invoice financing. Therefore, to crack the code of efficiently serving that specific financing segment, leads the way to serving the SME business lending needs best. In this case Fintech 2.0 means a “seamless specialisation” across a core element of the value chain whereby a number of providers combine to deliver a cheaper and easier-to-use proposition to end customers in the field of Invoice Financing.
Expanding that view, we hold that the future of SME financing is balanced, compartmented asset based financing. That is, financiers specializing in specific asset categories will finance the parts of the assets of the SME of their interest and specialization. In this view, the total set of lenders specializing in specific asset related lending products, combined with general financiers of equity and an array of mezzanine financing forms, will serve the total finance need of the SME.
Since all financeable assets on the balance sheet represent foremost stock quantities, whilst the invoices are a clear-cut flow category comprising real time information on a continuous basis, other financiers may well want to draw on the YCS Saas data to enrich and advance their monitoring and early warning credit assessment systems.
In this view Banks should be clear about where their market advantages and institutional strengths lie and collaborate with the fintech industry where they fall short. The same goes for the fintech industry in general and YCS in particular: to achieve Fintech 2.0. collaboration with banks (and/or vested interests) incorporates wisdom, market expertise, trusted brands and if so required a banking licence.