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Intermediation and brokerage in the digital era

The services economy in the UK powers some 80% of the British GDP and around 10% is from financial services alone. Of the services exports, 29% are from financial services. These are multibillion pound markets and employ a huge number of 'knowledge workers' who can work with these abstract financial concepts.

Yet the SME financial services market is not particularly efficient. For customers it's still fairly opaque, and demand isn’t matched to supply, so working with an impartial third-party to find the most suitable and best value provider often pays dividends.

Peter Diamond
In 1971, Peter Diamond, an American economist, showed that even small 'search costs', such as the time it takes to walk down the street to see what is on offer at a rival shop, can seriously undermine competition on price. Hence intermediation has served a long purpose of getting the best price for the customer.

So what does this look like in the digital era?

Intermediation in its simplest (non-consultative form) is really aggregation of supply. This is nothing new. Accoring to Mintel, 60% of Brits are 'most likely' to use a price comparison site when researching or buying a financial product.

In the digital era, both comparison websites and platforms are ubiquitous. In fact many of the largest service companies in the world such as Uber and Airbnb – and arguably Netflix and Spotify – are just thin layers of supply aggregation. The bulk of the value the customer is paying for is not something they control, and they leave the cost of production (the expensive bit) to the individuals within the network.

Group uber Airbnb Spotify Netflix

 
Matching prospects to your lending criteria

Turning on the marketing firehose of leads can feel like good progress, however the cost to lenders of qualifying and sorting leads efficiently can be a challenge for those with a single-product or specific lending requirements.

Accountants

So where can digital intermediaries add value? For starters, they can:

  • Match businesses to your criteria. You pay for their ability to do so successfully
  • Bear the cost of dealing with time-wasting leads who are scoping the market 
  • Triage businesses to only those lenders willing to consider their application

On a success basis, and a cost of sale of around 20% of fees, this can make an attractive proposition to lenders, and particularly new lenders in the market who haven’t yet developed channels or a brand.

This most basic form of intermediary that matches to your criteria and is paid on success, offers a very lean, accessible model for lenders.

Enter the era of the DIGITAL INTERMEDIARY.

We’re digital. How about advertising in Google?

Invoice Finance
Google aggregates products and homogeneous services amazingly well.

Buying a flight, a pair of shoes, or other real-world products with fixed attributes is a simple process (and well trodden), but it doesn’t work so well for purchasing services. 

If we look at this from the business’s perspective, how much can you convey about your lending criteria in the two lines of text? The answer is 'very little' – and 'not enough'. 

Businesses typically leave just seven days to find finance, and most stop after their first application to a finance provider – based on being turned down, the difficulty of the process, or a host of other factors. This feels broken to us. There is much work for intermediaries to do in this space.

Modern aggregators 

With the increased number of SME lenders in the UK, the choice for a traditional broker and introducer networks has increased hugely.

There are now over 200 alternative and independent lenders, offering a variety of finance products to SMEs in the UK. Many are FCA authorised and regulated (however over the coming months we're sure to see the FCA driving harder to enforce regulation).

Consequently, intermediaries in the space are now beginning to look much more like aggregators of the modern world. So why now and what has changed? With the emergence of digitally-mature SME lenders (often called alternative lenders) the process of getting an offer in SME finance is much faster than the traditional route (through a high street bank, for example). Average response times at Funding Circle is just two hours and three hours for MarketInvoice.

The answer to this change? Products such as Capitalise.com (disclaimer: for which I’m product director). These new, intuitive on-line platforms demonstrate a strong emerging trend (and market need) for more digital intermediaries or aggregators.

Capitalise

The role of these aggregators is to make it much easier for businesses to find, compare, and apply to lenders. In another article we’ll look at the implications for SME lenders and opportunities alongside these new intermediaries.

This article was originally published under Byng, which merged with Inviqa in October 2016. For more information about the merger click here.