Once monolithic commercial credit is morphing into something new as legacy and FinTech strengths combine into something more expandable and efficient in the face of changes to the payments ecosystem.
For decades, business and consumer credit have been siloed and have operated in distinct product centric ways. But the digital shift accelerated changes that were already altering that staid model, bringing us to the brink of a new era of commercial credit forms and functions.
In a recent conversation with PYMNTS, i2c General Manager, U.K. and EU Jonathan Vaux portrayed a credit sector in transition, saying application programming interfaces (APIs) have triggered utilization of virtual cards for a wide range of services, and embedded use cases are a big part of the value proposition.
Vaux said a boom in small business credit has been fueled by “a huge democratization” in acceptance that’s happened in recent years via players like Square. And it’s given issuers a much better picture of what overall credit usage looks like — and insight into how to optimize for 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 those services have been kind of decoupled and we are seeing some really exciting reinvention of those capabilities to offer a wide range of new services.”
Key drivers in this new credit paradigm are ease and personalization, and businesses are increasingly expecting services tailored to their specific needs. After all, the needs of a business that’s just starting out look a lot different from an established business looking to expand. What they all have in common, though, is a desire for what Vaux described as a credit ecosystem — where credit cards “speak” to businesses’ accounting software and APIs give them easy access seamless access to any number of financial services.
“What we have then seen is that many providers, by having a much better view of the small business’s spend or receivables, have leveraged that to offer commercial credit capabilities on top of that,” he said. “We have seen multiple new proposition types starting to emerge,” from B2B buy now, pay later to greater integration of virtual cards.
See also: Embedded Finance Experiences Should Be as ‘Easy as an iPhone’
Blurred Lines
Even as inflation causes banks to tighten up on lending, data can help lenders make informed decisions about specific businesses that allow viable businesses to borrow in tough times.
Saying that banks and traditional issuers have made it “relatively challenging for new businesses to access financial services” in any climate, Vaux told PYMNTS FinTechs disrupted that legacy roadblock opening credit that’s more tailored to individual business needs.
Noting that larger corporate purchases may require longer payment periods and better terms than what was historically on offer, Vaux said he expects “we will see far greater specific areas and segments targeted and probably smarter credit models based on how certain industries perform or how certain segments perform.”
Increasingly sophisticated algorithms are already helping lenders create more nuanced credit models that, in turn, open up new options for businesses. And that’s blurring, and in some cases erasing, legacy lines around credit cards, lines of credit, the types of payment terms offered, all powered by better data insights now available to issuers.
Using the example of a costly business purchase, he said, “If I’m buying something that has a resale value and you can actually tie that line of credit to that purchase, which you now can do with things like virtual cards and controls, then I’m probably going to take a different credit risk approach than I would if it was something that has no resale value whatsoever.”
Saying that banks have struggled with commercial credit cards as being neither fish nor fowl in the traditional view, Vaux said that adapting consumer cards for corporate use won’t fly anymore, and that fact is driving an evolution to more feature-centric and embedded models.
“There’s going to be increasing competition and attrition away from traditional issuer programs unless [banks] adapt,” he said. “Most commercial physical cards probably have far fewer digital capabilities than the services I get from my consumer debit or credit card and all the digital bells and whistles I get almost as a matter of course now.”
See also: i2c, Marygold & Co. Team on Contactless Debit Mastercard and Savings Platform
Partnerships and Predictions
As part of the growing trend of business finance being further consumerized, Vaux expects old distinctions to disappear, as new entrants are take a more holistic, customer centric view of needs. “Whether that be acceptance, accounting, line of credit, as opposed to very product centric card, overdraft, line of credit, merchant relationship,” he said, “they need to take a very different viewpoint of how they interact with those customers going forward.”
Getting this done requires organizational change, as legacy players often don’t have the in-house skill set to create and manage embedded B2B finance. Partnerships are critical now to bring specialized fintech capabilities together with legacy bank scale.
“The ability to scale and provide that kind of capital are things that banks do very, very well,” he said. “I’m not sure they’re as good at user experience or some of the digital initiatives that we see. I’m not trying to slam the traditional issuers. I just think it’s a question of can they go fast enough to keep pace without some of these partnerships?”
It’s a moot point as those partnerships are happening more and more in the post-pandemic environment as commercial credit undergoes its own shift within a shift. It will take some doing especially in the European Union and the U.K. where trade finance is more heavily regulated than in other markets.
Vaux acknowledged that, saying “because of the huge regulatory and compliance pressures they’re under [in Europe], it makes it very difficult (for banks) to either to share their services through APIs or consume third party services through APIs. A lot of progress is being made, but they probably need to accelerate that pace of change.”
A leading use case in this in cross-border payments, which is difficult in the EU and other markets that tend to be dominated by local payment schemes, requiring integrations to make an increasing number of cross-border payments faster and less friction-filled.
In response, Vaux said i2c is seeing “many of our key clients creating wallets that will have virtual cards in nominated currencies, whether that’s sterling, euro, U.S. dollar, so on and so forth, and that being a really effective way of ensuring that overseas suppliers are paid quickly and easily.”
It’s all leading to diversification of payments overall, led by embedding of payments into digital platforms, digital software linked into receivables and payable systems, and more interconnected ecosystem where expenses are updated seamlessly in accounting software.
Not everyone will make it, and Vaux said, “I think you probably will see quite a bit of consolidation and acquisition going on as maybe some of the bigger players will buy in some of those smaller players, because they’ve got a pre-existing niche segment, they’ve got a UX that does really well,” and that will be incorporated into more feature-centric offerings.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More