How to nail your working capital proposition this year

59 minutes

Are you looking for ways to nail your working capital proposition this year? Do you want to hear what industry experts have on top of their agenda?

Then you would want to watch our Predictions 2023 virtual discussion with:

🎤 Niall Archibald, Head of Financial Services Industry Strategy at Microsoft UK
🎤 Leda Glyptis PhD, Chief Client Office at 10xBanking
🎤 Ravneet Shah, CTO at Allica Bank
🎤 Martin McCann, CEO and Co-founder at Trade Ledger™

Some of the key takeaways of the discussion include: 

  • Now is the time to act. There is a lot of talk of supporting SMEs, 2023 is the year to do that.
  • Collaboration between banks and tech is a key driver for increased operational efficiency.
  • 2023 will be a year of uncertainty. To win this year, you need to be agile.

Watch on-demand now 👇

If you would like to continue the conversation on how to take your working capital finane to the next level, get in touch with us.


Martin McCann: Good morning, everyone, and welcome to Working Capital Predictions 2023, the LinkedIn Live Event. Thank you for joining us this morning. We're going to discuss over the next hour with the esteemed panel of contributors the report of the same name that we issued earlier this year. It's an exciting report and an exciting time. 19 industry leaders, four key themes, all in one report to help make the right moves and the right development in 2023, with regards to working capital credit solutions.

The question I'm most interested in answering with this year's prediction report, and what I'd like to discuss with the panel shortly is, 2023, the year that working capital gets unblocked for growth businesses globally. That's a big topic and a big statement, and I'm really looking forward to discussing with the panel, their views on whether or not that's an achievement we can target in 2023.

For me, it feels like we're at an inflection point, and the setup is certainly there for change in the market. There's a massive scale mismatch in supply and demand for working capital credit globally. For example, most people don't realize that more than one in two applications for working capital credits to banks globally is rejected or abandoned. For smaller companies, as you move into SMEs, that's closer to two, out to three. That's just an incredible fact and something that I think we need to lean in on box and try to address. The question is, is 2023 the year that we start to make meaningful progress on fixing that problem?

The resulting global gap for working capital credit is estimated to be in the magnitude of 4 trillion USD, huge opportunity for all the participants in the industry. There's certainly a willingness to address that problem, but the key question that we need to answer is how, there's been lots and lots of discussions over the previous years and in the previous reports around what will change and when. For example, will FinTech take over working capital credit markets? What do banks need to do differently after all?

Isn't there a charter to fund economic growth through the provision of working capital? Is there new technology that is a panacea or new data, which is a silver bullet, which is going to help us to reinvent the market for working capital credit as it has done in in many other sectors? In the report and with the esteemed panel that we've gathered today, we're going to dig into these significant issues. First of all, let me introduce you to the panel. I'm going to kick off with you, Ravneet. Would you please introduce yourself?

Ravneet Shah: Morning all. I'm Ravneet, CTO at Allica bank. For the audience who doesn't know Allica Bank, we exist to serve established SMEs with the banking that deserve. We are doing it with both investing in technology and the people who understand their business and by that we mean relationship banking. We are serving the SMEs with a wide range of product suites, like business loans, asset finance business current accounts, which we call business rewards accounts because it rewards the customers rather than charging them deposits and finance. That's about me and Allica Bank. Thanks.

Martin: Thank you, Ravneet. Great to have the banker who understands technology in the room. Looking forward to the discussion. I'm going to pass to you, Niall, for your introduction.

Niall Archibald: Thanks, Martin, and great to be here. Good morning, everyone. I'm Niall Archibald from Microsoft, so representing the big tech perspective in this conversation. I focus on Microsoft's strategy in the banking sector. At Microsoft, we want to empower every person and every organization on the planet to achieve more. That's across the breadth of what we do. When we think about that in the banking space, really, it's about the customer experience.

It's about the user experience within banks. It's about productivity and it's about building solutions that enhance the way the whole industry can function. Pointing to your point there, Martin, on the 4 trillion working capital gap. At Microsoft, we are really interested in providing the most innovative, most performant platform for industry solutions to be built on, to be integrated, and to join that up with the productivity and collaboration tooling that everyone uses.

Martin: Great, thank you, Niall. I'm really looking forward also to the perspective from the Global Tech Gorilla and understanding that the global perspective from the technology industry, welcome to you also. Finally, we're going to go to Leda. Would you please introduce yourself to the audience?

Leda Glyptis: Thanks, Martin, and hi, everyone. I am Lead Glyptis. I am the Chief Client Officer of 10x Banking. I describe myself as a recovering banker in that I have been inside banking for the best part of 20 years, which is painful to admit, but it gives good perspective. The last few years I have been serving banks from the other side software provision. 10X is a cloud-native core banking system Plus. We like to think of the problems facing our banking partners across retail, SME, and corporate banking and say, there is quite a lot of what you need.

That is plumbing and that's where we come in. In fact, you'll hear a lot of talk about plumbing if you've already read the report, you'll see that it's my favorite obsession and where I believe a lot of the answers lie. I will be a little bit of a broken record today as I have been for the last 20 years because I genuinely believe that behind every can't that we hear from a banking partner, there is a leadership question and behind every won't there is a plumbing question. I'm sure we'll unpack those today.

Martin: Great. Thank you, Leda. I love the way you describe yourself as effectively a reformed banker who understands technology now. I think we've got such a great selection of skills and experience on the call really looking forward to the discussion. My name is Martin McCann. I'm the CEO and co-founder of Trade Ledger. I'm delighted to be your host. My background is very much from the technology perspective.

I started the business in 2016. We're a global software company and our purpose really is to try and use technology and data and bring that into the market to help lenders and providers of capital to unblock the flow of working capital credit to growth businesses who want to have an impact on the world. At any further ado let's let's jump in. Warm-up question for everyone. You've read the report, what's the one thing that stuck out most for you or stood out most for you and why? I'm going to pass that question to open Ravneet.

Ravneet: Thanks, Martin. I think one specific thing that was quite resonated with me is the alignment of all the speakers within the report that we were talking about the SMEs, but now it's time to take action and solve those problems. We talked about automation, digital transformation, and one specific thing that I really liked how in the forward that law input, we don't need to think about the automation, we need to think about the transformation. How we change the technology or the processes to actually help and serve the SMEs? It was good to see like we are all aligned and working towards the same goal.

Martin: Thank you. I would agree. One of the things which is striking in the market this year is, there seems to be more alignment on the way forward to solve the problems of working capital credit, particularly for SMEs. Which gives me hope that 2023 could be the year. Niall, what stood out for you?

Niall: It was a point that Ravneet made actually in the report. Kevin Craven from Metro Bank made a similar point that business lending needs to speed up from months to what is actually possible with our technology tooling now in hours. I did find that staggering that SME lending, business lending could be a multi-month process to get approved. Actually, your point at the start, Martin, about 50% of it, maybe even up to 66% being abandoned or rejected. It speaks to a huge amount of untapped potential in the economy, in the UK economy, and globally. When we think about the economic context just now in trying to find more levers for growth, trying to exit the double-digit inflation.

We've had looking for more than just a couple of bits of economic growth trying to avoid recession in the UK. We're flirting with that right now, that providing more capital into the engine room of the economies in small businesses and enterprises is the way to do that. There's such a clear economic need for that business outcome of faster, more agile business lending. To get there, it's not going to be about adding more, it's going to be about taking away, it's going to be about more simplicity, less complexity.

It's connecting the applications in the banking stack that add up to a working capital outcome, a lending decision, a credit decision. It's about simplifying the user experience and data. It's about connecting data to get a more rounded view of a customer to get to the right decision faster, more external data points integrated with internal data points. For me, that was the really staggering thing that timeframe on getting a credit decision.

Martin: Good points, Niall, and I have to confess, the blockage that it takes months to get working capital solutions for growth businesses is one of the motivations for why I started a company in 2016 to try and lean into this problem and try and bring a technology perspective to unblock the industry perspective, which is part of the status quo. Couldn't agree more with the need for speed and agility. I suspect that's something that Leda has a perspective on as well. What stood out for you, Leda?

Leda: I think that coming to the report as a contributor in reading early on, one of the things I took away was an overall sense of optimism, that a lot of the obstacles that have at least nominally been put forward in the industry for reasons why we haven't been doing this, are known to be either no longer there if you want to be forgiving or false. What I loved about the report is that it tackles the questions from every angle and it says, guys, the tech is here, the economics can actually be worked out. A lot of the familiar reasons/excuses are no longer valid.

There's this optimism and urgency as I read it, and also a little bit of patience running low. People sitting around the table going, what's holding us back is now structural but we can fix it. We know what we need to do from a data governance perspective. We know what we need to do from a systems perspective to lower down unit economics. Coming back to the report in the last few days before we came to this event, I found myself thinking, is this the year? Because as Niall rightly pointed out, we're avoiding recession by the skin of our teeth right now.

We know for a fact that what has blocked this being a priority and working capital being affordable essentially has been a combination of it being too expensive and the fact that it was too expensive and it wasn't a business priority, and for some reason the technology that would make it less expensive was never made part of the same decision making and banks, in particular, were looped into that spiral of doom that creates an opportunity for companies like Trade Ledger or indeed us coming in and saying, we can lower that cost for you.

2023 will absolutely be the year where the need for working capital for SMEs will be higher than ever. We know that for a fact, that trend was there before, and the recession will make it harder. It is also the year where, because of the interest rate environment, banks will be flushed with cash in a way that they haven't been in a while. We know that banks don't necessarily innovate when [chuckles] they are in a good liquidity position.

It opens an interesting conversation about strategy, who will come in intentionally to go after this market, and is there an opportunity for a partnership in involving startups. Because the need is greater than ever, the tooling is here. We know what we need to do to make it profitable and quick, are we looking to the right people to do it?

Martin: Thank you, Leda, completely agree. I think there seems to be something different in the year in the market this year that 2023 is the year that people are going to start addressing this very, very significant, I would say, socio-economic problem as to how we flow capital at more skill into growth companies to have an impact on the things that we want to as humanity together. Let's flip that around the other way and as you're in the hot seat, I'm going to go back to you, Leda, to continue what's missing from the report. What are we not talking about, which is going to get us through to an outcome in 2023, which is going to significantly improve working capital credit solutions for growth companies?

Leda: I think we're missing two things from my perspective, and I know the rest of the panel have a slightly additive view to that. Something that I guess I could have realized we were missing earlier is that a lot of the thing that's holding us back is leadership and intent. It's not, we haven't worked out how to do this. It's about what would it take for the organizations that need to do this to bump other priorities and put that there so that that prioritization human element that says, I have so much head space, so much money, so much time, what's missing to make this a priority? I think we should and could have doubled down on that.

The other piece goes back to what I said earlier, and honestly, I don't think we could have guessed where we would be, but I think as we talk about leadership and intent, there is a very real world where the traditional institutions will be less motivated than ever to drive change in this space. That means that there is a unique opportunity for the organizations with the right leadership to really, really transform the space just by deciding to go for it.

Martin: Yes. That's a good point, organizational design and aptitude and attitude and ambition. I would summarize are key things that we don't talk in the report. That's a good point to bring Ravneet back in as the banker in the room specifically trying to solve this problem for the SMEs in the country. What's missing for you, Ravneet? What's your view?

Ravneet: Yes, I'll come back to probably what I think is missing, but I really liked what Leda said regarding the organizational design. It's very interesting topic because when we try to make some changes in terms of the digital transformation, the people or the cleats within the business sometimes are not used to the ways of working or probably are not ready to change the ways of working. That leads to a bit of friction and probably hold back people who are actually driving the change.

I think that that was a very good point. What I felt was missing is more we talked about the digitalization, automation, transformation, but we did not talk about the accessibility. I believe SMEs are passive with managing their finances and how we bring together the technology, the data to help them engage and understand their finances better in comparison to where they stand today.

If they need a loan, yes, they go to the bank and they go to this finance services only when they actually need something, but how do we make them more engaged and they know like what they can do in terms of how they manage their day-to-day finances in a much efficient way. That's what I think is probably, we could have talked more in the report and it is a very important aspect of it if you want to actually help and serve the SMEs in a better way.

Martin: I completely agree. We need a lot more focus on the SMEs and the problems the SMEs are facing to come up with solutions. There's no allergy, you don't want to put the cart before the horse. You need to understand what the problem is that you're trying to solve, if I was to paraphrase what you're saying. Then finally, I want to pass over to you on that question, Niall, what's missing or what's not getting enough air time in the report in your view?

Niall: Yes, I think, it was a great report. There are so many different perspectives across the ecosystem around working capital, but it'd be really interesting for me, probably for others to get a perspective from someone in the real economy running an SME. I appreciate actually this, Martin, you're very much in that space, so you've probably got some very valid perspectives to share on funding and capital and the facilities and the experiences you've had of that, which would be fascinating. It would be really interesting to bring that perspective in from the small business owner perhaps in non-financial sectors on their experience of this.

Other than that, I suppose one thing that I think about a bit is, hopefully, the inevitable direction of travel from open banking to open finance and beyond, and banks and other financial services firms being more of a platform in the future for integration of a variety of services. Obviously, we've made a leap forward in the UK and in lots of other jurisdictions on open banking, PSD 2.

We had the end of mandate of the open banking implementation entity, I think, just at the end of last year that's been taken forward to some extent by the FCA and HMT and the CMA. We need to keep the momentum on that in the UK market that has made good progress. We also need to think about it, the use cases and applications of enhanced data sharing and standard open APIs in the SME space, firms, organizations that would benefit from even more integration into their ERP and the wider stack. That's something I'd love to see, I suppose, lobbying and perspectives on to ensure that the momentum at the public policy level and the regulatory level continues on the direction of travel towards open finance.

Martin: Wonderful. I love that, will banks become platforms for financial services in the open finance era? I think that's the million-dollar question. That's certainly, I think, a quote that will be carried forward from this discussion. Let's move on. New topic and this one's really focused at you, Niall, and Leda, so let's keep you in the hot seat, Niall. Are the comments in the reports aligned with the conversations you're having as a technology provider with other lenders and technology partners in the market?

Niall: Definitely, there's a huge amount of alignment. One thing that really resonated for me with the conversations that we at Microsoft are having in the market, with our customers, with our partners, is on uncertainty right now, and the requirement that drives for agility. I think it was Laura Hales from experience in the report made this point really well, and I'll just read it out. She said, "We're living through extreme levels of uncertainty, for many businesses, 2023 will be about survival."

That, I think, is such a well-made point, when you go beyond the massive multinational corporates, highly resilient, you have ability for some degree of flexibility on the cash flow to the SME segment more domestically focused more probably less resilient in terms of economic uncertainty. To support that, there needs to be solutions, working capital solutions on the financial services providers' side that respond to uncertainty and the current economic outlook.

For me, that's about agility in the product stack. Do you have lending products, the parameters of which can be changed with the degree of flexibility and agility within good risk governance and good product control and product governance and regulatory standards? When you're moving from month to month, from are we in recession? Are we out of recession? What's the inflation numbers, what's CPI, what's the growth environment like? The demands on the businesses, the SMEs are rapidly changing.

Banks really need to be in a position where they can change product parameters with a degree of agility without a monolithic mainframe-based product stack, which is a 6, 12, 18-month change cycle to just embed it, perhaps, or to just change the way that it works or change some of the product parameters. I get to this point of uncertainty, but starting from uncertainty, economic uncertainty, I get to the point of you need product agility, you need rapid change cycles, you need to be able to build more integrations and different data feeds into your products, and change them relatively rapidly to be able to continue to serve your SME customer base.

Martin: Thank you, Niall. I can certainly identify with those comments as the founder and operator of an SME, and I can confirm two things. One is there is a lot of uncertainty as to what credit is available to SMEs in the market. Most tech companies in this sector are funded by equity, not by working capital, credit solutions. The sources of equity funding, have been significantly reduced, in some cases shut off completely because of the change in economic conditions.

The other comment I'd make is most people who are in my position operating small companies don't remember or have never lived through the types of macroeconomic cycle conditions that we're seeing at the moment. I would agree that 2023 is going to be an impactful year for SMEs and we're going to see a significant change in the SME landscape through the course of this year. Our hope is that we can help more SMEs to survive and change and lean into the change in economic conditions.

Leda, coming back to you. Same question to you, is what you're hearing and reading in the report aligning to the conversations you're having, particularly with lenders and other technology partners as a technology company, executive?

Leda: Yes. I mean, I would be lying if I said that we don't still get the odd what's wrong with my mainframe conversation, and that's a direct quote. The vast majority of people who find themselves in an exploratory conversation, let alone the mature conversation with a cloud-native or banking provider have exactly what I was talking about earlier in terms of intent and vision. The people that come to the table to ask how can 10x help me do this better, faster. Get everything we talk about.

What I find absolutely fascinating, just to add to what Niall was saying, is that the conversation has matured, I love to beat up on this industry about how slowly it's moving, and I will never take that back. We're finally getting to the conversation where the traditional lenders will come to the table and go, this has always been about unit economics. How can you, as a partner, help me move away from the unit economics that made all this impossible?

The other part of the attitude that is different and is captured in the report when we talk about user journeys and data-smart approaches, is that lenders used to come to the table going, this is what lending is, and I don't care what happens at the other end, I just care about your credit worthiness. Whereas now you see even traditional organizations coming to the table saying, "Okay, what problems is an SME facing, and how many of them are in my gift as a bank to help with." That already is a massive shift in the mindset. Then they turn to us and go, "And how much of that is a utility that you can take away from me as a set of problems so that I can focus on this layer of solutions."

In that mindset of accepting your unit economics can be made more profitable. Then looking at the problem statement and saying, all of this here, I should partner and turn it into a scalable, robust utility. All of that here is what my customer does with their business. Where I as a lender play is this narrow niche, and I now have worked out how to do it better and cheaper, and faster.

Martin: Thank you. I'm just noting that we've got some good questions and comments from the audience as well, which we'll get to at the end. There's a couple of them, which specifically want to drill into that question about what we're actually doing with regards to technology and adoption of technology with lenders and changes in risk models. I'll come back to that one later on.

Right now, I want to bring Ravneet back into the conversation and get the banking perspective to start with on the next question. Let's bring this to life. What problems are you trying to solve, or what challenge is mentioned in the report are you digging into, and how you're trying to solve those, Ravneet, as our resident banker on the call?

Ravneet: From Allica Bank's perspective, as we are serving established SMEs. One of the problem that they face is to get access to finance or probably get-- They're struggling to finance their business needs, be it cash flows, working capital loans, and if they do it, it involves very much manual and time-consuming processes. I think this is the biggest problem. We talk about the technology. We talk about how to provide them tools which can, if they can easily use to save the time, increase the efficiency so that they could focus on growing their business.

I think these are the-- Obviously, take informed decisions with the data and analytics, and this was the biggest problem when we started working on the technology side and within the Allica Bank, how we can actually solve this problem. Obviously, within the report we have a number of things that we discussed over the last few years, which we had a lot of decisions on Cloud models, the SaaS deployments or the software that we have, the strategy that we use between what we choose build versus buy decisions that we had to take, API-led software products.

Similarly, we came across the unified customer data as well considering how the legacy softwares are great and the products are well, that so many tech siloed functions, which they don't talk to one another. You don't get a holistical view of the customer data, which is a problem for any business and even the customer as well as the bank. We have been working on those problems and one of the problems that we're trying to solve this year and we started with it last year, and what Allica Bank is known for is its speed for decision, speed in which they take the decision.

It takes weeks to get just decision on your application within companies of the other challenger banks. We have been focusing even in the last year, so how we can speed that decision to help our customers, to help the brokers as well? We introduced auto decision as in auto decision in principle, which was implemented last year.

What we are trying to do is bring it in more technology in it to get into the application level rather than just the auto ... that we hand over in just a few minutes and bring in more machine learning capabilities into the process so that we can take a quick decision and provide a decision to the customer so that the whole loan application can proceed using the open banking using more financial and machine learning data within the processes. That's going to be the focus for the year. That's where we are.

Martin: Thank you for sharing such a cogent view on the intersection between how technology can actually help improve working capital services for SMEs. As an operator of an SME, I can share and add to the discussion that we have operating companies in multiple countries, and in each country that we're in, we're multi-banked because we cherry-pick the services that we want.

We'll have one bank for our main what you call the checking account because they're better at maintaining access to information and processing payments. Then we'll have another bank in that country for treasury services because they have the flexibility and the interest rates that we want. Then we'll have a different bank for potentially looking at lending.

I think there's huge opportunity from the customer experience perspective for SMEs for new banks and specialist-focused banks on the SME sector like Allica. I'd be interested on the same question getting your perspective, Niall. We're bringing the report to life. From, I guess, a global technology perspective, what is it that you're looking to solve? How do you lean into these challenges mentioned in the report?

Niall: I think a huge focus of what we are doing in financial services and more specifically in banking, is about enabling that single customer view, that unified customer profile, customer 360. Pick your term. That's, basically, ensuring that agents and relationship managers are able to get a consolidated view of a relationship. I think if we think about what we might call the UBS business model, you have a wealth management business, you have an investment bank.

It's the flywheel of growth between those two is based on you understanding that you have some high-net-worth individuals who also have some complex investment banking product needs. The family offices need some structured instruments and so forth. There's a flywheel that requires the two large pillars, lines of business to be connected at an institution like UBS that's trying to take that model.

If we think about a parallel in the SME space, the people who own SMEs and businesses are people, [chuckles] not to make an obvious point there, but who also have banking needs themselves. The bank, whatever scale that is operating at, that can connect the dots between, this is my private individual retail customer and also my SME business owner, and there is a connectivity between these relationships is going to be streets ahead.

I'm pretty confident in seeing there's not too many banks operating at scale that are able to join the dots across those disparate data pools, product stacks organizations lines of business. We do a lot of work trying to connect the dots on that single customer view. I think that's really important to be able to make smart decisions to bring it back to working capital for SMEs if you have a more rounded understanding of the overall relationship that you're transacting with that legal individual as well as the legal entity and legal entities.

I found that really interesting, Martin, that point you made about being multi-bank to multiple markets. There's obviously a huge opportunity there for all of those banks that you are transacting business with. If they can connect the dots and offer something perhaps with a degree of agility that out-competes where you are already taking your treasury services or your lending or your current account services, if they can just make a smart decision and recognize that they're only getting 20% of your business in that market and just a degree of agility and a degree of smart decision making around the overall 360 relationship with trade ledger would open up a whole other line of business.

Martin: That's some really good points there. The one that really resonated with me, which I wanted to pick up on was the blurring of the lines and the information between the individual as a banking customer and the business that they operate. I do think there's lots of opportunity there, particularly at that SME sector of the market given there's, I guess, an overlap in the data used to assess businesses and SMEs in that sector of the market.

Thank you for that perspective. I wanted to pose the same question to you, Leda, in terms of bringing the report to life problems that you're currently looking to solve. I have a suspicion where you're going to go with this one, given as we've had this conversation multiple times. I'm just going to ask you for your view on how we solve these problems.

Leda: Give me an opportunity to talk about my favorite subject. I think absolutely any challenge we've had in our industry, you could boil down to two things. Intent and tooling. We've talked before with all of us touched on revenue, talked about the organizational component. I think there's a lot of intentional leadership and actually taking it on to do something differently.

The realities, for a long time, certain segments have been underserved and SMEs have been top of that list because it was deemed unprofitable. The reason it was deemed unprofitable was around how we structure profitability in traditional lending institutions and how we service and how we service has a component that for a long time hasn't been in our control because you use the tools you have and the technology we had made it expensive.

In fact, it made it forbiddingly expensive to service SMEs in a way that was meaningful to SMEs and that wasn't just working capital, that has been everything. I've worked inside banks with the SME component was actually part of corporate banking. You have this heavy, cumbersome set of capabilities that is so much beyond the needs of a small SME that doesn't have a treasury division and doesn't do FX hedging and they don't know what you're talking about half the time.

Equally, I've worked inside banks where the SME offering was retailed, but you paid for it. Neither is it appropriate. The reason there was nothing ever in the middle, it was just not deemed profitable enough. Let's be honest. Now we're saying that there is technology at your disposal working with us, with you, and with a variety of other providers of solutions out there that slashes those unit economics.

It is all about reusable, scalable plumbing that doesn't make SME a separate thing apart but allows you to reuse capabilities across the board that reduces that total cost of ownership, that reduces the unit economics of your loan. Therefore, all you need is the willingness to change the organization that Niall was talking about on top of it. I don't think we can underestimate that unit economics conversation.

One of the things I find fascinating about some of the clients I'm working with is that they're coming to the table with these reworked unit economics and they're going out seeking partners for their technology stack that help them deliver against the unit economics and therefore, against their business plan. That is a radical change that-- Let's face it, we have not seen before.

It gives me a great degree of optimism that despite the headwinds that we're definitely facing into this year, that gear change of lenders coming to the table and saying, "This is what it needs to look like." I'm going to pick partners to serve that is the gear change we need to be having a very different conversation this time next year.

Martin: That's a great point. We need to change gears. I think we can all agree on that in order to have a significant impact in 2023 on working capital credit solutions, particularly in the SME sector, if we're going to have any chance of really helping SME survive the current economic cycle. Now what's really interesting in what you said, and I don't think it's called out very often in the market, is the connection between the plumbing and the unit economics.

That's something I think we need to maybe focus on a little bit more. If I come straight back to you, Leda, and talk about through the lens of the connection between plumbing and unit economics, we need to drive change. That's something which hasn't gotten to the forefront of working capital solutions in previous years and something we need to figure out how to do in 2023 or thereafter. Change in the industry is clearly accelerating. However, you worked on a lot of transformation projects when you were a banker before you were reformed, and as a technologist helping bankers. In fact, you've just written a book on the subject. We would like to come back to you and talk a little bit about what advice can you share and how to get that transformation, how to change those unit economics, and what is it about plumbing that makes that happen.

Leda: There's obviously a lot to say there, so get the book, everybody. You're right. I have written a book on exactly that topic. I think there are three pieces to what needs to be done to get to that decision. One is the understanding that organizational structures, incentivization, the cadence of decision-making, all get in the way of agility. If you decide that providing working capital is your priority for 2023, and have a cadence of half-hour meetings with your senior sponsor every eight weeks, you will not get it done this year. There is an element of allowing the organization to move at pace to understand and make decisions that actually gets in the way of most transformation. It doesn't sound like a big important thing, but it's a thing where most things fall down.

The second piece is to break down where you're moving away from. I would say that the main reason is that you wouldn't serve the underserved. I would put SMEs in this, but I would also put the working poor in this, or companies that need micropayments. They would historically not get served. Why? Because the technology that banks historically have creates an expense threshold that makes these transactions loss-making. The second is that, particularly for lending of the small SMEs or indeed the sole traders, is that the credit decisioning as it exists cuts them out.

What we need to do is crack open that organizational and decision-making bureaucracy that says, "We know that we have data and data-passing capabilities that will allow us to make informed credit decisioning based on different data sets. That will actually be probably more accurate and more helpful. It's just that the tech we have now won't let us do it." From a credit decisioning and creditworthiness perspective, if we look at the data we have with different partners, we will end up in a different place that will actually have a lower risk profile and a higher social impact.

What technology do we need and what data cleansing, data governance do we need? On the unit economics piece, which is actually the final frontier where things die-- if you can't get the economics to work, you will not get sign-off on a project-- is the realization that if you move to technology that is designed for real-time connectivity that is scalable and robust, and yes, cloud-native because that's the world we're in, I know that I sound like a 10x advertisement now but bear with me, the reduction to your unit economics can be right out of the bat without redesigning your business model, as radical as an 80% cost to serve, just because of the heaviness of the footprint of the technology that is currently being used in a lot of organizations, the dependencies on COBOL engineers who are being brought out of retirement to intervene in mainframes. These are horror stories that are happening every day out there.

If you actually understand the existing cost footprint of systems, because historically bankers have said, "It's expensive to loan." Why? Because the way we service is expensive. Why? Because we have a lot of manual workarounds, we have a lot of anticipation of error in the process. I used to run a team that had a processing team, a reconciliations team, a queries team, and a post-reconciliations team, so about 800 people.

The anticipation of these breaks is expensive. The time it takes is expensive. Mainframes are expensive, so understanding what the cost exposure is today, and understanding what moving to an appropriate infrastructure for the economy we operate in, and the reduction that brings to the cost profile, combined with the ability to use the data that we currently have to make better credit decisions, isn't just about doing the thing for the working poor, for young companies, for smaller SMEs. It's actually opening an avenue to net new money because these underserved communities, if you service them in a way that is sensibly stacked, are actually highly profitable.

Martin: I would agree with that. Well, thank you for sharing that perspective. You're clearly very passionate about it. I guess I would add to that what I find really interesting is the way that banks spend so much money on technology but so little about specifically what they're spending it on. There's this concept of shared services which covers a lot of sins, so there's a big budget for technology, but nobody necessarily knows what technology is consuming what cost, which is something we're going to have to unpack to get to transformation. I wanted to go back to you, Ravneet, as the bank operator in this conversation and focus a little bit more on transformation. In terms of the projects that you're working on, what advice can you give us here on how to successfully complete transformation in an organization like a bank? Because that's the hard bit, that's where a lot of organizations fold on.

Ravneet: Last three years, I've gone through that journey, so starting from a legacy system and making a transitional transformation to modern architecture, tools, and technologies. I think the first thing is the organization design. If you have to do any kind of transformation, you need to understand the problem that you're solving. There is a gap between how the organizations are structured in terms of the functions. Historically, we had big functions and then the waterfall process. From the waterfall model, we moved to the agile model, but what we didn't realize is that, rather than moving from waterfall to scrums or more agile or Kanban methodologies, we ended up in scrum falls so we haven't done any transformation. I think that that was the key.

There have been a lot of changes, how Big Tech are reorganizing the teams to achieve that, and that's what we are following in Allica Bank. We don't have the functions as in like siloed functions as front-end, back-end, and the business. We have brought everybody together as one cross-functional sports that we call them, aligned to the tribes as in domains. That team is basically has every aspect of the function, and they're working on the problems, rather than just working on the changes that are being prescribed.

I think one of the challenges, sometimes when a business owner wants something, and I think it's there in the report, like a car is not a fast horse, so you need to understand what that digital transformation looks like and what can be achieved with the technology and the tool.

That's where understanding the problem is the key. That's how we have done it, and so it's just like cross-functional squads working on the problems. That means understanding the problems and then solving it, and they own the end-to-end journey of that problem, from implementation, discovery, design, planning, implementation, and then deployment to the production, so working on those features and automation of it. I think it's just like coming back to what is needed is obviously you need shared goals, shared objectives, you need to understand each other's objectives, understand each other's problems, and cross-functional collaboration is the key to it.

Martin: I love the term you just coined, scrum fall, which I think a lot of people in this industry will identify with, where you look at a methodology as a way to execute and exercise change and realize that methodologies have limitations as well. The DNA doesn't necessarily change just because you've got a different approach. I think that's a great example, and again, another highlight for me from this discussion in terms of realistically how do you drive change. That's really hard.

Niall: Martin. Just briefly, I might build on that. Great points made by Ravneet. I think it's so interesting to look with a degree of analysis that the organizational design because the way you're organized is going to drive a huge amount of the way you change or not. It's interesting to hear about different approaches. There's also the potential for innovation and transformation coming from your line roles that, say, outside of your technology organization, outside of your transformation group or however that exists. There's a huge amount of people in any financial services organization who are running risk reports, liquidity reports, operational processes, who actually have really clear ideas about how to optimize what they do. We are a huge believer in the citizen developer concept and empowering the line role user to drive their own transformation within appropriate governance. With the right tooling, they can do their own automation, they can build their own virtual agents, they can build their own BI, maybe that's partnered in fusion teams with technology professional developers. I actually think there's a huge amount of untapped potential to speed up transformation and create better organizations and processes by getting the users, the line role users to contribute to that more actively.

Martin: That's a great point. You're actually touching on one of the questions that we've had from the audience, from Dan Feeney. Maybe I'll pose that to you and let you completely answer that while we're touching on it. Dan asked two questions, but one of them was around the fact that in the UK, Allica Bank, OakNorth and other newer banks see more advanced over legacy established high street banks in terms of lending the SMEs in the last decade. What's going on there? Is there a point when we'll catch up and link to that? He also had a question around credit risk ratings and the impact that they're going to have for putting real-time funding in place. You touched on that when you were talking about the opportunity for innovation from within, from the people who are actually creating these credit scores in the operations. Do you have any further comments to Dan's point?

Niall: Yes, Dan, thanks for that. I was reflecting a little on the point that Dan made around where the insurance industry is going in terms of keeping up with bank innovation. From what I see within Microsoft and with our insurance customers, is a huge amount of focus on making use of the data that's available for insurance carriers and brokers. Insurers are actually, in some ways, in a better position than credit lenders, banks, to make smart underwriting decisions based on external data. Any insurance product is always completely tied to a real-world asset or activity, car, pet, home, business process, whatever it is, buildings. These assets all generate a huge amount of data now and they really didn't 10 or 15 years ago.

What insurers are thinking about is ingesting, and the more real-time, the better, this structured data that's coming out of essentially the internet of things or other such concepts to make smarter underwriting decisions using that structured consumable data. Think about the concept of dynamic pricing and insurance, basically flexing the price of a policy based on where you are and what you're doing. Real-world example would be a ship traveling across Indian Ocean gets near the straits of Hormuz or off the coast of Yemen, geographic, geolocation technology says where the ship is, the price of the policy goes up because it's in pirate waters, or it's off the coast of a geopolitically hot zone in the straits of Hormuz. This is the kind of stuff that insurers are thinking about. I think there's a lot of potential for lending to good on that dynamic pricing real world data ingestion as well.

Leda: The reason I'm smiling as you speak, because a few years ago in my last banking job, I worked on a joint mission between the ministry of finance, one of the biggest logistics operations in the world, and the local port-- people will probably work out what I'm talking about if you look at my CV-- to do exactly what you're describing. There was immense investment and willingness to create this IoT capability, that real-time connectivity. You could actually turn FX hedging into an insurance product and capture that volatility into a set of sliding fees. The biggest sticking point was that bills of lading and all trade finance was paper. It wasn't about bringing digital assets into a new era, it was paper.

Martin: Yes. Fascinating discussion. I think it's topical as to the things we need to start changing to lean into solving working capital credit for 2023. We're approaching the final straight for our time together, so I'm going to change gears a little bit. We're into the last five minutes. I'm going to jump forward because, as I feared, we're not going to have time to get through all the topics that we wanted, to the last question. The last question is, what do we do different? You all are experienced, accomplished practitioners in the industry from one dimension or another. When you look at other players in the business lending ecosystem, and when they read the report, what's the one action you would ask them to take? Where do they start? How do we start to lean in and solve this problem in 2023? I'm going to pose that to all of you, but I'm going to start with Ravneet.

Ravneet: Thanks, Martin. I think for me it's now or never. If you're already on a journey for digital transformation, it's good. If you're still thinking, probably you need to action it. I believe the accessibility to financial services is the biggest barrier that needs to be resolved and should be the primary focus before building any product before we start talking about any tech. That's what we need to start with.

Martin: Thank you. Because of the interests of time, I want to get a comment from our other two colleagues on the panel, so I'll pass straight to you, Leda.

Leda: You won't be surprised that my focus is look at your infrastructure, look at your plumbing. Historically, we've seen lenders cut their ambition to suit and fit the limitations of their systems. We know in the report does a great job of highlighting that the capabilities to support your ambition are there, so allow your ambition to serve this community, to drive your tech choices because it is possible to do more than you currently do.

Martin: Then finally, I'm going to pass straight to you, Niall. What would you recommend, then, next actions for lenders in the business ecosystem?

Niall: I want to think about the whole ecosystem. For me, it's about healthy regulatory modernization that is in lockstep with internal risk governance improvements. I think in the UK and in other markets, sophisticated financial markets, regulation around digital transformation is going in the right direction. The UK is actually leading in many ways when we think about operational resilience and discussion papers on artificial intelligence, the critical third-party regime, bringing critical third parties within the regulatory perimeter. This is all good stuff and we massively supported at Microsoft, but it's got to be in lockstep with appropriately evolving internal risk and control governance to deliver on an organization's digital transformation ambitions.

Martin: Thank you, Niall. Actually, I think that's one of the problems that we need to be addressed, is this very specialized vertical product focus. It's something that Dan has also come back and commented on in the chat. I just wanted to take a moment to pick up on what he said because I think it's relevant and maybe we should have Dan on the next panel. He seems quite passionate and engaged on this topic. Dan's mentioned that, doesn't this all start with treasury? ERP connectivity is one thing, but treasury management software doesn't exist for SMEs. I would agree. My perspective on that is the regulatory environment that Niall just mentioned has led to a slightly atypical situation in this industry versus other industries, which has slowed down innovation and change and made it harder. At the end of the day, businesses need to manage a cash-to-cash cycle.

They need credit, they need liquidity, they need treasury solutions. Those solutions morph into each other at different points in the cash-to-cash cycle for the business. It feels like there's somewhat a little bit of an artificial separation between the specialisms in those different areas, which may perhaps be driven by that regulatory oversight and constraint in how we do things and may make it more difficult to drive the level of change that banks like Ravneet's are wanting to drive at the speed that we want to, and to get the agility that we want to.

Lots of opportunities. That's what I get from this conversation, and lots of intent in order to improve the provision of working capital credit solutions in the market, but particularly for SMEs, which is direly underserved. That's what I'm hearing from our great conversation. We're out of time. As much as I've enjoyed this conversation, boy, that hour went quickly. I just want to do a quick fire comment from all of you. 10, 20 seconds to respond. If you had a magic wand, what's the one thing about the industry that you would like to change? Let's start with you, Leda.

Leda: Kill learned helplessness. We can do this.

Martin: Great. I love it. Niall.

Niall: Speed. Speed of deployment. Speed of decisions. Speed of innovation. Speed of regulatory modernization.

Martin: Fantastic. Then, final words go to you, Ravneet.

Ravneet: For me, it's the digitization. A lot of manual processes as of now, so we need to digitize them processes, build new technology solutions to support them.

Martin: Great. Well, thank you, Ravneet, thank you, Leda, thank you, Niall. Thank you to the audience who've been quietly listening and contemplating how we lean in and we try and solve working capital credit in 2023, with a particular emphasis we're hearing for solving the problems for SMEs in 2023. I've really enjoyed our time together. I've really enjoyed the discussion. Thank you to the panelists in particular for taking the time out to share their considered opinions and experience with all of us.

Thank you to the audience for taking the time to listen to us. If you haven't read the report, I recommend you go and have a read of it. It's got a lot of insights from industry leaders. It's not one company or one person's perspective on the world. It's an amalgamation of what the industry thinks, is certainly the perspective that we are trying to bring. With that, we'll bring the event to an end. Appreciate everybody turning up and making this such a great event, and we look forward to speaking to you either in real life if we run into each other at events in the near future or at the next event on this topic. Thank you. Goodbye and have a great day.

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