Northrow's Adam Holden says the most agile lenders are best placed to provide SMEs in particular, with the urgent access to credit that they are likely to need if their businesses are to continue during these unprecedented and challenging times
Alternative lenders have played an increasingly vital role in delivering much needed state-backed loans to UK SMEs during the ongoing pandemic. Despite being locked out from the scheme in the first instance, non-bank lenders have an opportunity to influence this next period – whether it be further state-backed support or influencing the accelerated adoption of online lending.
Of the 115 accredited Coronavirus Business Interruption Loan Scheme (CBILS) lenders, 60 per cent can now be classed as an alternative.
So far, over $57bn in Government-backed Bounce Back Loans (BBLs) have been distributed to UK businesses, although the majority of these loans have been awarded from traditional banks.
As we head into winter and the threat of more widespread lockdowns increase, there is evidence that the larger banks are refraining from approving further state-backed loans. As a result, experts fear the UK could be heading for another credit crunch, or should we say Covid-19 crunch, pushing many European countries into a recession not dissimilar to the one that followed the 2008 financial crisis.
But out of crisis and adversity comes opportunity. As state-backed loans and subsidies reduce, there is an opportunity for alternative lenders to plug the gap and supply businesses with the much-needed credit required to ensure business continuity.
Increasing levels of Fraud and Risk
In the scramble to contain the economic disruption caused by the pandemic, and justify Rishi Sunak’s declaration that the safety net would come ‘red-tape free’, traditional lenders often prioritised speed over the usual robust client due diligence processes, leaving their systems open to organised crime groups, opportunistic individuals and identity fraud in general.
A recent BBC investigation found that criminals were setting up fake businesses on an industrial scale and successfully applying for government-backed Bounce Back COVID emergency loans - claiming up to £50,000 on each application - with no intention of paying the money back.
Acuris Risk Intelligence, which tracks online fraud, claims to have found more than 100 fake businesses set up by one criminal gang alone. Which, bearing in mind that one of the underlying key criteria for a BBL, was that, to qualify, a business had to have been trading for more than 6 months, is extremely worrying.
As a result, the UK Government faces a potential loss of £26 billion, either through legitimate businesses not being able to repay the CBIL or BBLs, or through the potential widespread fraud identified, according to the latest National Audit Office (NAO) report.
Alternative lenders should seize the opportunity to fill the post-COVID lending gap that is already appearing and is only predicted to get worse over the next few months, by providing essential funding to SMEs. However, it is critical for them to effectively manage their risk status.
That said, there’s still the possibility that the Government could extend economic support well into the winter of 2020, but even so, that’s simply another opportunity for alternative lenders, most of whom have a positive outlook for the weeks and months ahead.
When the CBILS were being rolled out, traditional lenders relied heavily on manual paper-based processes that were extremely inefficient, sometimes taking weeks to approve a loan or make a decision. With BBLs, the increased focus on providing results quickly has left lenders, and by extension the Government, open to vast fraud and credit risks, due to a lack of proper due diligence.
Digitally native alternative lenders, however, can use their software solutions to accelerate loan processing, supporting their customers at speed and maintaining their reputation for advanced customer service and experience. They are also more accustomed to using technology solutions to quickly assess a client’s identity and risk status, giving them an edge in the due diligence stakes.
The most agile lenders are best placed to provide SMEs in particular, with the urgent access to credit that they are likely to need if their businesses are to continue during these unprecedented and challenging times. Being ahead of the curve in adopting a digital-first approach to risk, means they can easily onboard, and then prioritise low, medium and high-risk clients, through the use of relevant risk-oriented rules and scores using modern APIs.
Using technology to easily process successful applications (Green) and decline those unsuitable (Red) allows the lender to focus on their efforts on resolving Amber cases where applications haven’t clearly passed or failed the criteria for a loan. Understanding why a fully automated decision could not be made enables the lender to focus on resolving their ambers and increase lending or decrease their risks by declining the application.
How to better mitigate risk across the customer lifecycle
Delivering robust client due diligence processes at the point of initial onboarding, without sacrificing the client experience will be a key priority for all ‘switched-on’ lenders.
Lenders can now and should be, using the latest in biometric facial recognition, documentation verification and authentication software, to deliver safe and effortless onboarding experiences. Indeed, by using Genuine Presence Assurance (GPA) technology, firms can ensure that their clients are the right person, as well as a real person and authenticate them in real-time right now.
Allowing clients to update their own information and upload ID documents at their own convenience via a digital self-service, also greatly improves the efficiency of the process. Conversely, poor initial data-capture at the point of onboarding is often the reason that lenders are exposed to fraud.
Given the volatility of the current financial situation (but rightly so in normal walks of life), the client you signed up a couple of months ago may not be the same individual or company today, relatively speaking. For this reason, alternative lenders should remediate their back-book of client data, at the earliest opportunity, to quickly highlight high-risk clients.
Such rapid changes in the market mean that, ideally, businesses should invest in ongoing client monitoring tools, as a safety net against identity volatility, so they can have real-time alerts on relevant changes to their clients’ risk status.
Receiving alerts, of changes in company structure, beneficial ownership, directorships and customers and their financial stability, through agile cloud solutions, can significantly reduce your business risk and operational overheads.
There’s a great opportunity for alternative lenders to claw back some of their Government-certified, low-profit lending in the immediate aftermath of lockdown, by taking advantage of the opportunities made available by the pulling back of traditional lenders, thus allowing them to lend at their normal rates now that restrictions have been lifted. But, the caveat to all this, is that the market is still awash with not just bad actors, but increasingly sophisticated bad actors, on top of those who are already hiding in the system.
It is therefore imperative that cutting-edge onboarding processes are used, alongside continual monitoring of relevant client changes, and subsequent remediation, to identify and weed out these fraudsters at every stage. Traditional manual systems are no longer sufficiently robust to deal with this situation, so digital-first systems should be used to police the system in the most efficient way.
Digital solutions do not equate to increased expenditure, either on resources or budget – quite the contrary, they are able to both save money in the short and long-terms, as well as provide a compliance shield to guard against regulatory fines.
This article was provided by NorthRow and does not necessarily reflect the views of AltFi.