Robot lenders are increasingly seen as the future of finance, especially when it comes to loans for smaller companies. Automated algorithmic systems can make credit decisions in an instant, and should be much less hassle for the borrower. But a key question about their widespread adoption is whether small businesses owners used to talking about money matters face-to-face with bankers will trust the digital replacement.
Take Royal Bank of Scotland, for example. The company’s NatWest unit is rolling out a service for working capital loans for smaller companies, ranging between £25,000 ($31,200) to £300,000. The credit limit is determined from the company’s unpaid invoices, and the borrower can expect a credit decision within a day (and to have the money a few hours later). NatWest said on July 4 that the loans are available to its business customers and will be opened up to all UK business in the coming weeks.
Quick and easy algo loans could be good news for small businesses, which haven’t had as much access to lending in the decade since the financial crisis. Research shows that some banks have focused on their bigger more lucrative customers, leaving fewer options for riskier, smaller enterprises. Automated online lending should be more cost efficient, and scalable, which could make financing more widely available.
Other large banks are offering similar services. Barclays partnered with a fintech called MarketInvoice, while HSBC is working with Tradeshift. Larger tech upstarts like PayPal and Square are also making inroads in the US.
This type of borrowing was arguably pioneered in China, where the technology is cutting edge and widespread. Ant Financial’s MYBank (Quartz member exclusive) uses the so-called 3-1-0 model: borrowers complete online loan applications in three minutes, get approval in one second, with zero human touch. It provided more than 1 trillion yuan ($148 billion) of financing to little enterprises last year.
The difficulty for places like the UK is that many small entrepreneurs are used to having face-to-face conversations with bankers at the nearest branch. RBS, meanwhile, has faced widespread backlash from consumers, as well as businesses, following the closure of more than 1,000 local bank branches since 2015. In speaking with small business owners in rural Scotland and England, Quartz found that many of them don’t trust, and aren’t interested in, online alternatives to bank branches.
Academic research signals that algos aren’t yet a replacement for the human branch manager. Businesses are more likely to get financing—the oxygen for commerce—the closer they’re located to a bank branch, according to research published last year (pdf) by professors at the London School of Economics and University of Edinburgh Business School. “Our results suggest that, despite rapid technological change, local banking markets still matter,” they wrote.
All of this is to say that while algo lending has potential to solve a real problem, success is far from assured. An RBS spokesperson said its digital working capital product “has been designed based on customer feedback on how NatWest can make it easier for businesses to grow.” The bank also pointed out that it has 750 relationship managers based in our branches around the UK, in addition to telephone and video banking.
And of course, as with all new lending systems, it remains to be seen how the credit models and algorithms will perform when the economy goes into reverse. But if RBS’s automated working capital loans can make it in places like rural Scotland, the robots could very likely be successful elsewhere.