connected credit and compliance for lending growth · connected credit and compliance for lending...

REPORT ON A WEBINAR BY FINEXTRA AND MISYS APRIL 2016

CONNECTED CREDIT AND COMPLIANCE FOR LENDING GROWTH The findings of a webinar from Finextra and Misys

01 Introduction ...........................3 02 The Panel Discussion ..............4 Challenges and opportunities ............5 Drilling down on technology and operations ......................................7 A focus on compliance .................... 10 Dealing with disruption .................. 11 Lending nirvana? ........................... 14

03 About .................................. 16

CONTENTS

| CONNECTED CREDIT AND COMPLIANCE FOR LENDING GROW

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01INTRODUCTIONCONNECTED CREDIT AND COMPLIANCE FOR LENDING GROWTH

In the ‘new normal’, pent-up credit demand from a growing mid-market remains a big global opportunity for lenders. At the same time, volatility continues to impact debt markets and complex lending. Compliance and capital constraints are par for the course, and while reports suggest bank credit lines to businesses are on the rise, opportunities are being picked up by new entrants able to meet demands in underserved – yet potentially lucrative – areas of commercial and corporate credit.

There are opportunities for banks to make things simpler. Many institutions are already reaping the benefits of connected approaches to corporate and commercial lending and capitalising on industrialisation, replicability and data insight along the credit value chain. Their relationship managers are empowered to deliver tailored financing solutions. These banks are leveraging transparency, compliance and efficiency to provide the confidence that risk is controlled, helping both to ease credit policy and protect margins.

A recent webinar from Finextra in association with Misys brought together a panel of industry experts on commercial and corporate lending and digital innovation to explore why, for many banks today, legacy processes, business silos and operations are creating unnecessary layers of operational complexity. The panel also examined opportunities for banks to drive innovation and look at how they can overcome the barriers to growth today, and meet the future demands of clients and regulators tomorrow.


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The panellists

“Across all the global accounts we have, the customers we work with, our partners, our entire ecosystem, customer experience is key. If you can’t answer the question of how long it takes you to process a particular type of transaction – whether it be SME or asset based lending or a complex commercial C&I loan or a syndicated type transaction – how can you measure it, and how do you know you are living up to what that customer experience should be?” JOHANNA PUGH, GLOBAL HEAD FUSIONBANKING LENDING, MISYS

Stefan VerhoevenManaging Director, Head of Corporate Lending Europe, ING Wholesale Banking

Jimmie BridwellChief Operating OfficerVirtus Partners, LLC

Susan FeinbergSenior Analyst, Corporate Banking, Celent

Michael KingChairman, Credits

Johanna PughGlobal Head FusionBankingLending, Misys


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THE PANEL DISCUSSION02

Challenges and opportunities

The webinar opened with a discussion of the challenges facing the lending business today, led by Susan Feinberg, Senior Analyst, Celent Banking Practice. She set the scene by updating the familiar “four Cs of commercial lending” for the current environment. “I would start with constraints on capital and liquidity,” she said. “In the post-crisis environment from a global regulatory perspective banks are having to think more carefully about what markets they serve and what segments and what industries they are willing to lend to. They are making these strategic decisions about where to play and where not to play, and those constraints that are causing them to make those decisions are probably the most important part of their lending strategy going forward.”

The second of the “four Cs” is the cost of compliance, Feinberg continued. “Clearly there’s an increased cost of compliance across the board, which means that profitability is lower and banks have got to figure out ways of operating more efficiently.”

The third is changing client expectations. “There are two aspects to this,” she told listeners. “One is the word digital. Every corporate client is also a consumer of retail banking services. Banking is becoming much more digital, and those expectations are being transferred to their professional roles. Every one of them is also a user of corporate transaction banking services which are increasingly digital as well. The other aspect of changing client expectations as a result of digital is speed,” Feinberg continued. “Clients expect decisions to be made more quickly and they expect information to be delivered more quickly – and that has an impact on the business.”

Feinberg’s final of the “four Cs” was competition from new entrants – a topic explored in greater detail later in the discussion.


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Johanna Pugh, Global Head FusionBanking Lending, Misys, picked up on Feinberg’s mention of client expectations. “Across all the global accounts we have, the customers we work with, our partners, our entire ecosystem, customer experience is key,” she said. “If you can’t answer the question of how long it takes you to process a particular type of transaction – whether it be SME or asset based lending or a complex commercial C&I loan or a syndicated type transaction – how can you measure it, and how do you know you are living up to what that customer experience should be?” Pugh asked listeners.

She also highlighted the need to understand the profitability of a deal. “How do you know that it’s actually going to be profitable? How can you guide your customer down the right path, considering regulatory constraints, transaction times and the types of structures they are asking for, if you don’t even know what the profitability of a transaction is?” It’s also vital to look at the regulatory cost of a deal, she said. “If you can’t answer those three questions, it’s going to be very difficult for you to guide the customer experience in the right way, and that’s why banks today really need to look at digital transformation – and it is absolutely looking more like what we as consumers experience in a retail environment.”

For Stefan Verhoeven, Managing Director, Head of Corporate Lending Europe, ING Wholesale Banking, the future, though challenging, is bright. “We are living in a very unique era where we have a lot of technological development, but also a lot of energy within the banking sector to address these issues and really work with the new opportunities that are being given by these technology developments,” he said. There are opportunities to “optimise your

Complex lending architectures are commonplace


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model further, make your assessment of risks smarter and… reduce the cost of operations, by making smarter use of technologies including big data and blockchain technologies and so forth”, he said, adding: “I think that we are at a really good moment in time where we can actually address the challenges that we are being faced with, and I am quite positive that we will see some quite good developments going forward.”

Drilling down on technology and operations

The discussion then moved on to drill down into the challenges and opportunities in the syndicated and capital markets lending, beginning with technology and operational aspects. Jimmie Bridwell, Chief Operating Officer, Virtus Partners, reminded listeners about the importance of preserving liquidity. “One of the primary drivers of this market is the fact that it’s liquid and without liquidity this market will stagnate,” he said. “We don’t want to be too stringent to the point where liquidity is hampered, but obviously we want some consistency in the market, so there’s really two challenges: one is operational, one is technology. Operational challenges normally come first – they’re the immediate tactical type solutions – and then the strategic solutions are usually the technological solutions,” he continued.

“Historically, the loan market has been far behind the other asset classes in the speed to execution for both the original syndication and specifically the secondary trading aspect of it, which is what has really come under fire lately in this area. What has been published as a market average along the broadly syndicated asset class has typically been about 15-21 days over the last several years, and we haven’t seen that develop into a more speedy settlement process. So what everybody is focused on and what we need to continue to focus on is technology solutions in that asset class, to ensure liquidity and that the settlement of those trades happens as quickly as possible.”

Bridwell then considered the impact of new market entrants. “Even when you’ve had the consistency of a smaller market base, settlement times were slow because of the flexibility of the loan asset class. Being able to structure these

“ We are living in a very unique era where we have a lot of technological development, but also a lot of energy within the banking sector to address these issues and really work with the new opportunities that are being given by these technology developments, to optimise models further, make assessment of risks smarter and reduce the cost of operations.” STEFAN VERHOEVEN, MANAGING DIRECTOR, HEAD OF CORPORATE LENDING EUROPE, ING WHOLESALE BANKING


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debt instruments in a way that is individual to each of the borrowers has made this market very attractive to the borrowing base which has in turn led to some attractive pricing which is always a good thing for investors. So as we see new market participants in this space, beyond the big banks, including some of the smaller regional banks and fund managers, we need to ensure that those market entrants have the same consistency that we have seen in the past to ensure that this entire market remains liquid and we don’t see bespoke instruments that trade and are managed in a bespoke manner really convoluting the market and making it less liquid and less attractive,” Bridwell said.

The priority operationally has to be understanding the new market participants and how they plan to administer, trade and structure deals, and from a technology perspective to understand those requirements to create technology that is more streamlined but also allows competition and innovation, he said.

Pugh emphasised the importance of “people, process and technology”. “You need the right people – whether they are fintechs, or co-innovation partners – and processes that are going to help get you to minimisation of settlement costs in the back office,” she said, adding: “The hardest part about the technology is being able to digest it. We have had a lot of organisations charging ahead to help customers by doing more in the back office, but it’s not just the back office, it’s the front office as well. The more you can digitalise, the more you can automate processes while still allowing for the boutique element. That’s where you’re going to get a really quick uptick in the minimisation of settlement times, and the minimisation of processing times, and that’s where you really need an adviser to help you progress your journey – someone who’s been down that road and can be your co-innovation partner.”

“Being able to structure these debt instruments in a way that is individual to each of the borrowers has made this market very attractive to the borrowing base which has in turn led to some attractive pricing which is always a good thing for investors. So as we see new market participants in this space, beyond the big banks, including some of the smaller regional banks and fund managers, we need to ensure that those market entrants have the same consistency that we have seen in the past to ensure that this entire market remains liquid and we don’t see bespoke instruments that trade and are managed in a bespoke manner really convoluting the market and making it less liquid and less attractive.” JIMMIE BRIDWELL, CHIEF OPERATING OFFICER, VIRTUS PARTNERS


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Verhoeven agreed it is important to collaborate to progress in the best and fastest way. “We strongly believe that we have to unify all the services that we are delivering within the institution,” he said. “Products are becoming much closer together than ever before, and it’s really crucial for us to have one global unified platform on which we are operating with our clients so that they experience the same types of services across the board.” He echoed earlier comments about matching in the wholesale experience what customers are experiencing in the retail world. “That’s definitely our vision,” he said, “and we are investing very heavily in moving the totality of our IT and operations into that strategic vision. That’s not an easy task obviously, but we are progressively getting there, and we are very confident we will make it. We have already more than 50% of our lending portfolio on the strategic platform, and we are developing new services – among others with Misys – on that to really deliver a higher value to our client base.”

Banks are focusing on

End-to-end Digitisation

Regulatory Risk andCompliance


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A focus on compliance

The panellists agreed that compliance continues to be a major driver shaping commercial lending today. “Whether our customers are global or super-regional or in a finite arena doesn’t matter – regulation’s going to be there,” said Pugh. “We know that we have to future proof the way we do business today in order to manage and maintain our regulatory requirements going forward. Organisations come to us all the time saying they have 9, 12, or 15 months to get in a system to prove they know how they are doing their business. But when you look at this from a fintech perspective, it’s almost open road,” she continued. “So we’ve got these new start-up companies coming in and usurping arenas in the market like the SME business but with an open road for now. Once the visibility becomes evident the regulatory requirements for them are going to be just as stringent as they are for banks, but today they can operate under minimal overhead, while banks are also saddled with how they deal with the competition and the cost at this point: they’re in a trying position.”

Verhoeven echoed comments about the weight of regulation banks are dealing with. “We are very used to heavy regulation being deposit takers and having been under regulation for a long period of time, especially over the last 7 or 8 years when that has only increased because society has rightly had a vested interest in making the system as safe as it can be,” he told listeners. “But at the same time I think the fintech businesses can also bring in a very interesting angle to the discussions we are having with regulators, about what regulation is useful and is in line with where the markets are heading. I think we can reinforce each other here, to have that debate and prepare ourselves for a future that is nearer by than most people think,” he said.

“ What are new entrants doing differently that makes it easier for them to make decisions, better decisions, quicker decisions, become more efficient, and connected? How can banks become more connected with their business and corporate clients to provide better service? Digital disruption is not just providing an online or a mobile or a tablet channel, it’s actually integrating directly with clients, and some of the alternative lenders are doing that. I think there’s a lot of opportunity here for banks to not just think about new entrants as a threat, but as potential partners, and also as sources of ideas for new ways of doing things.” SUSAN FEINBERG, SENIOR ANALYST, CELENT BANKING PRACTICE


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Dealing with disruption

Feinberg further developed the discussion on new entrants. “It would be foolish to assume that banks are the only players involved in the broad commercial lending space, and that’s been true for decades,” she said. “But what is different in recent years is that we are seeing alternative lenders come into the space – especially in the SME space – and they have been very successful and have filled a gap where the banks have either temporarily or permanently exited markets for some types of customers. We also see new models, crowdsourcing for example, which again so far has been primarily focused on consumer and small business lending, though certainly longer term there’s some potential for those types of organisations to support larger credit.”

Given that in the area of high quality, commercial, large corporate credit there has always been competition for funding for the banks, the important discussion around digital disruption is, what banks can learn from those different types of providers especially in the fintech space, Feinberg suggested. “What are those organisations doing differently that makes it easier for them to make decisions, better decisions, quicker decisions, become more efficient, and connected?” she asked.

“How can banks become more connected with their business and corporate clients to provide better service? Digital disruption is not just providing an online or a mobile or a tablet channel, it’s integrating directly with clients, and some of the alternative lenders are doing that. In order to make better decisions they are looking at those corporate clients’ receivables or business activity and they are better able to make decisions based on the actual results of the company. I think there’s a lot of opportunity here for banks to not just think about new entrants as a threat, but as potential partners, and also as sources of ideas for new ways of doing things.”

Michael King, Chairman, Credits, also emphasised the need to look at the business models of new entrants, not just the technology. “What’s interesting in the emergence of the alternative finance market is that the ones that are winning are the ones that are not reliant on technology per se,” he told listeners. “The problem is the credit process is what’s wrong. There is a tick box and if you don’t tick the box you don’t get funding – and that’s why lots of SMEs go to the wall. In Europe there are 186 P2P lending platforms, the majority around the real estate sector. Last year in the UK GBP601m was lent via these platforms – 30% of total loans in the UK. Why? Because these platforms are getting closer to the customers than the banks are. If you talk to the majority of corporates and ask them when they last had a conversation


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with their sales person from the bank, many will say they see someone once a year if that. And that’s the problem: it’s not technology.”Verhoeven picked up on the need for banks to work in collaboration with the fintechs. “The fintech development brings a lot of benefits that we can learn from and work with,” he said. “We are very bullish on that, and are keeping a very close watch on whatever we see around us. We are not always part of the SME asset class and we think through fintech we may be able to do that much more effectively than we can otherwise achieve. We have for instance partnered with a well-known company called Kabbage to leverage its platform in Spain and we are looking at other markets as well to see whether that would make sense for us. I think it’s a very effective way of using the great ideas that have already been developed, and where we can apply our funding and our knowledge surrounding that into addressing certain market needs.”

Connectedness is critical, added Bridwell – “not necessarily just connected to your clients, but connected to all the different areas that need to be connected”, he said. “The amount of information and data and resources the big banks have is huge, but what they haven’t always been the best at is connecting all that data and those resources together in one concise location, and their sheer size has made it nearly impossible to do so in any short amount of time. Now with all the regulations that are coming out that are requiring all that information be aggregated and put in one place and analysed and reported, it’s proven difficult to many of the banks. If you think about new players entering the market, it takes a very large amount of overhead and capital to put a structure in place to really be compliant with those requirements. So the new entrants do not necessarily have the mindset that they are going to do it on their own.”

They’re really looking for alternatives, and that’s where a financial services firm like Virtus comes in, he says. “We have from the outset always focused on integration between all our systems and attributes and all of the information we aggregate and collect, and can apply that as well through partnerships with fintechs like Misys and other firms.”

When it comes to new technologies such as blockchain, “everyone should pay a close eye to them to understand whether they fit within their current model”, Bridwell added.

“I do see blockchain changing people’s thought processes but I don’t see it as a disruptor – I see it as an enabler.” MICHAEL KING, CHAIRMAN, CREDITS VISION

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The impact of blockchain at this point on commercial lending is not clear, said King, “because most proof of concepts going on out in the financial industry are mildly disruptive at best”. “The intellectual of blockchain is that it takes out all the intermediaries,” he continued. “Do I see that happening? No I don’t because I think intermediaries will use it. I do see blockchain changing people’s thought processes but I don’t see blockchain as a disruptor – I see it as an enabler. I do think it means people will have to rethink the way that processes work because it changes our hub and spoke thinking completely with the whole idea of distribution. I also think it will put the trust back into the internet which is I think the real purpose of it.”

It is early days for blockchain, Feinberg agreed. “I think there could certainly be a role for blockchain in certain aspects of commercial lending, for example in syndicated lending, in being able to manage collateral, asset based lending, so I definitely see some opportunity there,” she said. “But I think there are some other ‘new’ technologies that could play a critical role going forward. One of the things that we’re going to start to see is how the internet of things will play a role in commercial lending, for example in commercial real estate, where you’re monitoring things like energy use, as well as in leasing and in working capital finance.”

Feinberg also mentioned analytics and big data as critical technologies. “Banks have no choice but to use more of that technology in terms of making strategic decisions about which markets to play in and how to allocate precious capital, but also more tactically in credit decisioning and loan monitoring,” she said. Standards are also important, she continued. “Agreed upon global standards are really not there in commercial lending, and there’s a role there for standards, especially as we see more and more of that growth in host to host connectivity. You’ve got to be able to have some form of standards.”

A member of the audience asked the panel for its views on whether new technologies are enabling improved assessment of risk. “Risk is something that is always going to be evolving,” answered Bridwell. “As you get new data attributes and new ways to acquire that data more quickly and more accurately, you should be able to better reflect the risk of your portfolio and do better analysis,” he said. “Do we have the golden chalice yet? No. Do we find that we can predict risk better than we could in the past? Absolutely, and I think that will continue to evolve over time. But I think as we are better able to aggregate all the information that’s out in the market through various tools and through various providers, we should be able to have more complete analysis at our fingertips and be able to do it quicker with less overheads – which I think is the goal of every institution that does any type of risk analysis.”


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Lending nirvana?

The panel concluded with a discussion on the ideal end state for commercial lending and the operational and technological capabilities underpinning it. Determining what that could look like “is a bit hard”, said Verhoeven, “because there’s so much rapid technological development and change of client preferences at the moment that it’s hard to have a real static end state in mind”. But he continued: “Based on the current knowledge and understanding of where we are, we have defined a few items that we believe we should achieve, and those are built around simplicity and flexibility. Having a global lending business and platform is very important, and one example of how we are building that is that we have created a platform called Inside Business which gives our clients access through one portal or app to all of our services within wholesale banking, including our lending business. They can interface through computer and mobile and over time we will evolve into other means by which clients want to access the information and interactions with us. We strongly believe that that’s a very important step to take so clients feel that they can access and interact with us in the way that they want. We are also bringing capabilities like fingerprint authentication into that, so people feel like they can do this in a very easy fashion.”

Pugh at Misys outlined the pillars it believes are needed to support the achievement of ‘lending nirvana’. “One is customer experience,” she said. “How can I ensure that a large corporate that wants self-service and to understand its treasury, trade and lending across all platforms, with insights into its positions and the ability to transact via the same user interface and have access

Lending Nirvana workflow: One platform for the end-to-end credit lifecycle and for any type of loan

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immediately to its information, has what it requires?” Usability and transparency are critical not just for external but also for internal customers, that is relationship managers, Pugh emphasised. “The second aspect is analytics,” she continued. Here she also emphasised the importance of the internet of things – “being able to pull in data elements that you’ve not had access to before”. The ability to look forwards is also vital, she said. “It is important to be able to answer the question, tell me what the profitability could look like based on what if scenarios.”

“We have to have a standard industrial utility for certain segments of the market,” she said. “We’ve got that in some arenas – we’ve got to get it in commercial lending. We need to homogenise what we do to make it easier to co-innovate together, not just partner to bank, but bank to bank to the entire ecosystem.”

Bridwell reminded listeners about the importance of straight-through processing (STP). “A lot of the work done behind the scenes by operational teams is something that we are really focusing on and our ability to take manual processes and automate them through technology, through technology partners, through our own technology, to ensure that the overhead and therefore the overhead cost that gets sent to our clients is reduced as much as possible. I think that in operations that is what everybody is looking for – to reduce overhead while controlling risk. There are a number of different solutions out there are furthering that. I think we have a ways to go on a large majority of it, settlements being one of those areas, but I think we’re making large steps in the right direction to ensure that we are getting as much of it as automated as possible,” he said.

For Feinberg, the elimination of silos in commercial lending is key. “This is certainly something on the mind of every leading provider of these services,” she said – “getting rid of all the lending silos within the bank and having a 360 degree view of what the customer’s exposure is, of what their business is. I’ve been doing this kind of analysis work for over 10 years, and it always surprises me when I talk to a bank and I hear how they are handling each type of loan product differently in a different system with all these data silos. We should be well beyond that at this point, and I think that’s an important aspect of lending nirvana that we still have work to do on,” Feinberg concluded.


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“We have to have a standard industrial utility for certain segments of the market. We’ve got that in some arenas – we’ve got to get it in commercial lending. We need to homogenise what we do to make it easier to co-innovate together, not just partner to bank, but bank to bank to the entire ecosystem.” JOHANNA PUGH, GLOBAL HEAD FUSIONBANKING LENDING, MISYS

03ABOUTFinextra This report is published by Finextra Research.

Finextra Research is the world’s leading specialist financial technology (fintech) news and information source. Finextra offers over 100,000 fintech news, features and TV content items to visitors to www.finextra.com,. Founded in 1999, Finextra Research covers all aspects of financial technology innovation and operation involving banks, institutions and vendor organisations within the wholesale and retail banking, payments and cards sectors worldwide.

Finextra’s unique global community consists of over 30,000 fintech professionals working inside banks and financial institutions, specialist fintech application and service providers, consulting organisations and mainstream technology providers. The Finextra community actively participate in posting their opinions and comments on the evolution of fintech. In addition, they contribute information and data to Finextra surveys and reports.

For more information:Visit www.finextra.com, follow @finextra, contact [email protected] or call +44 (0)20 3100 3670

Misys FusionBanking LendingMisys provides the broadest portfolio of banking, treasury, trading and risk solutions on the market. Misys delivers solutions to 2,000 customers in 130 countries. With a 360 degree view from origination through to maturity, FusionBanking Lending helps banks to connect disparate IT, organisational silos and data underpinning bank lending with the broadest, deepest functionality available for every stage of the loan lifecycle. Unifying origination, collateral management, servicing, trading and settlement, and for every type of loan, from SME to syndicated All-in-one Lending helps banks reduce total operating costs by 30% or more, capital costs by 8%-15% and loan servicing turnaround time by 60-80%. With a focus on client experience, consolidated data and integrated risk analytics banks optimise the business on a single platform that balances risk, cost and service innovation to connect and grow.

For more information:Visit www.misys.com/lending, follow @MisysFS, contact [email protected] or call +44 (0)20 3320 5000


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