The future of lending: moving into execution mode
It’s been pretty remarkable how banks have been able to shift to supplying credit with entire workforces sat at home – in a matter of days, in some cases. Around 10-12 years ago this aspect of the pandemic’s impact would have been catastrophic; even five years ago the market would not have been able to react as nimbly and effectively as it did. And from a corporate coverage perspective, from mid-March 2020 onwards it has been one of the busiest times that anyone can remember, as corporates made calls on credit facilities and emergency finance.
We should also remember that bank clients were in the same boat, so lenders have had to balance managing their internal processes with engaging effectively with clients. Sometimes, this has meant chasing physical paper from home to home. It’s a reminder that in the new normal, lending still relies on paper, particularly in the syndicated market. This is an industry that still sends 20 million messages via a technology that was invented in 1843: the fax machine. And it uses a 2005 standard, FPML, that doesn’t cover the full breadth of data needed.
However, the pandemic has provided a strong impetus to accelerate a lot of projects related to cloud, digitization and automation that have been running alongside business as usual. Today, it’s all about using resources as efficiently as possible, getting technology to do the grunt work so people can focus on relationship-related tasks. In higher-end lending, we've seen exemplary borrower communications from relationship managers, and in general, more conversations around digitizing self-service document exchange than ever.
In the secondary market, there have been record volumes from a trading perspective. Settlement times were OK in Q2 2020 but looked poor for Q3 2020. It’s not just about problems with paper trails, though. There’s a degree to which there are “behavioural silos” that hide behind the paper-trail issue and impact lenders’ ability to be more efficient. Even at the end of 2020, we see more than 30 business days to settlement. So, in the new normal, we need to look beyond the paper trail to see what’s really causing bottlenecks. On the high street, we've seen businesses pivoting fast, for example changing their credit policies and applying automation to facilitate the uptake of government-backed loans.
One interesting twist to the government support story has been in Europe, where in some countries, for example the Netherlands and Austria, the small and mid-cap business that drive these economies have been reticent to accept government support unless for an absolute last-resort measure. Like the differing acceptance of e-signatures across countries, it illustrates how difficult it can be to present one offer or product to multiple countries.
So, where next? From a market perspective, there’s plenty of volume ahead, and challengers are vying for business that has been managed conventionally for decades. From a technology perspective, we see an acceleration in channel digitization, as the industry looks to leverage efficient ways to interact. And we envisage more collaboration between vendors and banks to facilitate change in the market.
Also, it’s time to forget about the influence of COVID-19. It has already defined the future: now it’s time to move into execution mode, thinking about the distribution of people in lending operations, for example, and how it will impact business. Firms have proved what’s possible: now it’s about operationalizing it. The new normal we see is a collaborative, ecosystem-based model that features multiple vendors and challenger lenders alongside traditional institutions.