An interview with Ian Nelson, Managing Director of Q2, EMEA
As the economy returns to growth following a year and half of pandemic-induced interruption and lockdown, so demand for business lending across all sectors and all size of company is bound to increase. How can lenders make sure they are as best prepared as they can be and how can they do all they can to keep an eye on the notoriously competitive and high cost of lending?
We sat down over Zoom with Ian Nelson, Managing Director EMEA at digital lending technology company Q2, to get his perspective on managing thin lending margins with robust and API-led technology.
What are the factors driving the cost of lending and is the current trend upwards?
From my perspective the key issue is the cost of acquisition. It’s all about how people originate new business. If you go back a few years, it was about relationship managers getting though the shoe leather or getting in the car and knocking on doors. We’ve moved a long way from that, but some lenders are still on that journey. When it comes to assessing the true cost of lending, it’s cheaper to acquire clients if they’re filling in forms online. If they can be completely fulfilled online, it’s quicker, easier and cheaper to make the money available.
The technology of lending is moving the market towards agile, flexible solutions. I like to say our solution is bringing the client closer to the lender. We’re tightening up that interface. In the past, people have looked at technology as a means of disintermediation, as something that gets in the way of the relationship management between lender and client. But there’s still a place for that at the right time. But there’s so much that can be delivered by bringing that relationship together via technology, so that people can set up facilities, agree them and have it funded more quickly, and more cheaply online. It frees up time for lenders, if they have relationship management as a USP, to build those relationships. But also, the cost of acquisition comes down.
Is pricing just an issue of margin management and is this a concern as interest rates rise?
First of all, we’re in a low-interest rate market. Margins are squeezed on the back of that, and it is more difficult to get profitable margin. When you’re a lender, there’s a lot that goes into how you make your money. There is a simple margin that says if I buy in money at 2% and lend it at 7%, I’ve made a 5% margin. But the reality is there are lots of other bits that need to be included, including that cost of getting a client on board. But also, the costs of managing their facilities once they are on boarded. Is that process efficient or is costly and unwieldy?
Then you need to consider bad debt. Lenders need to think about how to manage bad debt, especially if we’re going through the cycle where bad debts are rising. And it’s not just the pure cost of bad debt – the money you haven’t been paid – but the cost of managing bad debt.
Technology gives lenders the ability to control all these elements more quickly. With real-time data, interactions with clients can be quicker, and more efficient. In that area of managing an account, managing the money you’ve got out on loan, technology can help squeeze down costs, so that it gives you the chance of getting more competitive in terms of the rates you go out with.
Can technology, as well as speeding up acquisition, help lenders make better decisions and reduce bad debt?
If you look at all the models, they say you get fewer bad decisions with an automated process than humans. But that’s easy to say. The reality is that there’s more complexity to lending than automated decision tools. It’s about knowing a market, knowing clients. Some businesses will be vertically integrated in the markets that they lend in. In terms of margins, it’s a matter of how you organise your business.
In the main, there’s parts of a market that lend themselves to full automation and others that need a hands-on, relationship-led approach. Across the lenders we work with, we see some that are totally automated and some that are totally relationship-based, with a manual decision-making process. But there are lots in the middle that have a balance between the two. Organisationally, you have to decide which parts of your business fit into those buckets, so you can get the most efficient way to do the business that you’re trying to write.
Are you’re talking about a hybrid approach with something like part-automation?
Everyone talks about technology in terms of automation, but that’s not where technology benefits stop.
We’ve got clients who are using our technology to improve all areas of their business, while still using old processes. They get an application in, review it, pass it on to somebody, who passes it on to an underwriter, who passes it to sales processing, who disperse it via another team. Every one of those can be described as a manual process, but they’re using technology to gather the information, store it and pass it on in the correct form. They could make it fully automated, but don’t want to. Technology is just an enabler. It allows you to run the business in the most efficient way you can, and ideally in the lowest-cost way, for the best return. But companies shouldn’t think digitalisation just means automation.
Technology can provide an awful lot of flexibility and agility, around manual processes. Firms whose model is built around relationship management as a USP, or that operate are in a market that needs hand holding and management of proposals, can still deploy technology.
Does automation have limits anyway?
There is a size and complexity issue, that’s always going to mean that technology can help some deals but the process isn’t going to be fully automated. I can’t see a market for automated decisions on a on a bond issue. The chances of that being done online are slim.
Outside of that, it is determined above all by the level of personalisation required. Lenders who have a strong relationship model, whose USP is that they know a sector, know the assets of the companies in that sector, know the suppliers to the industry, can use that experience to lend a little bit more or lend for longer, because they have such deep knowledge and experience in that sector, or asset class. These businesses are able to use our technology to manage workflow an awful lot more efficiently than they would if they were still using spreadsheets and email.
What other common blockers stop people from adopting technology as much as they could?
The biggest other blocker is legacy systems. We come across a lot of clients with legacy systems, kind of bolted together and it’s a big decision to rip and replace what has probably had a lot of time and money poured into. There is also always inertia or resistance to change. It’s also not always clear all the things that any new solution will deliver for lenders. Some things are pretty simple. So, if you process a loan manually now, and this new system can do that for you, that is easy to grasp. But when you get to the front end and how a solution can help manage engagement with clients in a much more engaging fashion, it is harder. From there and into the origination journey and how you map that and how you deal with that, these are areas where some people have an inability think out of the box in terms of what they really want and how it’s going to be delivered.
And what impact has Covid-19 had?
We’ve been through an unprecedented global pandemic. There’s an argument to say now is the best time to invest. But there’s also plenty of people who take the opposite view and say in periods of upheaval, you should sit tight. We have clients who made the investment decision right at the height of the crisis last March or April. People either see is as a time to invest or a time to be still. Levels of borrowing, particularly during the height of the pandemic, were low. Business dropped off from March to August last year, but now we’re in a period of pick up. Those people that did invest did it so that once we’re out of the pandemic, and business levels return, they’ll be in a better place to access new busines and markets.