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Over the years, dozens of founders have told me that the problem they are solving is that banks want to lend more but cannot, due to limited data. The idea that access to more data automatically leads to greater lending volumes is, however, flawed. When lenders access more data, they don't see less risk unless the additional information materially improves the credit profile of the borrower. If having 85% of the available information results in a "no" decision on a loan, does getting to 95% have the power to move it to a "yes"? More "yes" decisions — an increase in lending activity — only occur when the data transforms undesirable risk into a risk worth taking. This is challenging to prove out on a forward-looking basis, and that is one of the main reasons that startups have a hard time selling insights tools based on providing more complete data for lenders.
However, there is value in demonstrating the impact of better insights and data on a lender's existing credit portfolio. Analyzing outstanding loans via a startup's superior tools, and then contrasting those insights with loan performance, is an effective way to show what the bank's current methodology might have missed. The most powerful tools highlight gaps with real-time data and AI-driven monitoring that assess a bank's current risk exposure and enable immediate action. Banks often find more risk than they're aware of which gives urgency to finding tools that can mitigate it today and going forward.
In the B2B lending world, banks want to know that the money they lend to clients is being used responsibly and have the ability to pull back available credit if they see negative signs. They also want the opportunity to deepen their relationship with a growing client by offering more credit proactively. Typically, the information that a bank has access to about the performance of a client's business and the health of their spending activity is limited and infrequent. Reporting is delivered periodically and with significant lag time, making it challenging to reduce risk or offer more credit to a client at just the right time. Real-time spending behavior, one of the most powerful indicators of business health, is generally not available to the lender.
Financial institutions need to reconsider the logic and intuitiveness of their website design. They could also introduce free credit scores and capitalize on generative AI, experts say.
The good news is that there are startups working on solving this by facilitating real-time transparency and increasing the predictability of a client's business health for the lender. The better a bank understands the health of a business, the stronger relationship it can have with that business and the more opportunities there are to serve as a trusted advisor and provide relevant solutions including credit.
On the client side, businesses want to aggregate all company spend in one place to have full visibility and control. While a number of large players have emerged in the space, it is important to distinguish between expense reporting and spend management platforms that have a credit component and those that do not. Most of these disruptors do not extend lines of credit to clients in the same way that banks do. While they offer corporate cards, the associated spend limits directly correlate to the amount of money that a company holds in their account. This doesn't solve for actual credit needs a business may have or expand its credit eligibility. These credit limitations can also mean that a business has to engage multiple platforms to ensure control and visibility, increasing the workload on their financing function. Spend and expense management platforms that collaborate with banks and allow businesses to merge the when and how much in real time are the key to improving the company's financial health and expanding their banking relationship.
As I meet with founders in the space, it's clear how much desire there is for technology that brings businesses and banks closer together. Providing banks with more powerful data tools and businesses with more streamlined ways to monitor spend helps to enable greater risk mitigation and credit collaboration. I believe we're just beginning to see the potential of how these relationships can evolve, and real-time data and AI-driven insights are two important pieces of the solution. There's a huge opportunity for these enabling technologies to help banks and businesses move toward a more real-time, streamlined and analytical way of credit extension.
