The corporate customer business of 1990 was different for banks than it is in 2021. The main reason for this is that corporate customers and their needs were different 30 years ago than they are today. This development is accompanied by technical innovations and the omnipresence of digitization.
The types of corporate financing for small and medium-sized companies have long since shifted from tried-and-tested working capital and investment loans toward other forms of financing. Even the bank as the usual first port of call is no longer considered a safe bet. As a result, entrepreneurs are increasingly questioning the supposed core competence of lending institutions and considering other options for external financing.
To throw light on this, we first look at the traditional lending business with corporate customers and how it has changed in the perception of banks.
The classic lending business
According to the definition, lending business in its professional form is conducted by banks. Classic lending business is always involved when there are bilateral credit relationships between banks and customers. When granting loans, the main focus is on the purpose for which the funds are to be used. If the funds applied for serve to finance ongoing business activities, such as the settlement of accounts receivable, the banks grant short-term working capital loans. The most common type is the overdraft facility. On the other hand, long-term investment loans are granted to corporate customers mainly to finance fixed assets.  The granting of loans by banks requires companies to provide appropriate collateral as a matter of priority. Various forms of collateral can serve as security for loans granted. In addition to pledges, assignments and guarantees, the most common form is probably the registration of land charges on company real estate and/or private residential property.
For decades up to the 00s, the business of banks with their medium-sized corporate customers, self-employed persons and smaller tradesmen functioned more or less according to the same pattern. If there was a need for capital, corporate customers went to their traditional bank and humbly presented their concerns to the banker. The banker then made a loan offer. The corporate customer could either accept the conditions or leave without any money. The customer journey here was more comparable to going to Canossa. Back then, the banking world was much more analog and much less networked. In addition, there was less competition between banks and hardly any other players from the non-bank and near-bank sectors. In those days, corporate customers had their “one” house bank to which their fathers and grandfathers had sworn allegiance, especially in family businesses. Accordingly, they felt secure as lenders on the other side of the bank counter.
A paradigm shift
Today, many years of digitization, technological innovations and new competitors in the banking sector have led to a shift in the traditional understanding of the role of bank and bank customer. While it was initially primarily private customers who, due to their often much simpler economic structures, were able to benefit from various and in some cases very innovative products (e.g., N26, Verivox, Cashpresso, etc.) and were courted accordingly, in recent years more and more corporate customers have also benefited from the new developments. In the meantime, they are being literally wooed by a wide variety of service providers with financing products and other new and smart services.
The new products and providers, which place the customer at the center of all business activities, are forcing traditional banks to change their paradigm. It is now much more important to retain corporate customers. Not least for the reason that it is precisely in business with corporate customers that most of the traditional banks’ revenues are generated. Having recognized this, they have now made it their task to provide corporate customers with their highly individual needs as well as the young digital competition with innovative and individual solutions. The role of the tradesman or self-employed person as a supplicant has long been considered outdated. Now it is he himself who is wooed with services, consultations, telephone calls, emails, etc., carefully compares offers from financial service providers with the great market transparency available, and finally makes a decision about working with a business partner.
From the corporate customer’s point of view, there are a number of new products and ways of credit financing offered by banks and other financial service providers. These new forms of corporate financing and their providers, some of which specialize in them, are presented below:
Factoring is almost an old familiar. It has been used by companies and financial institutions for many years and its popularity continues today. The different types of factoring can be roughly differentiated according to the scope of services and the type of assignment of receivables. The clear advantage of factoring is that the company receives immediate liquidity through the sale of outstanding receivables and is protected against possible payment defaults. In return, it often pays a discount on the amount of the receivable. Banks and savings banks have recognized the growing trend towards factoring and offer their customers appropriate solutions from their own or from specialized subsidiaries as part of their bancassurance offering. There is strong competition for the traditional players in the banking market from new players such as Billie, fundflow or Flex Payment. The target group of these FinTechs tends to be small and medium-sized enterprises (SMEs), selfemployed persons and freelancers. The latter in particular often cannot be precisely assigned to the FK or PF area by banks. Demand is correspondingly high here. The interest of many entrepreneurs is aroused in the new providers by a short onboarding process and the frequently more favorable conditions for the purchase of receivables.
In crowdfunding, the user selects a project or start-up project on an online platform and provides smaller or larger amounts of money for its realization. Well-known providers of crowdfunding platforms are kickstarter.com, indiegogo.com and unternehmerich.com. Here, funds can easily be collected around the globe. Investors thus get the chance to invest in exciting projects of German SMEs and receive corresponding participation payments or non-monetary benefits, such as manufactured products, services, admission tickets, etc. The companies in turn benefit from the strength of the community and thus create an alternative to traditional bank financing. Sub-types of crowdfunding are crowdinvesting, crowdlending and probably the best known type, crowdfunding. Since start-ups in particular often have problems raising capital, crowdfunding is becoming increasingly popular here.
Selling and leasing back company assets has been practiced by companies for years. This offers a simple and quick way to release funds that are tied up in the company in the form of machinery or other resources. This leads to increased financial independence, which can be used for necessary investments or projects, for example. What is also new here is that the number of providers has increased compared to earlier times. In addition, fintechs that specialize in the sale-and-lease-back business are increasingly appearing. This also includes the fintech NetBid Finance from Hamburg.
The process behind it is simple: the requesting company takes a look at the tied-up funds in the business that can be leveraged to generate liquidity. These include machinery, equipment and real estate. NetBid Finance buys, for example, the production machine at the current fair value and pays this out to the respective company accordingly. The determination of the current market value takes place with the help of the latest artificial intelligence. The company leases this machine back from NetBid Finance over a fixed period of time. After the payment of the last monthly installment, the production machine becomes the property of the company again. Compared to traditional banking houses that operate the sale-and-lease-back, the transaction speed of the new competition is said to be impressively high, according to customer experience.
The corporate lending market has evolved just like other areas in the financial sector. It is becoming increasingly normal for entrepreneurs to consider new solutions outside the range offered by their own principal bank or other traditional banks. These are often smarter, faster and, due to the high degree of specialization and the leaner processes of the new providers, often also cheaper. However, this does not have to mean that banks are losing their edge and fintechs are seen as the panacea. Above all, customer loyalty (yes, it still exists) and many years of experience with regulatory requirements play into the traditional players’ hands. As is so often the case, hybrid models are proving to be very promising approaches.
In the recent past, the cooperation between the Berlin-based fintech Penta and Vereinigte Volksbank Raiffeisenbank eG from southern Hesse attracted particular attention. On the one hand, there was the fintech, which wanted to get involved in KFW’s Corona fast loan for SMEs, but was not allowed to do so (KFW veto), and on the other hand, the Volksbank from a structurally weaker region, which, in search of new customers, interpreted the regional principle somewhat more “loosely” for itself. The result was a classic win-win situation and a good example of how banks and fintechs can coexist peacefully. Another example of this development in the market is ING’s cooperation with Scalable Capital. This, but also a multitude of other examples, show that such cooperation models can work.
Ultimately, the provider who best succeeds in identifying the needs of corporate customers and integrating them into the credit process will prevail in the battle for corporate customers.
1] Cf. H. Bost, Wertorientierte Finanzierungsentscheidungen im Corporate Banking, in: Corporate Banking, ed.: H. Bost; A. Dahmen; I. Lippmann; Frankfurt 2008, p. 242 et seq.