Addressing the complexities of the corporate lending environment

The technological challenges of delivering corporate lending products and services at speed are both familiar and long-standing. The sheer number of platforms and systems that banks use to service their loan portfolios means that end-to-end process integration is always a significant challenge.

The question today is how banks should respond to this challenge and prioritize their next steps. One of the first steps is to work with software vendors to understand their product strategies and how these vendors can assist with integration, particularly by providing middleware solutions.

Standardization is another big focus, and is best started with digitizing loan origination platforms, then ensuring that accurate up-to-date information feeds all the way through every other system. Standardization creates the opportunity to consolidate systems, for example by bringing those for bilateral and syndicated loans onto one platform.

The provision of composable solutions, where new workflows, customer journeys and value chains can be created from interchangeable components and new functionality can be added as appropriate, via standard application programming interfaces (APIs) is another area where vendors can show the way forward for banks.

Addressing a persistent problem

Why does the challenge of lack of integration in corporate lending systems persist? One issue is the manual nature of loans as an asset class, which means dealing with physical credit agreements that can be 100 or 200 pages long.

To move forward, in order to have interoperability in the loan market, we need consensus among market participants about the required systems and platforms in the loan ecosystem.

Another issue is the high cost of integrating disparate systems, along with the commensurate costs of employing an expert group of people who can develop and maintain not just systems, but also bridge technologies such as APIs. Again, speaking to vendors to evaluate the integration options they can offer can reduce some of these high costs.

Cloud: a catalyst for change

Technical and commercial pressures are now encouraging banks to accelerate their plans to integrate corporate lending platforms.

The most important technical pressure is the desire to migrate to a cloud environment in order to leverage the economic benefits that it delivers.

For banks running all their systems on premise, it was easier to take a tactical strategy and simply couple systems together to meet a particular requirement. However, as banks move to a cloud-based architecture, they have to give more thought to how to connect their systems so that they work across the open internet effectively.

Historically, banks haven’t always managed the total costs of running and maintaining their systems on a dollar-by-dollar basis. But with the ever-present downward pressure on operational costs, banks now understand more comprehensively where the money is going – which means in turn that the business case for integration is clearer and more of a priority.

There are two additional reasons why pressure is now building on banks to build end-to-end systems. The first is a growing understanding that while it can initial upfront cost to integrate end-to-end systems, once they are in place they are more cost-effective and efficient than the current manual cost to serve.

The second relates to regulation and the need to maintain data accuracy and transparency. The ongoing wave of regulation means banks need to provide more data to investors and auditors, as well as to the regulators themselves. This trend will continue in the future, so the time is right to ensure a single version of accurate data can flow through all corporate lending systems.

Considerations for banks when integrating lending systems

As well as providing an opportunity to consolidate systems, system integration projects open up the possibility of introducing new technologies to reduce inefficiencies.

Banks could consider the use of optical character recognition (OCR) technology for automating the process of getting credit agreement data into loan origination and servicing systems, for example.

This kind of low-hanging fruit is ready to be picked – and provides a way to improve data accuracy and integration from the very beginning of the corporate lending process.

The value of integration for banks and their customers

As well as providing value to banks by reducing cost, integration has the potential to deliver a consolidated, accurate view of their loan pipeline and books of business, which means they can monitor their exposure more accurately and reduce balance sheet risk.

They can also comply with all regulatory reporting requirements more easily without having to produce information at the last minute, with the high costs that this entails. Integration removes the risks of rekeying data multiple times into different systems, which can create errors that are expensive to fix.

Integration feeds into banks’ modernization journeys, which means they can better serve their customers by providing accurate, up-to-date information at a lower cost. This addresses the growing expectations from banks’ customers for faster, simplified loan servicing processes, with time to settlement a particular focus.

Over the last few years, we’ve seen different types of investors coming into the loan market, many of whom are familiar with the bond market where a bond will settle the same day or next day, settlement times for loans are more likely to be 40 days or longer in Europe and this is naturally a point of frustration.

If the sector wants the loan market to continue to grow, we need to bring down settlement times – and system integration is a key part of that, as well as supporting customer acquisition and retention. Having integrated technology is essential to meet the expectations of the market that we’re dealing with, and it’s increasingly mandated by the lending process.

The role played by software providers

Software providers including Finastra, with its Loan IQ Nexus platform, recognise that there’s an onus on vendors to facilitate integration and support the interoperability that we know our clients and the broader loan market need.

What’s important to remember is that the tools and technologies provided by vendors should be designed to be used effectively in banks’ own strategies. The key to this approach is not to provide a ‘one size fits all’ approach, but instead to offer a flexible platform that exposes the right information through APIs, ensuring they are reliable, safe, and can be tested or overhauled when needed.

Banks need to be confident that persistent APIs can be built into their corporate lending systems and will not necessitate huge changes further down the line. Vendors can work with Clients to facilitate changes in technology or regulation such as the recent Libor reform exercise.

Banks play an important role by identifying new use cases they would like to add to their IT platforms and bringing them to their vendors for input and development.

Importantly, banks must consider their future state, and how integrated systems will support their aims and objectives, and not simply focus on automating everything that they do today. Instead it should be all about recomposing current systems and taking out inefficiencies.

To conclude, stakeholders in the lending market need greater standardisation, data accuracy, and integration. Working together, software vendors and banks can drive the corporate lending sector forward, create better services for corporates, reduce cost to service, and deliver profitability.