September 27, 2018 / 3:07 PM / 3 months ago

Loan market embraces technology but queries cost

LONDON, Sept 27 (LPC) - Europe’s syndicated loan market is on the brink of a technological revolution which will increase its speed and efficiency as banks continue to modernise, but questions remain over its implementation and cost.

The complexity and expense of integrating new technologies into a complex web of existing bank proprietary systems and a reluctance to change is holding the loan market back for now, despite the obvious advantages offered by new digital platforms.

In a market that is 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 of the advantages of updating lending practises.

“We need to make loan products more efficient and technology will become more important to help with that. We need to be cognisant of the need to change and offer greater flexibility,” said Charlotte Conlan, head of loan and high-yield syndicate for EMEA at BNP Paribas at the Loan Market Association’s (LMA) syndicated loans conference this week.

New technology is expected to have the biggest impact on loan agency operations, followed by KYC requirements and secondary loan trading, according to a poll of conference delegates.

Artificial Intelligence (AI) is expected to be widely adopted by the loan market in the next five years, along with blockchain technology which could help to cut loan settlement times to as little as three days, conference panellists said. While adopting these technologies is a long-term goal, changes will start to be seen within a year which will free bankers from onerous 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 images from digital cameras into editable and searchable data.

This will allow ‘straight through’ processing without human processing, where information is kept and transmitted in digital format, preventing the repeated conversion of analogue to digital and back.

SCHULDSCHEIN PIONEERS

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

Unlike syndicated loans, SSD’s are promissory notes with concise and relatively standard documentation which are therefore particularly well-suited to the use of blockchain technology.

By replacing labour intensive manual procedures, such as the creation of SSD contracts and setting up digital processes to check received payments, the new platforms have helped to keep costs down and made smaller deals much cheaper to execute.

Moves are already afoot to digitise syndicated loan workflows, despite the apparent challenges. BBVA said in June that it was moving to the testing phase of a project aimed at using blockchain technology on syndicated loans.

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

The negotiation and the completion of the conditions for the loan was carried out internally using private blockchain technology (Hyperledger), while Ethereum’s public blockchain (testnet) was used to register a unique identifier for the transaction’s documentation.

Meanwhile, UK-based financial services software firm Finastra has been working with a group of lenders to create an online syndicated loan platform designed to improve transparency and efficiency across the market, which will slash operational costs and risks and lead to faster loan trading and settlement.

HUMAN AFTER ALL

Some bankers remain doubtful that the loan asset class will fully embrace the transformative potential of technology and remain unconvinced about the ability of machines to be able to complete complex tasks that require human input, including client relationships and management.

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

A centralised KYC platform is also cited as a potential benefit for the loan market, but that could also be hampered by the individual processes undertaken by each bank.

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

“Who is going to pay for the shift?” Conlan said.

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

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

Despite this, few bankers disagree that improving the loan market’s efficiency will be hugely beneficial, particularly to front office operations as staff will be freed to perform more creative tasks.

It is also more environmentally-friendly and sustainable as it eliminates paper, and will help banks to focus on ESG goals.

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

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