The technology landscape in the asset-based lending sector is shifting, and even if the industry hasn’t always been hyper-focused on future developments, embracing change and incorporating new platforms will be critical to enhancing the lending process. To take the temperature of the current technology environment in ABL, ABF Journal spoke with Joseph Caplan of Finsoft, Kevin Day of HPD Lendscape, Rosanne Doyle and Kristin Maxwell of Solifi, Nancy Lee of ABLsoft and Billy Quinn of CODIX.
What is the asset-based lending industry’s relationship with current and emerging technologies?
Joseph Caplan: In a word, mixed, because the older models for operations and compliance are hard-wired into the minds of management and change is hard to accept for some. Even the newest systems will have growing pains as we move to more internet-based reporting. Large banks are investing and even merging to deal with the technology cost, while smaller lenders are not changing much at all because things work.
Kevin Day: Traditionally, ABL has used technology to underpin the business and provide a secure system of record. More recently, the rise of innovative players in the fintech space has allowed for greater adoption of digitalization to manage risk better. Additionally, the harnessing of open data trends offers increased specialization and more tailored, meaningful products and value-added services.
Rosanne Doyle and Kristin Maxwell: The B2B industry in general tends to lag on current and emerging technologies. It’s no different with the asset-based lending industry. While adoption for finance applications is increasing and beginning to move from the early adopter stage to the early majority phase, it still lags behind other industries. We see far too many manual processes and labor-intensive tasks that could easily be automated.
Nancy Lee: Asset-based lenders reside along all stages of the technology adoption curve. You would think that more lenders would jump to adopt new technologies, but with the characteristics of ABL — specialized underwriting processes and human relationships — this industry has not felt as much of the urgency to adopt the latest tech. That said, incoming fintech lenders have led the way with innovative lending terms, personalization and approval processes catalyzed by new tech, which could eventually morph the concept of ABL as we know it.
Bill Quinn: Traditionally, technology has been the backbone of asset-based lending. From an emerging technology point of view, it provides the ABL community with opportunities to rethink some traditional ways of performing ABL. New technologies provide the opportunity to optimize processes. Overall, this can provide a better user experience and reduce costs while increasing compliance. There is certainly the mindset across all organizations to improve their processes utilizing both existing and new technologies.
What are the bare essential technology solutions an asset-based lender should be using today?
Caplan: Some form of operations software is a minimum. Lenders need to track the loans [and] covenants, calculate fees and interest owed and provide borrowing base data or related loan availability data to borrowers. The borrowers then need to report collateral documents per the loan and security agreement.
Meanwhile, data downloads are one of the biggest opportunities for both time savings and accuracy checks. This should extend to the field examination side too, and lenders should be asking all outsource firms about what they use for downloading data and who is trained to do it.
Day: At a minimum, an asset-based lender should utilize a core system to manage the collateral and lending facilities. Nowadays, it would be standard practice to provide online banking capabilities to interact digitally with borrowers.
Doyle and Maxwell: We recommend that asset-based lenders use technology solutions that automate workflows and allow customers to access their information easily. At a minimum, an organization needs to provide borrowers a self-service portal with 24/7 access. This technology is a clear indication of the maturity of an organization and how it values its customers. Of course, we recommend our ABL customers move to a software-as-a-service solution so they can leverage the technology throughout their entire business.
Lee: Many lenders have incorporated some software automation in the lending process. The most utilized tools are loan monitoring and management systems. Up a level, you’ll see lenders utilizing a web portal to digitally facilitate the data reconciliation between borrower and lender.
We are also at a point where being on the cloud is becoming mainstream. It is often a requirement by auditors and investors for their lenders because it enables better auditing, data accessibility for distributed teams, less IT hassle, and it meets borrowers’ minimum expectations.
Quinn: There are many different types of software and technologies in the industry. The bare essential would be to have the appropriate product technologies along with the “front to back” end processing capabilities. Ideally, this should be in one system to reduce risk and costs and allow cross-product offerings due to having all the entity data in one source.
How can and why should the usage of emerging technologies be accelerated in the ABL industry?
Caplan: Many lenders have not shopped for new ideas because they like what they have. If management starts by saying, “I don’t know everything and I want to see alternatives,” then the process can begin.
There are large banks that want a bank-wide system. These are big systems, but ABL-specific models won’t play in that big-system game. Workflows will get customized and built out over time, but they’re rarely cutting-edge. Smaller lenders seem to adopt what is known, good or new.
Day: Like many things, necessity is the mother of invention. Needs have driven the adoption of technological advances, and the COVID-19 pandemic has been a catalyst to increase the pace in the adoption of digitalization. When it comes to incorporating new technology, the leaders in ABL consider anticipating need rather than accelerating adoption.
Doyle and Maxwell: The hesitation to embrace digital transformation typically comes from fear of change, an aversion to risk and/or a lack of understanding. To help accelerate digital transformation among ABL lenders, we need to make it easier, affordable and accessible for all organizations, regardless of size. The most progressive companies are adopting technology like software-as-a-service in the cloud, data insights and data streaming, conversational AI, application programming interfaces (APIs) and open finance platforms. Those who embrace emerging technologies are the most successful; it sets ABL lenders up for future success to match business scale needs, enable rapid innovation and create a positive customer experience.
Lee: The ABL industry is not behind in incorporating emerging technologies, but it is behind in adopting current digital strategies. Lenders can accelerate their usage by identifying additional process gaps that can be automated and unsatisfactory customer experiences that can be positively changed and analyzing data trends that can potentially be trained with AI and machine learning.
Quinn: It depends on point of view and different organization capabilities. What can accelerate usage is removing old ways of thinking, such as a paper-driven approach. When true ROIs are established, it is clear how much cost saving is possible with investment in technology. Also, the COVID-19 pandemic has democratized the use of technology, like electronic/digital signatures, for most contractual engagements, which is important to integrate throughout the commercial lending process.
Which part of the lending process is best suited for automation and how can companies make this a part of their operations?
Caplan: Areas like factoring, where invoices are purchased and cash can be applied electronically. Emails or a portal to get borrower reporting documents is also widely used. Field examination report generation has a massive “fidget factor” to combine examiners and divisions and then summarize all that information. However, the limited file format uploads and unusual reports that we get in the ABL space are tough to translate back as machine readable reports.
Day: When data quality is upheld, all interaction between lenders and borrowers can be easily automated and handled digitally. A digital feed can be created to provide real-time updates to the client on availability and provide automated drawdowns when required. Data extraction directly from the borrower’s ERP system can enhance the calculation of borrowing bases and reduce the need for reconciliation and field surveys.
Doyle and Maxwell: Everything that can be automated will be automated — and should be automated. But that doesn’t mean human intervention goes away. It means you shift your staff to focus on those areas that require more personal attention, which enhances the customer experience.
The areas best suited for automation are those that are repeatable and scalable, such as availability calculations, borrower portals, borrower document management and borrower verification. Automation removes many of the repetitive tasks and friction that currently exist in workflows.
Lee: There are three main areas where automation is suited for ABL. First, is the underwriting process, and for ABL specifically, this would be in the BBC submission process. The next area is in back-office loan monitoring, which has been the most advanced to date, although there is more that can be done to further automate these processes. The last area is enabling real-time data connections between multiple software systems like CRM, accounting, loan management and reporting using web APIs.
Quinn: There are opportunities for automation across the board in general. However, areas such as onboarding, credit decisioning, automatic funding/payments and automatic payment matching have experienced major efficiencies with automation. Companies can make this part of their operations by having the appropriate technology to support the automation, including advanced expert systems where users can define their business processes dynamically without going through the traditional development/test/deploy process.
Will emerging technologies like artificial intelligence, machine learning and blockchain become more standard in the ABL industry in the next few years? Why or why not?
Caplan: I hate to say it, but AI is not going to solve much in the ABL space for some time, although specialized industries such as financing the trucking sector could benefit.
Blockchain is interesting, but the problem for lenders is they don’t necessarily finance companies that are selling like that or have access to blockchain query tools. In more than 10 years, it might be possible to do a 100% audit of deliveries with blockchain, but right now, it is mostly being used to track specific shipments.
Day: Data is king and will continue to be the linchpin of technology in the ABL industry. With that, AI and machine learning will only gain significance if there is the scale of data to create beneficial algorithms.
Opportunities exist to harness open banking and other API-based technologies to provide an enhanced experience for the borrower. Cloud computing and software-as-a-service are now mainstream in the world of ABL, with many banks adopting this going forward to provide more scalable, cost-efficient models in the future.
Doyle and Maxwell: The top three most significant trends and developments in software systems and technology includes the move to software-as-a-service in the cloud; the growing importance of self-service, conversational artificial intelligence and machine learning; and [the] establishment of system integration as table stakes. Innovation, speed and agility are the top challenges facing the ABL industry. These emerging technologies will help ensure organizations are set up for future success and can scale and innovate at the pace of change.
Lee: It’s going to take a few more years for tech like AI, machine learning and blockchain to become standard in this industry. I recommend focusing on digital strategies, utilizing APIs to achieve seamless workflow and efficiencies within the financial ecosystem. Analyze the data to find ways to personalize the borrower experience and to identify better risk indicators, with a future goal of leveraging AI and machine learning technologies to hyper-automate these processes.
Quinn: I think digitalization standard and electronic formats will become more standard. There is always a challenge when standardizing ABL, but the move toward a standard is always an ongoing topic of conversation. For topics like blockchain, there are many different fabrics and it will be more challenging to standardize technologies like these.
What is one area of technological innovation that is not yet being discussed in relation to the ABL industry but could (or will) be a major force or trend in the next decade?
Caplan: More accounting systems will provide ABL-specific reports and even a report of operations (sort of like a field exam report) for management. There will also be more third-party options to plug in to existing systems. Those “plug-in” items will likely be API options, which will be more common in the coming years and will eventually expand the options for existing systems so that they can adopt best-of-breed pieces.
Day: Traditional banking is very siloed and product-led. In an increasingly customer-centric world, an outside-in approach will dramatically change the way lenders and borrowers interact.
Doyle and Maxwell: A major technological innovation that we predict will become a major force in the U.S. is one that is considered standard in Europe and one that Solifi introduced over the past year: open banking. This technology allows a consumer to safely and securely share their banking information with third parties, streamlines digital onboarding, enhances the credit and underwriting processes, accelerates borrower verification, offers a complete picture of collateral performance and helps meet government mandates in some countries. Today’s borrowers expect an online digital journey with instant service; open banking is another opportunity to enhance the customer experience.
Lee: Outside of the maturation of AI in hyper-automating the ABL monitoring process, technologies like cryptocurrency and blockchain could have a significant impact. As cryptocurrency becomes more widely accepted and blockchain-based contracts and workflow become common, this new asset class could change the way we think about the ABL industry.
Quinn: Capabilities to do availability/milestone-based financing and the continuing merging of the physical and financial supply chain. This will provide opportunities in finance for underserved finance opportunities and de-risk trade transactions using data visibility. There is also the possibility of the ‘internet of things’ playing a part in giving information to financiers to bring them closer to their clients.