Bank-FinTech collaboration blends trade credit landscape

Once upon a time, monolithic trade credit is turning into something new as legacy and FinTech assets combine into something more scalable and efficient in the face of changes to the payments ecosystem.

For decades, business and consumer credit have been siloed and operated in a separate, product-centric way. But the digital shift has accelerated the changes that were already altering this entrenched model, bringing us to the brink of a new era of trade credit forms and functions.

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

Vaux said the small business credit boom has been fueled by “a huge democratization” of acceptance that has happened in recent years via players like Square. And it gives issuers a much better picture of what overall credit utilization looks like – and insight into how to optimize it.

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

The main drivers of this new credit paradigm are convenience and personalization, and businesses increasingly expect services tailored to their specific needs. After all, the needs of a start-up business are very different from those of an established business looking to grow. What they all have in common, however, is a desire for what Vaux describes as a credit ecosystem – where credit cards “talk” to corporate accounting software and APIs give them easy access and transparent to an unlimited number of financial services.

“What we found then was that many vendors, having a much better view of small business spend or receivables, took the opportunity to offer trade credit capabilities on top of that,” he said. -he declares. “We’ve seen several new types of propositions start to emerge,” from B2B buy now, pay later to greater integration of virtual cards.

See also: Integrated financial experiences should be as “easy as an iPhone”

Blurred lines

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

Saying that banks and traditional issuers have made it “relatively difficult for new businesses to access financial services” in any climate, Vaux told PYMNTS that FinTechs have disrupted that old roadblock opening credit. which is more suited to the needs of individual businesses.

Noting that purchases of larger businesses may require longer payment terms and better terms than historically offered, Vaux said he expects “we will see specific areas and segments a lot broader targeted and probably smarter credit models based on how certain industries are performing or how certain segments are performing.”

Increasingly sophisticated algorithms are already helping lenders create more nuanced credit models that, in turn, open up new options for businesses. And it’s blurring, and in some cases erasing, legacy lines around credit cards, lines of credit, types of payment terms offered, all fueled by better data insights now available to issuers.

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

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

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

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

Partnerships and predictions

As part of the three-year consumerization trend in corporate finance, Vaux expects old distinctions to “disappear because these new entrants take a much more holistic view that is customer-centric, about me, my business and my various needs, be it acceptance, accounting, line of credit, as opposed to the very product-centric card, overdraft, line of credit, merchant relationship. take a very different view of how they interact with these customers in the future.”

Achieving this requires organizational change, as many (if not most) incumbents lack the in-house skills to build and run integrated B2B financial services. Partnerships are now essential to combine specialized fintech capabilities at the scale of traditional banks.

“The ability to scale and provide that kind of capital is something banks do very, very well,” he said. “I’m not sure they’re as good in terms of user experience or some of the digital initiatives we’re seeing. I’m not trying to criticize traditional issuers. I just think it’s a matter of knowing if they can move fast enough to keep up without some of these partnerships?”

This is a moot point as these partnerships increasingly occur in the post-pandemic environment as trade credit undergoes its own change within a change. This will take time, especially in the European Union and the United Kingdom, where trade finance is more heavily regulated than in other markets.

Vaux acknowledged that by saying “due to the tremendous regulatory and compliance pressures they face [in Europe], it is very difficult (for banks) to share their services through APIs or consume third-party services through APIs. A lot of progress is being made, but it probably needs to accelerate this rate of change.

A leading use case in this area in cross-border payments, which is difficult in the EU and other markets that tend to be dominated by local payment systems, requiring integrations to make growing numbers faster and less complicated cross-border payments.

In response, Vaux said that i2c sees “a lot of our key customers creating wallets that will have virtual cards in designated currencies, whether it’s British Pounds, Euros, US Dollars, etc., and that’s is a really effective way to ensure foreign suppliers get paid quickly and easily.

All this leads to a global diversification of payments, thanks to the integration of payments in digital platforms, digital software linked to receivables and payables systems, and a more interconnected ecosystem where expenses are updated in a way transparent in accounting software.

Not everyone will make it, and Vaux said, “I think you’ll probably see quite a bit of consolidation and acquisition going on, because maybe some of the bigger players will buy some of these smaller players, because they have an existing niche pre-segment, they have a UX that works really well,” and that will be incorporated into more feature-focused offerings.

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