Managing the broker-funder relationship
In the 1990s, banks and leasing companies were generally somewhat reluctant to deal with brokers. Times have changed quite dramatically, with banks and non-bank lenders happily dealing with communities of brokers, with many funders set up specifically to deal with brokers as their primary source of new business.
The panel at the 2022 AFC Winter Conference included a mix of brokers and funders who came together to discuss some of the challenges facing the broker-funder relationship.
Continual changes in the financial services landscape are causing issues for both brokers and funders; these include changing customer needs, expectations and demographics; regulation and compliance; and emerging technologies.
The Covid pandemic tended to push digitalization to the top of the agenda for companies around the world, with the financial services industry accelerating its adoption and development of digital channels and technologies.
However, the more digital things become, the greater the possible threat to brokers. There is an underlying concern that brokers might not be needed in the future as AI could potentially takeover key operations on all platforms.
With the transition to the digital world, brokers can themselves use tech to enhance the customer journey and manage the customer better, with dealer portals giving some power back to the brokers.
“There is a strategic way of using technology to complement the traditional methods of acquiring customers and building relationships,” according to Lee Schofield, Director of PMD Business Finance.
For brokers, the technology focus must start at the point of new customer acquisition.
According to Schofield, customers are wanting answers faster, coupled with digital ease of use. So, technology needs to be harnessed in the broker-customer relationship and have a particular role to play through the use of APIs.
However, with lower value asset finance deals, customers can still use online portals and digital platforms to go direct to the lender, therefore bypassing the broker.
Tom Perkins, Director & Co-Founder at Charles & Dean, believes that “brokers are having to evolve to have multiple business models within their own businesses.” According to Perkins, brokers are having to leverage different technology and systems for different asset finance applications. There has even been a surge in brokerages creating their own bespoke IT systems in order to make their business more competitive and also more efficient.
Along with the pandemic, came a shift to hybrid working and changing customer behaviours, resulting in much more online interaction as opposed to face-to-face client relationships.
It is inevitable that things will become more digital, according to Lee Brenard, Managing Director at Asset Funder, as it improves efficiency. But Brenard also sees a need to keep the ‘old’ values of face-to-face business, particularly as one way of reducing fraud.
Mike Randall, CEO of Simply finds the asset finance industry to be at a crossroads. While digitalization is helping to standardize the system, regulation is not making things any easier for brokers and funders.
Many panelists believe that regulation is actually stalling technological progress in the asset finance sector as compared to the consumer world.
With the introduction of the new Consumer Duty, regulators are continuing their drive for best practice and good customer experiences, together with a focus on price and value. However, the expected reform of the Consumer Credit Act and the prospect of yet more change has left many in the sector wondering how their already stretched teams will be able to respond.
Nova Everidge, Director of Asset Finance at Metro Bank sees regulation as the biggest issue affecting the industry, making things ever more complicated, especially the lender’s relationship with their broker community.
While regulation is having a notable impact on the end-user customer outcomes and is helping to reduce risk and fraud in the financial services sector, the broker community can see a potential reduction in business as more oversight progresses with the introduction of more regulation.
With brokers dealing with many lenders on their funding panel, all of whom interpret the regulations slightly differently and have different requirements, Everidge believes that funders, “need to find a better way of working with brokers in what has become a complex marketplace.”
In the funder-broker model, Nathan Mollett, Head of Asset Finance at United Trust Bank feels that any issues are about oversight and the methods that funders use to ensure brokers are in fact delivering fair outcomes to customers.
All lenders perform their broker oversight slightly differently depending on their interpretation of the regulation, leaving brokers having to go through a detailed oversight audit process numerous times in accordance with the number of funders they have on their panel.
Smaller brokers can therefore end up spending more time dealing with funders, broker oversights and audits than they do actually serving their SME customers.
According to Mollett, standardization and consistency in execution is needed with funders and brokers collectively agreeing the way forward.
Key to a really effective relationship between funders and brokers is the need for consistency, oversight and collaboration between the various parties.
Funders and brokers need to collectively agree on how such a collaboration will work, possibly in a forum where all voices are heard enabling both brokers and funders to have viable businesses going forward.
The Finance & Leasing Association (FLA) and the National Association of Commercial Finance Brokers (NACFB), trade associations representing funders and brokers respectively, both need to work harder to reach an efficient solution for funders and brokers, according to the FLA’s Simon Goldie and the NACFB’s Norman Chambers.
While the FLA brings the funders’ perspective and the NACFB brings a broker view, they both also need to understand the other side of the equation. Goldie commented that, “collaboration and an open dialogue with brokers is key, together with understanding the issues from all sides.”
An efficient digital solution for broker oversight is also a necessity in managing the broker-funder relationship. While the NACFB and the FLA both have their own systems, they must work together for consistency so that brokers can serve customers rather than deal solely with oversight for funders.
“Standardization is important” from a reporting perspective, according to UTB’s Mollett, and is an issue which should be relatively easy to fix.
Many of the panelists, including Paragon Bank’s John Phillipou, agree that collaboration and standardization is very important and will help the relationships between brokers and funders, but agrees that the competitive edge must not be lost in the process.
Randall commented that “the pie is big enough for all of us,” and would therefore not want to see absolutely everything standardized, as some elements could risk the competitive element of relationships.
In Randall’s view, there is currently still quite a gap between brokers’ and lenders’ drivers and expectations, and the industry needs to collaborate to reduce this gap before there are long-term consequences for both lenders and brokers.