Lending market embraces technology, but queries are expensive

LONDON, Sept. 27 (LPC) — The European syndicated loan market is on the brink of a technological revolution that will increase in speed and efficiency as banks continue to modernize, but questions remain about its implementation and its cost.

The complexity and cost of integrating new technologies into a complex web of legacy banking proprietary systems and the reluctance to change is holding back the lending market for now, despite the clear benefits offered by new digital platforms.

In a market still heavily paper-, fax- and email-based and where secondary loan settlement times can take up to three months due to onerous Know Your Customer (KYC) requirements, bankers are well aware benefits of updating lending practices.

“We need to make lending products more efficient and technology will become more important to help with that. We need to be aware of the need to change and provide greater flexibility,” said Charlotte Conlan, Head of Syndicated Loans and High Yield EMEA at BNP Paribas at the Syndicated Loans Conference of the Loan Market Association (LMA) this week.

According to a survey of conference delegates, new technologies are expected to have the biggest impact on loan agency operations, followed by KYC requirements and secondary loan trading.

Artificial intelligence (AI) is expected to be widely adopted by the lending market over the next five years, along with blockchain technology that could help reduce loan settlement times to just three days, panelists said. conference. While adoption of these technologies is a long-term goal, changes will begin to be felt within a year, freeing bankers from cumbersome and repetitive administrative tasks, they added.

Optical Character Recognition (OCR) technology will allow banks to convert different types of information, including scanned paper loan documents, PDF files or digital camera images into editable and searchable data.

This will allow “straight through” processing without human processing, where information is held and transmitted in digital format, preventing repeated conversion from analog to digital and vice versa.

THE PIONEERS OF SCHULDSCHEIN

The loan market could follow the lead of the Schuldschein (SSD) market, which has seen a mini digital revolution with several new digital platforms arranging transactions, including VC Trade, credX, Debtvision, Synd-X and FinnestPro.

Unlike syndicated loans, SSDs are promissory notes with concise and relatively standardized documentation, therefore particularly well suited to the use of blockchain technology.

By replacing labor-intensive manual procedures, such as creating SSD contracts and setting up digital processes to verify payments received, new platforms have helped reduce costs and make small businesses much cheaper transactions to execute.

Initiatives are already underway to digitize syndicated loan workflows, despite the apparent challenges. BBVA said in June that it was moving into the testing phase of a project to use blockchain technology on syndicated loans.

The Spanish bank was the first global lender to arrange an end-to-end business loan using blockchain technology in April for Spanish consulting and IT technology company Indra. This €75 million loan also used distributed ledger technology combining public and private environments.

Negotiation and completion of loan terms was done in-house using private blockchain technology (Hyperledger), while Ethereum’s public blockchain (testnet) was used to register a unique identifier for the documentation of the transaction.

Meanwhile, UK financial services software company Finastra has worked with a group of lenders to create an online syndicated loan platform designed to improve transparency and efficiency in the marketplace, which will reduce costs and operational risks and lead to faster negotiation and settlement of loans. .

HUMAN AFTER ALL

Some bankers doubt that the lending asset class fully embraces the transformative potential of technology and are unconvinced of the ability of machines to perform complex tasks that require human intervention, including customer relations and management.

“Technology is not a silver bullet. It’s about getting the processes right and supporting them with technology,” said Keith Taylor, head of EMEA loan syndication at Barclays.

A centralized KYC platform is also cited as a potential benefit for the lending market, but this could also be hindered by the individual processes undertaken by each bank.

Some banks have been discouraged by the expense of improving lending operations and technology systems and by a reluctance to pass on higher costs to customers.

“Who will pay for the change?” said Conan.

The unanswered question of long-term investment and who will bear the cost has already seen many technologies shelved as banks hesitate over which system to choose in the rapidly changing fintech landscape.

“We take too long to make decisions,” said one banker.

Despite this, few bankers disagree that improving the efficiency of the loan market will be hugely beneficial, especially for front office operations, as staff will be freed up to perform more creative.

It is also more environmentally friendly and sustainable as it eliminates paper and will help banks focus on ESG objectives.

“Few markets are as archaic as the lending industry,” said a second banker. (Editing by Tessa Walsh and Christopher Mangham)

Priscilla C. Carnegie