Financial software is broken; big data is the answer

The payment industry is being revolutionised: think Square, PayPal and Dwolla. Soon consumers will be able to pay anywhere with a mobile, and harness biometric options such as fingerprints.When the future of money is discussed many people imagine...

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The payment industry is being revolutionised: think Square, PayPal and Dwolla. Soon consumers will be able to pay anywhere with a mobile, and harness biometric options such as fingerprints.

When the future of money is discussed many people imagine these scenarios. Fundamentally, though, it is still the same common denominator, the same credit card companies shaving two to three per cent off a transaction or a regular credit card sitting inside a Google Wallet or Square CardCase.

This is not the big revolution in finance that we have been waiting for. There is something far bigger on the horizon, driven by data. Money will be transformed and it will happen in the next 12 months. Most people do not seem to have noticed this coming.

Give us our money

Here’s an example of what it might look like. When banks lend, they usually expect "security". They want to make sure they will get their money back and so will hold onto an asset that has value for you. The interest you have to pay back is calculated in two ways: firstly, based on the risk the bank has calculated and, secondly, the bank's share in terms of "cost of money" or liquidity.

It’s always been like this. These systems have existed for thousands of years and whole industries have sprung up to help people predict risk with more accuracy. The better these predictions are, the lower the risk the bank is taking and the lower the potential cost of money for us all. So everyone wins, right? Wrong.

The truth is banks don't actually have a very good model for calculating individual risk for small companies. So these businesses, the backbone of innovation in a struggling economy suffer rejection or at least very expensive rates of interest.

But the world is changing and data lies at the heart of it.

Even bigger data

Cloud providers can now create advanced global data collections - like the millions of online invoices we process. And it could potentially have a very real effect on the cost of money.

Access to real-time financial data can change the way rates get set for small and medium-sized business loans. We have a service called Instant Payments that allows a buyer to mark an e-invoice received from a supplier as ‘approved’. Once this step is taken, the buyer is committing to pay within the agreed timeframe. We then give the supplier the option to receive that money immediately at interest rates far lower than typical business loans.      

The money still comes with an interest rate, but the size of that rate is determined based on the buyer's credit rating, not the supplier's. This is good news for smaller suppliers that often get hit with higher rates because they are perceived to be riskier bets.

This is a great example of how electronic data can be used to improve life for businesses of all sizes. As we get more data on transactions, it changes the whole credit picture.

For me, the future of finance is clear: better data means better predictions and therefore a lower cost of money.

Posted by Christian Lanng, CEO, Tradeshift
Christian Lanng launched his first start-up at 19 years of age, creating one of the world's first mobile browsers. He went on to become the youngest Head of Division in the Danish government, where he met the co-founders of Tradeshift. Their company has created an open, standardised cross-border framework for e-business called PEPPOL, which today is used by more than 14 European governments.
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