Digital self-service in corporate lending: the treasury perspective
What does the digitization of lending look like from a corporate treasurer’s point of view? In this article, which draws on conversations with a corporate treasury operation, we conclude that there’s huge potential for change.
Remote working and digital self-service are a given across many areas of activity today, retail banking included. Lending in the consumer space is making use of open banking, for example,
offering instant credit terms on checkout for digital purchases. As a consequence of this growing retail convenience, corporate customers expect a similar experience from their banks.
But corporate banking is lagging some way behind the retail world – especially when it comes to lending. It’s still not unusual for the majority of a treasury department’s banking relationships to deliver a very manual, spreadsheet-based service in lending. This can mean that a single treasury team member can be occupied full-time managing external debt because of the need to manipulate spreadsheets to be easier to understand. This time could be much better spent on higher-value tasks.
COVID-19 has added a new impetus to the need for digital self-service in corporate lending. While there’s been some focus on origination – perhaps understandably, because it's a front-office function that brings money into the bank – servicing is where improvement would be particularly valuable. The servicing relationship lasts anything from 5 to 10 years and can consume a great deal of resource within corporates as well as in banks.
According to the treasury operation we spoke with, a drawdown requires a document to be manually sent to two people for digital signature. To agree on interest figures, in some cases the treasury department exchanges spreadsheets with the bank to check that both parties’ numbers are in line. On one occasion, the treasury was even asked by a bank for a copy of a credit agreement that the bank couldn’t find. And a great deal of governance and control is still manual, with critical tasks such as KYC and covenant compliance driven by Outlook reminders. Missing these, of course, has serious consequences. The control and automation that a digitized platform offers would significantly reduce this risk.
For a large syndicated loan, the treasury team has to analyze lenders on a regular basis; but even here, minor elements such as lender name changes can create additional overhead, with hours of work needed in some cases to make information usable.
The combined pressures of COVID-19 and the upcoming shift to Alternative Reference Rates (ARRs) make the need for digitization even more pressing. While the extra calculations needed under ARRs will add more complexity across multiple banking relationships, they could easily be translated into a system. Corporate treasuries struggle with access to systems like cash management services, whereas banks have these systems at their disposal and can provide value by offering them to their corporate treasury clients.
As an asset class, corporate loans can be complex, with many moving parts including fee structures, currencies, spreads and analyses of companies’ financial conditions. Nonetheless, many integration opportunities exist. Finastra’s lending team working together with fintechs to explore ways to bridge the gaps between treasuries and banks.
There’s a valuable message for banks from treasuries: corporates place a premium on efficiency. Treasuries look at banks holistically, not just on the strength of one service area. If the overall service meets their needs and removes the burden from their teams, they are happy to pay more for it. They see banking relationships as symbiotic: if the bank provides something that’s useful, they are more likely to go back and ask for more.
Lack of automation around lending remains a major issue for treasury departments, so digital self-service is an opportunity for both banks and vendors. However, the future service model for delivering it may cross over traditional divides between players. For example, there could be a brokerage role in which third parties manage servicing, acting as an intermediary for multiple banks but without damaging banking relationships. And fintechs such as Finastra’s partner HUBX Arranger, which supports all stages of the syndication book build process, can provide elements of automation that can ultimately come together on a single platform.
That’s the ideal future from the point of view of the treasury operation we spoke with. Their view is that if banks could bring together lending, cash management, trade finance and other services onto a single platform, it would be a real game-changer.