Photo by Denis Dervisevic
In this two part series, we delve into the reputation economy and its impacts on small business finance and banking. In today’s second and final post we put forward a blueprint for a new kind of small business bank – one that actively improves its customers reputations with their own customers and suppliers.
In last week’s post we explored why the concept of the reputation economy is central to the development of a post-industrial society’s financial system. This week we look at how a small business focused bank could help enhance the reputation of its own customers, so they can gain an advantage in their own business dealings.
To gain an understanding of how this might work, it helps to have a look at two core issues small business face when dealing with finance providers today.
Small business borrowers are generally price takers
There are a myriad of factors that result in this. One of these is often a lack of competitive tension in a marketplace, however this is changing with a stronger non-bank lending market.
The second factor is an inability for a bank or lender to understand the business and price risk accordingly e.g. how is a newsagent different from a hairdresser. The typical benchmarking tool – a business or director’s individual credit score – is a blunt axe by which to measure a business by and takes little account of these industry nuances. Add to this the fact that many small business owners are entrepreneurs themselves and inherent risk takers, then the chances of negative marks recorded against their credit score increases. The ‘does the punishment fit the crime’ is opaque to most lenders, thus relegating most of them to take a ‘glass half empty’ approach to the majority of adverse findings.
Small business borrowers want to improve their financial standing but don’t know how
Many small business owners are regular victims of bank rejections – especially when seeking capital. The difficult part about these rejections is that the reasons behind them are often undisclosed by the bank, or at least can be difficult to understand. The ‘theatre of compliance’, where endless paperwork must be completed, IDs scanned and signatures matched can add to the confusion, ensuring many are reluctant to even bother considering moving banks. Thus they remain stuck with a sub-par bank, with a faint hope they may one day be rewarded for their loyalty.
But what if we had a blank slate for a small business bank? What would we do differently?
Start small, aim high
Trust is a two way conversation. That means neither a bank or its customers should take the relationship between the two for granted. But creating a trust balance by using technology to actively assess data points on both side of the equation regularly would help both parties better understand the other, and price accordingly.
Let’s imagine a startup business, with no credit history to speak of and an urgent need for capital to grow. The business also has no reputation amongst the supply network either and are eager to build credibility. What if a bank could help them on both fronts, simultaneously?
Firstly on the capital front, lending small amounts to begin with and building up as repayment milestones are met is an obvious approach – and one strategy many banks already implement. But translating this ‘good behaviour’ into a portable reputation is how the business could really get traction in its wider business dealings and enabling it to grow faster.
For example, what if a small business, in partnership with its bank, could build a personalised reputation profile, unique for a particular industry and share this with a new supplier or business partner? The new supplier could then apply their personalised weighting to the raw data or use the auto-generated, out-of-the-box score. A tech first bank doesn’t simply have to rely on financial data in order to build this profile. They could leverage a number of disparate and alternative data points from across various digital footprints, including repayment patterns with other suppliers and sentiment metrics from social networks.
Examples where this is happening outside of the traditional banking system include Cignifi, Lenddo and EFL , the latter who use a psychometric tool to inform credit scoring. A business focused bank offering this as a one stop shop solution could use this to differentiate itself in the market and create a compelling reason for business to switch.
The old adage, ‘we grow when you grow’ is one a small business bank could truly embody using this type of approach. Creating differentiation in the marketplace, without asking a small business to split off small chunks of their banking to a fintech provider is critical. Business owners are wary about spreading their financial life to thinly across multiple providers.
This is no mean feat however, ensuring the barrier to entry for new banks remains high. The ecosystem approach seems to be the best avenue here, bringing together a selection of specialists providers and creating a personalised banking solution for a business owner. It will be interesting to see if this plays out in any meaningful way over the next few years in the banking and fintech arena.