Simplifying Market Practice in Wholesale Funding of Lending Platforms

The funding environment for lending platforms in the UK is undergoing significant change, presenting challenges and opportunities. For example, the SME funding gap in the UK is an estimated £22bn. 

This article is authored by Charles Kerrigan, Fiona Henderson, and Laura Collins, fintech lawyers at international law firm CMS, together with Kawai Chung, who has over 20 years of structured finance experience in banking, asset management and private equity and Xavier De Pauw, founder at kennek, a fintech that aims to bring more funding to the real economy by building an end-to-end operating system for alternative lenders, investors, and funding structures.

Together, the authors have collaborated on a White Paper that sets out a model to be used to build standards to reduce costs and make time and budget predictable.

The White Paper is available in full here.

This article summaries the authors’ reflections on the need for simplification, standardisation, and digitalisation to support the growth of lending platforms.

Current Market Practices and Challenges

Between 2019-2023, lending platforms in the UK experienced a surge in available funding, largely due to a low interest rate environment. However, the subsequent rise in interest rates put pressure on many business models, leading to market consolidation. Originators now face a challenging environment shaped by high interest rates, rapid technological change (notably in AI), and difficulties accessing funding. The sector is also hampered by unnecessarily complex market practices, which increase inefficiencies and costs. This complexity, combined with the need for certainty of costs and deliverability, has made the current environment particularly demanding for loan originators.

Despite these challenges, several positive trends have emerged. Capital regulations have evolved, increasing the appetite of insurance companies, pension schemes, and challenger banks to fund loan assets. There has been growth in private credit and alternative investments, and consolidation among non-bank lenders has created opportunities for capital deployment at scale. The new interest rate environment allows non-bank lenders to differentiate on price and the emergence of forward flow structures has enabled off-balance sheet funding without risk retention requirements.

A source of friction in the sector; there is a mismatch between the speed of capital deployment promised by fintechs and the often lengthy process of securing wholesale funding. Traditional and/or highly bespoke legal processes exacerbate delays and costs and are misaligned with commercial objectives.

The Case for Simplification

The lending sector has lagged behind other fintech verticals (e.g. payments) in innovation, particularly in funding. However, increased interest in alternative credit is driving a movement towards digitalisation across the value chain, including origination, underwriting, servicing, investor reporting, and funding. The authors make the case for simplification, with benefits such as reduced transaction costs, faster execution, enhanced transparency, and greater scalability.

Framework for Simplification

1. Operational Standardisation: funders expect operational discipline and standardisation from originators. Each originator has unique processes, but standardising documentation (e.g., underwriting policies and servicing manuals) would expedite due diligence and transaction documentation. This would be especially valuable in fragmented markets with many smaller originators;

2. Originator Readiness: transactions often stall over recurring issues. An “originator readiness checklist” covering commercial, legal, regulatory, tax, and data protection considerations, would standardise the information and documentation required by funders, reducing transaction execution timelines and costs. An example checklist is appended to the White Paper;

3. Standardisation of Transaction Documentation: the sector would benefit from industry-standard templates for common funding structures (e.g., warehouse facilities and forward flow agreements). Standardising transaction features and risk allocation provisions would streamline negotiations and documentation;

4. Execution Process: the execution process could be improved by optimising term sheet reviews, establishing negotiation protocols and transaction protocols for managing document mark-ups and comments. This would reduce delays and improve predictability;

5. Operational Processes: conducting operational “dry runs” before closing and standardising reporting and data requirements would help identify and resolve issues early, improving transparency and ongoing monitoring.

The Opportunity of Digitalisation

Manual processes and lack of standardisation create inefficiencies, errors, and data inconsistencies. Digitalisation and automation would enforce standardisation, improve data reliability, and enable operational scalability. A centralised, up-to-date data ledger accessible to all stakeholders would reduce cyber risks and data breaches. Blockchain technology (or similar) could provide a single point of truth, while AI could automate data confirmation and anomaly detection, further reducing manual checks.

Standardised data and reporting would benefit all parties, enabling automated investor reporting and integration with investment management systems. AI (or smart automations) could enhance credit decisioning by processing real-time borrower data, incorporating non-traditional data sources, and supporting explainable, dynamic models that improve over time.

Call to Action

The White Paper calls for industry collaboration to develop standardised documentation, data definitions, and reporting templates. It advocates for a process-driven approach to transaction documentation, the adoption of digital technologies (including blockchain and AI), and the formation of working groups to drive innovation and efficiency in wholesale funding.

Conclusion

Simplification, standardisation, and digitalisation are essential for the future growth and efficiency of wholesale funding in lending platforms. By adopting these practices, the sector can reduce costs, accelerate execution, and enhance transparency and scalability - ultimately benefiting all stakeholders.