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Q&A: Driving world-class SME lending experiences

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December 6, 2022 | Jonathan Pryer

John Pesavento, VP of Technology at Reliant Funding, shares his insights on how to power rapid approvals and accelerate SME lending processes.

Q: What are some of the challenges faced in accessing and using alternative data?

One challenge with alternative data is really understanding which alternative data elements provide the right signals relative to what you’re trying to achieve as a business. You can procure a lot of third-party data out there, and if you go into it without a thoughtful understanding of what’s going to differentiate you from your competitors and what data gives you those signals, you could sit there in a data lake for years and not get the answer you’re looking for. So, there’s a business accountability – what are we trying to answer relative to predictability and/or information around credit decisioning that we can’t answer today? How does alternative data augment that, and what are the right alternative data elements that give us the appropriate signals relative to what we’re trying to achieve as a business? How do we want to differentiate ourselves in the marketplace, and what alternative data will best supplement our first-party data and allow us to achieve that differentiation?

Q: So, what are some of the ways that AI and machine learning can be used to make more accurate predictions? And what are some of the challenges you’re seeing in deploying AI?

What we’ve really tried to do with AI and machine learning is to take a holistic approach for what we call the entire funnel. And that’s from initial interest of a small business, all the way through to funding and contracting. And we use AI to really understand the predictability at each inflection point in that funnel, from a lead, all the way through to propensity, to actually approving them based on submission characteristics. The further you get in a process in any organization, the more costly it is. If we can use machine learning and AI to be more predictive on the propensity for a merchant to convert into a funding, then we gain cost-efficiencies as an organization.

Q: How can technology help you adapt and scale your product offerings so you can get to market faster?

I think that this is an interesting question because there’s a lot of different dimensions to this, so I’ll try to unpack a few of those. First off, there’s always the trade off about whether you should custom build your own solutions or leverage package software, or SAS-based solutions, and there are pros and cons to all of that. I think the speed to market really must focus on one very important dimension, which is what are our points of differentiation relative to our competitors? I’ve seen a lot of organizations historically invest in technology – basic capabilities that are table stakes for the marketplace they’re in. Yet, it’s all custom-based applications, hard to iterate, hard to evolve and change.

In terms of table stakes, there’s an expectation of merchants that this is stuff you just do and do well, and then there’s points of differentiation. If you can’t have technology platforms and systems that allow you to move at pace in line with the market expectations, then you’re going to fall behind because your systems are an inhibitor to you. We try to take a very disciplined approach to where we need to have things that we can configure outside of system software changes versus where we want system software changes. So, if we have to make changes relative to pricing, and credit risk scoring, we can make those in a rapid timeframe as market condition changes, versus have to initiate a software development build. If your software solutions don’t facilitate some of that, then you’re going to be a laggard.

I also think that your technology choices become an integral part also of your cost-to-serve model. As we look at our cost-to-serve, I look at how our systems help facilitate how we actually serve customers by providing the products and services that they’re looking for. And just because we could get to market faster, but it costs us three X what it should, and therefore degrades our margin and profitability, that’s not a healthy position to be in. So, we’ve tried to be very cognizant of trying not to build custom applications where necessary. We leveraged a lot of software-as-a-service solutions that can scale, so we can focus on delivering those points of differentiation when it comes to new products, services, and capabilities.

Q: Why are rapid approvals so critical to SMEs, and how can digital lenders make them happen?

I think in the US very specifically, speed is sort of the name of the game. There’s certainly a lot of players in the marketplace that a small business can go. Interestingly enough, our stats suggest that 60% of the people that apply, or the business that apply, for funding from us are doing it on a mobile device, which means they’re out in the community. They’re looking for speed and efficiency. They’re looking for a frictionless process, and they’re looking for an answer quickly. We are continually trying to innovate to recognize that and recognize that we have a very diverse merchant customer base that is our national population. And how do we really make that approval process as seamless as possible, but also giving it the human component?

But fundamentally, businesses are oftentimes ill prepared for really understanding their cash flows. And so rapid funding is really important to them, and every small business has a different preference. Some of them care about rates. Some of them care about duration. Some of them care just about the how much their payments will be. So, giving them very flexible options in terms of the different offers you can present to them becomes really, really important.

The diversity of products and offerings in concert with speed are absolutely a differentiator. Typically, the first one or two offers that come through are the ones that win. And merchants often take it because time is money for them. They’re not sitting behind a desk, typically. They’re out in the community, running their businesses every day. They need a fast source of funds. You’re an outlet, but there’s many other outlets out there.

Q: What do you see for the future of SME lending?

I think one of the things that will be interesting to see in the marketplace is how small businesses, and then subsequently lenders, pivot to a relationship-based orientation from a transactional one. As you think about markets potentially tightening, talks of recession globally, I think there’s going to be more merchants that are going to really want to be able to say, “I have a funding partner I can trust” versus “I did a funding transaction with that company.” There’s a big difference between those two. If you can be the funding engine for this merchant, support them and be their go-to source, that stickiness factor is going to be very important. What’s important to us is providing a frictionless experience with a personal touch. So, we can build those relationships and recognize the fact that this business has an immediate need, but they’re also trying to grow a business over the long term. And can we be their funding partner of choice when they have lots of choices in the marketplace?

Q: How do you ensure that Reliant Funding offers a differentiated experience for your customers? And what are some exciting tech innovations in lending that you have seen in the past few years?

From an experience standpoint, I think it really has two dimensions. One for us is frictionless. How robust and engaging is that mobile application so customers can apply very easily. If you’re on your mobile device, you’re not uploading documents very easily. And then incorporating the human touch. How do we build a relational connection with those individuals, and not make it so sterile that all they see is a web screen or a mobile app.

If we want to make the relationship the focus, and less around transactioning by giving funding, then we must be able to have both of those. The technology enables a better engaged experience between the merchant and our organization.

From a technology perspective, I think probably the most exciting thing is the application of machine learning. We’re trying to really apply that technology in a meaningful way to how we run our business.

How do we continue to drive margin growth? How do we continue to drive efficiency but still have the human touch, but only where it adds value? So how do we leverage machine learning to drive better predictability, ensuring that we’re going after the right opportunities for merchants, ensuring that we’re facilitating the right credit and decisioning processes. And I think leveraging those all in concert and thinking about it from a profitability standpoint is a very important consideration, because technology can really be a fairly big cost component of any organization if it’s not applied properly. So, the business becomes an integral part of really trying to leverage that technology in an effective way.

Excerpted from “Driving World-Class SME Lending Experiences” webinar hosted by Finovate.