Business banking is about to be up-ended by modular banking

Martin McCann, CEO of Trade Ledger, looks at how business banking is catching up with the digital world

Modular banking, or composability, has arrived

New data sources, feeding into better decisioning systems, with deeper insights for both lenders and borrowers, will take our industry towards the experiences we all want, enabling us to create real value for our people, our communities, our companies, and the world around us."      

- Martin McCann

Customers are not at the centre of business banking today. Products are. But things are about to be up-ended.

It’s been like this for about the last 30 years, mainly because of the regulatory constraints of the industry. Commercial banking has adopted a consistent and basic model: manufacture the product, distribute the product, and service the product. Retail banking, on the other hand, has been pretty much digitised, and people want to do their business banking in the same way – on their phone or laptop.

Business banking is at least a decade behind. And business banking revenues have been falling steadily, when looked at as a percentage of GDP and GDP growth over the past decade. Clearly, the value of business finance is coming from places other than banks.

How do you reinvent banking business models to be more relevant? The concept of modular banking - also known as composable banking, or a componentised or non-linear model - is a good place to start.

How the car industry did it

The automotive industry did this a long time ago. Most carmakers design cars and provide car services. They don’t actually manufacture the cars – they assemble, or compose, the parts. Gearboxes are typically made by ZF in Germany, and there are two companies that provide airbags to 99% of auto makers. The carmakers differentiate what they sell by how they specify the subassemblies to the subassembly providers. The cost advantages have been huge as each part of the supply chain has optimised its output and costs.

That’s what’s going to happen with banking services.

For example, KYC, AML and CTF (know your customer, anti-money laundering, and countering financing of terrorism) are all capabilities that banks spend a lot of money on, because of tightening regulations globally. At the moment, they’re not seen as products – they’re treated as a utility or hygiene factor; a cost of doing business.

But we can componentise them, and the bank that specifies the best component as part of the best-composed process will do it better than everybody else. Or we can provide KYC/AML/CTF for an ecosystem or marketplace of partners who then sell to the banks. Specialist capabilities can be created by the people who do it best, and then supplied to the ecosystem.

It’s the way the automotive industry has gone, and the way that the business banking sector is going.

Not cost-sensitive - it's experience-sensitive

It’s not about cost. Business banking isn’t a cost-sensitive market – it’s an experience-sensitive market. And the experience isn’t fit for purpose. A typical commercial loan takes 90 days to process today, and that’s if the firm even qualifies to apply.

Businesses, ours included, can’t get the credit, treasury and liquidity services they need. For small and medium businesses in particular, the market is not just underserved, it’s starved. There just aren’t the services that can be used for optimising economic growth in the economy.

The discontinuity that lenders must face

The bigger the bank, the more likely it is to be trying to address these problems, modernising and digitising its offering. Banks of all sizes know they must think about the next horizon of banking products, which will be discontinuous – a leap from where they are today.

Right now, a business leader who wants to get finance for their company needs to identify what product they want from the bank; then go and ask for information; then figure out how to apply; then go through the process of application, assessment, onboarding and so on. It’s a lot of work to do, and they’re probably not an expert so there will be a learning curve.

Excited about applying for forfaiting? Unlikely.

No business owner ever woke up in the morning and said that they’re excited about applying for a forfaiting product. Lots of people have to do it, but they don’t even know what it is, and they need third parties to explain what it is and why they need it. In the future, borrowers might get that product without ever hearing about forfaiting or invoice financing.

Within three years, it’ll be totally different. The borrower will connect their data to a service which may belong to the bank or to a third party; the service will analyse the information and come back with insights including recommended next actions, and could connect them automatically to application processes, fulfilled directly at the back end of the analysis.

There are many routes for banks and other lenders to get there, as we saw in our valuable report Business Finance Predictions 2022. New data sources, feeding into better decisioning systems, with deeper insights for both lenders and borrowers, will take our industry towards the experiences we all want, enabling us to create real value for our people, our communities, our companies, and the world around us.

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