Will PSD2 Open up New B2B Lending Opportunities?

For those that aren’t aware of the Payment Services Directive 2 (PSD2) its a new EU directive that enables a bank’s customers, both consumers and businesses, to use third-party providers to manage their finances.  Banks, by law, are now obligated to provide these third-party providers access to their customers’ accounts through open APIs (application program interface). The hope is new financial services will be built on top of this data and breaks the monopoly banks have on a customer’s account data.  This means new providers in the payments arena (yes, Alibaba, Tencent, Google, Square, etc.) can offer services to both consumers and businesses, including bill payment, transfers, spend analysis, credit, liquidity, investments, etc.

When it comes to new services around B2B and working capital, I believe like any good market hypotheses to test, we need to understand a basic question when it comes to corporates – will they provide third party vendors this access?   I don’t know the answer to that question, but I do know it comes down to trust and value proposition.  Certainly making sure vendors have the security around your bank data will be important in this age of constant hacking threats.

If we assume a certain percentage of business clients will not give FinTech vendors access to their bank accounts, than other options are needed.  New digital lenders have already built data extraction tools with accounting software programs and other sources of data to supplement their credit risk assessment and digital lending products.

I know of one specialty lender who works with companies and pulls invoices from the different P2P network providers the company uses.   So if the company sells through Coupa, SAP Ariba, and Taulia, they ask the company for their user ID to pull their total network invoice value. The advent of API technology and robots can give them this trusted data in addition to (or in spite of) getting access to bank data.

This specialty lender went on to say the network data is more valuable than taking data from accounting packages, which he claims actually discard up to 94% of the data – account debtors that can’t be financed, or invoices where only 80% of the value can be financed, or the currency is not right, so he claims it can be a very frustrating experience for the seller.  I dont know if these numbers are right, and I am sure the Bluevines and Fundboxes will refute, but his point is an approved invoice from a buyer is better than a seller’s invoice.

Specialty lenders are now rushing to be creative developing new invoice finance and line of credit propositions off of all this data, whether gained through APIs from banks, or data extraction tools from networks, accounting packages or other sources (egs, lien registries, tax claims, etc.).

As to PSD2, it will be interesting to see how the Bank-FinTech world develops B2B Lending.

I will be on a panel at Lendit FinTech USA 2018 in San Francisco April 9th talking about Digital Lending & Invoice Finance along with George Shapiro, chairman The Interface Financial Group and Andrew Jesse of Tradeshift.  If you use the code below (LENDITSPEAKERVIP), you save 15% on your entrance fee.

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