I have always liked cracking hard nuts, and disliked bad processes that could be done better. My latest venture TRIVER is going after one of the most complex and poorly addressed financial services need: small businesses’ cash flow management. This is a major issue for the real economy and the society, and I believe it can be solved today leveraging the power of data science and technology.
Although small businesses represent around half of the UK economy and more than 60% of the employment, when it comes to financial services, they usually get a very poor deal. Products sold to them are expensive, cumbersome to set up, slow to operate and quite inflexible. This feels like what consumer finance was 50 years ago. Why is that?
The main reason is that assessing the risks of small businesses is a very complex exercise that was for long perceived as nearly impossible to do precisely. Facing this challenge, banks have usually opted for manual credit underwriting and conservative product constructs like secured loans – making customer experience suboptimal as compared to consumer finance that is highly automated. It’s true that small businesses have complex cash flow dynamics, volatile performance, and limited accounting data to describe their operations. But I believe that today the necessary ingredients are available to overcome this challenge.
I have spent the last 25 years exploring how data science can solve real-life problems through predictive analytics. Despite how much we like to believe that we are unique individuals with a sophisticated judgement, I have found fascinating to observe how precisely human behaviours can be predicted at a collective level from patterns available in various datasets. For instance, whilst working at Capital One, I found similarities in credit card usage across countries quite puzzling – when presented with the same product choices, British, Spanish and American customers tend to react in a similar way, with the same proportion of customers of the same kind of profiles opting for the same options… And this is also true of small businesses, who are led by real entrepreneurs. In the last seven years at Funding Circle, I have demonstrated that it is possible with advanced statistical models to predict with a remarkable precision the likelihood of small businesses to repay their loans over a 5-year horizon.
TRIVER is pushing these possibilities to the next level. With the emergence of data sharing infrastructure like Open Banking and powerful AI models, I am convinced it is now possible to assess the credit worthiness of most small businesses accurately using statistical models only. With transaction-level bank data, the entire P&L and cash-flow profile of a business can be established, enabling well-grounded forecasts of its future performance. This means that manual credit underwriting is not needed any longer, and SME lending decisions can be fully automated.
Moving to full automation creates a change in paradigm. With full automation, not only are operational costs significantly reduced, but the service offered becomes available 24/7, in a click, instantly. Like when written messages became e-mails instead of paper mails, usage frequency is likely to skyrocket. Instead of contacting their bank once every couple of years to obtain a business loan, small business entrepreneurs will have the freedom to request capital by smaller increments, at the last minute, when it is really needed, and not pay for what they don’t need.
With full automation, it also becomes possible to offer financing at point of need, seamlessly. Instant financing can become part of other transactions like payments processes. Combined with API technology, this opens the possibility for a variety of companies that already serve small businesses to also offer financing, without dealing with its complexity, by leveraging a third-party embedded solution like TRIVER. For example, an FX platform can offer to its business customers an automated trade finance solution bundled with foreign payments.
My conviction is that 100% automated and instant credit decisions enable a step-change in SME finance UX and the creation of a new product category. With TRIVER, SME have access to a facility they can use whenever they want to accelerate clients’ invoices and release capital to their business bank account, without taking new debts. This is only the beginning, as other working capital finance use cases will be created from the same automated lending platform with a consumer-like customer experience. Like credit cards brought flexible borrowing in everybody’s wallet and revolutionised consumer spending behaviours, ‘instant capital in a click’ will profoundly change how small businesses optimise their cash flow.