Technology is an enabler for the broker-lender channel, delivering business efficiency and simplified compliance, leading to better customer outcomes.
The recent Asset Finance Connect asset finance unconference brought together lenders, brokers and technology providers to discuss how technology can enhance the broker-lender channel.
Today’s UK asset finance brokers and lenders interact using a variety of competing solutions.
The technology sessions in the conference considered whether one technology platform used by all participants would create greater efficiency and a better experience for customers than multiple competitive platforms.
The scaling ecosystem business model
Participants in a scaling ecosystem are competitors who collaborate in ways that deliver benefit for all. This collaboration enables all parties to efficiently scale. Members of a scaling ecosystem may establish a collectively funded and owned entity to orchestrate the activities of all participants.
In the Netherlands, three competitor banks established HDN, a commonly owned organisation which enables interactions between brokers and lenders in the residential mortgage market. The collaboration lies in agreeing a format for the transition of data which moves through digital pipes owned by the organisation.
In the UK, if asset finance lenders and brokers were to establish a similar organisation and to agree a format for information exchange then this would create efficiencies for both brokers and lenders. For example, a lender seeking to create a single technology system to manage incoming proposals from multiple lenders could depend on receiving information in a single agreed format rather than having to cater for different formats. Similarly, a broker seeking to send proposals to multiple lenders could depend on sending information in a single agreed format rather than having to alter the proposal to meet individual lenders’ different requirements.
Against these efficiencies, some ecosystem participants might fear that they will lose the competitive advantage that lies in differences between them and other participants.
Case study: HDN
HDN ensures smart and secure information exchange in residential mortgages. A Dutch company owned by three of the largest banks, HDN creates the technology pipes and messaging standards connecting lenders and brokers. All mortgage transactions in the Netherlands go through HDN.
The HDN co-operative association includes 60 members representing almost all major providers of mortgage and mortgage-related products – financial advisors as well as franchise chains, service organisations and IT suppliers. HDN provides secure and smart information exchange in financial services with standardised, fast and efficient processes via a state-of-the-art secure and compliant platform.
Reinier van der Heijden, Director at HDN said, “There are great opportunities to use standardisation to serve customers even better. It helps customers to create a reliable and predictable process.”
HDN facilitates the application, underwriting and management process of mortgage and mortgage-related products. They do this, among other things, by developing and managing the standard for secure digital communication in the financial chain. This HDN language is created through interaction and co-creation with members and users. As a result, the HDN stakeholders save considerably on their operating costs, their processes are efficient, and their customers quickly know where they stand. To guarantee the quality and unambiguity of the standard, the members and users are certified annually.
The members of HDN make an annual financial contribution and participate in HDN’s working groups to ensure that all members have a say in what happens at HDN.
For more information, visit HDN’s website: https://hdn.nl/
The challenge of collaborating between participants in the lender-broker market
The UK asset finance industry is a larger more fragmented market than the Dutch mortgage industry. With more participants it is likely to be difficult to reach an agreement between lenders and brokers to establish a commonly agreed format without a trigger which makes it difficult to continue without an agreement to collaborate.
The industry sets a relatively high bar for collaboration.
The industry is currently negotiating an agreement to establish a commonly agreed basic audit for brokers (called a review) which lenders can rely on wholly or in part to replace their own checks. This would leave the broker more time to focus on generating business for lenders.
One trigger for establishing a common review process is arguably the increased focus generally on long complex distribution chains which has occurred because of the introduction of the Consumer Duty for regulated transactions. A common review has already been agreed for motor dealers, for example, which ensures that dealers are compliant with Consumer Duty requirements. A common review process for brokers dealing with non-regulated transactions is an obvious next step.
Attempts to agree a common review process for asset finance brokers have been largely successful, however the trade bodies FLA and NACFB have not agreed a single organisation to orchestrate the process – and it is possible that the industry will have two potentially conflicting sets of reviews, one run by the FLA and another by the NACFB. It is unclear whether the benefit of having two competing processes will outweigh the inefficiencies of having two organisations carrying out largely the same activities on behalf of brokers and lenders.
Another opportunity for collaboration has been more successful. Acquis Data Solutions have established an exposure register, a single shared resource which records leasing transactions by lessee. The collaboration required by industry participants was to share a sufficiently high percentage of all industry transactions that it would successfully identify individual lessees with whom the industry has a high exposure.
This project was triggered by a large fraud in which a single lessee financed an asset with multiple lenders. It was suggested that the size and frequency of frauds might be increasing. In this instance Acquis managed to establish a consensus among lenders to support the collaboration, even gaining participation from a large lender organisation who said they would not necessarily use the service.
It is possible that efficiencies alone might not be compelling enough to encourage collaboration. A large technology player, with the potential to act as a competitor to all lenders (Amazon, for example), might provide a trigger if they established a platform for brokers to submit proposals to them. An established infrastructure owned by the industry would create a barrier to entry for such a competitor.
The unconference considered FXE Technologies SmartFinance Hub to identify potential benefits of a common platform.
Case study: FXE Technologies (FXET)
FXET is a specialist provider of intelligent digital solutions for the business funding market that makes it easier for the ecosystem to compliantly transact.
For the Broker-Funder channel, FXET’s SmartFinance Hub enables efficient, compliant processes and freeing up time spent on admin to invest in building client relationships:
· Single point of access for brokers to screen proposals in minutes: Single point of access to panel of funders to match proposals to appetite without a hard credit search
· Digital packaging of proposals to drive high quality, consistent submissions with minimal admin effort: Use of background data and a single proposal path reduces admin time and increases look-to-book ratios
· Evidence of compliant processes and adherence of industry’s code of conduct: Audit trail to evidence compliant processes from capture of customer needs to confirming relevant consents makes adherence to compliance part of the management of each individual proposal – and easily evidenced
At the centre of the platform is FXET’s a digital proposal management process that ensures compliant processes are followed by a triage engine instantly assesses proposal against appetite across a funder panel. Funders can use more than 300 characteristics to pre-qualify proposals – providing brokers with an instant indication of the appetite across their panel.
Brokers are fully in control of progressing with any of the funders on their panel – creating a high-quality proposal and using the initial appetite assessment to have the right dialog with funders.
For the funder, the solution transforms their front-end and underwriting processes by doubling their underwriting capacity as proposals that are not in appetite are quickly screened out, preparing an initial set of assessments for the underwriter, driving higher conversion rates, and helping the funder internally to bridge the gap between an enquiry, decisioning and underwriting. This translates into faster decision making – and less wasted time.
Unlike decisioning platforms, SmartFinance Hub puts both brokers and underwriters at the centre of the decision-making for deals: recognising the nuanced decisions that are often required in the Asset Finance space, the platform creates instant visibility on ‘fit’ to brokers and funders but leaves decisions in the hands of experienced professionals.
For technology platforms to be effective and successful in facilitating interactions between funders and brokers, FXET believes that trust as well as demonstrated value-add is central. By working collaboratively with all industry players to solve key pain points, FXET recognises that transformation can be slow moving – as change without advocacy from all involved stakeholders is likely to fail.
Operating in the complex commercial funding ecosystem for more eight years, FXET has always put the human interaction at the centre and seen digital technology as a supporting system that can reduce the administrative workload and address compliance challenges, freeing up humans to deal with personal interaction.
Benefits of technology platforms
Many large funders are adopting digital systems to facilitate faster, more effective engagement with clients. In some cases, these solutions have cost millions of pounds. Funders view their proprietary digital platforms as a differentiator. The platforms embed the funder’s take on compliance and governance processes, as well as value-adds they want to provide to brokers.
A drawback of multiple lender-specific platforms is that brokers have to engage separately with each and to deal with the funder’s unique take on how proposals should be submitted.
The benefits for brokers of a solution that gives them a single point of access to all the lenders on their funding panel are clear. It reduces the need to enter a proposal into each lenders’ platform, giving them time to focus on the human interactive side of the business – engaging with customers and funders to structure the right deals. It also makes it easier for a broker to add new lenders onto their lending panels.
The benefit to large lenders who already have their own lending platform is less clear. One difference lies in potential value-adds extracted from data derived from other lenders as well as their own data which may provide valuable insight into an individual broker or an individual customer.
For example, a broker who submits the same proposal to many lenders (known as multi-propping) could be more quickly identified and treated differently. A lessee making multiple applications for an individual asset would also be more likely to be identified.
Perhaps the largest advantage to lenders of shared infrastructure is shared investment, and less duplication of work. The more lenders pool resources to invest in infrastructure, the more infrastructure they are likely to be able to afford.
This advantage is particularly compelling for smaller lenders who may not be able to afford their own solutions; and who would be more likely to conform to a common agreed proposal format than larger players.
But as expectations about what problems technology should be able to solve increase, the case for shared investment even among larger lenders may become stronger. One area where technology is expected to play a far greater role is around compliance.
Compliance remains a major concern for the asset finance broker-lender channel, specifically as the FCA makes it clear that obligations like Consumer Duty will in due course also apply to the unregulated market.
There is already a blurring of the boundaries between regulated and unregulated business, with most funders having the same processes in place for regulated and unregulated deals.
The review of the Consumer Credit Act 1974 is expected to bring clarity and greater harmonisation of rules followed by unregulated and regulated business.
As the industry develops an understanding over what are the right controls, it can reduce the cost of these controls by making them part of commonly agreed background processes that ensure that compliant processes are adhered to.
Technology can allow a business to build-in processes that can ensure that compliance issues, like GDPR, and Consumer Duty, are addressed and demonstrated. Simon Goldie, director of advocacy at the FLA has suggested that technology could be used to embed many of the core elements of broker reviews into real time transaction checks.
The core DNA of a technology build is the ability to demonstrate good outcomes for customers and to track and show that good customer outcomes have been achieved. Automating and systemising data and evidence would assist brokers by bringing to the forefront those assessments that brokers must evidence, for example, eligibility and affordability.
While a technology platform can contribute to addressing key challenges in the asset finance broker-lender channel and delivery efficiencies, it should not be seen as a ‘quick fix’ to every industry-wide challenge between brokers and funders, for example, technology need not be the solution to commission disclosure.
The adoption of a co-operative technology platform similar to the HDN mortgage platform in the Netherlands provides a potential opportunity to establish an efficient ecosystem which embeds a range of value-adds which can significantly improve the broker-lender channel and discourage activities like multi-propping.
The business case for using a single platform is currently strongest among the smaller lenders who are less likely to be able to afford their own systems, and who will benefit most from shared infrastructure and sharing data. For now, the benefits of efficiency currently seem unlikely to offer a compelling enough case for larger lenders to drop their proprietary platforms which provide them with a competitive advantage.
Technology is increasingly being seen as a tool to manage compliance across the distribution chain. In future the broker-lender channel seems likely to embed real-time compliance into digital processes to ensure the sector delivers the right outcomes for all stakeholders.
Managing compliance may change the status quo, driving development of industry rather than lender-specific infrastructure. Industry platforms enable an industry to orchestrate ecosystem participants more effectively particularly where adherence to a common process is more about achieving compliance than efficiency.
The role of trade associations in establishing industry-wide solutions will be key.