Technology has transformed commerce in many ways we couldn’t have anticipated a few years ago. The business of lending and leasing is no different. Today, companies of all sizes have a wide variety of outlets to access capital, choices that extend far beyond the bank on the corner. The evolution of the Internet has given business owners the ability to compare shops for rates at the click of a button. And the digitalization of documentation has dramatically impacted due diligence and shortened time to closing.
"Already, banks and independent lenders are using market information provided by Dun & Bradstreet and other alternative sources like social media to perform algorithm-based credit checks"
But that’s merely scratching the surface. Technological advances are continuing at a blistering pace, and the benefits should soon be visible to many business borrowers. In my view, the similarities between how technology drove great upheaval in the capital markets, making them far more efficient, and the changes taking place in the lending sector are striking. As someone who spent much of his career focused on stock exchanges and the business of trading, I can tell you that much of what we’re witnessing today in the lending arena was presaged by developments in the capital markets.
That is great news for business leaders going forward, because financial services providers are still playing catch-up in some critical ways. Specifically, three major developments that transformed capital markets over the past two decades have yet to be fully felt in the lending environment.
1. Market Fragmentation
We have come a long, long way since a handful of traders first met under a buttonwood tree on Wall Street over 200 years ago. Today, when you place a market order to purchase a stock online, your mouse click initiates a chain of events that ultimately ends with your order being filled by any number of stock exchanges, electronic crossing networks or alternative trading systems.
The fragmented nature of capital markets is largely a result of Regulation NMS (National Market System). This series of rules, issued by the Securities and Exchange Commission in 2005, spawned a surge in electronic trading by mandating that investors get the best available price when they buy or sell shares.
In the lending and leasing space, increased competition is clearly a result of Internet-enabled rate shopping, but some other pressures are also contributing. With the Federal Reserve keeping rates historically low for so long, it is no longer just the big banks that are interested in lending to commercial enterprises.
Searching for higher returns, we have seen smaller banks and non-bank lenders such as private equity firms and business development corporations courting companies looking for credit to help them grow. The end result is increased access to credit and downward pressure on borrowing rates – both pluses for middle-market and other growing firms.
2. Fixed Protocol
The second major technological development we are beginning to see in the lending and leasing space is the emergence of common communication platforms aimed at streamlining the borrowing process.
In the mid- to late-1990s, a group of banks got together to establish a fixed protocol to enable trading settlements to happen more quickly by making the flow of information passed between banks, exchanges and alternative trading systems uniform. Today, this standard messaging is used not only with the trading of equities, but in foreign exchange and debt markets as well. It should not be a big surprise to hear that when everyone was able to speak the “same language,” it made communication a lot easier.
For years, standard lease and loan terms have been communicated over a variety of channels, including voice, email and fax. The back and forth can be time-consuming and inefficient, and can create the risk of errors. Individual lenders like CIT have worked to streamline these communications by turning to computer systems to communicate lease and loan terms, and provide electronic credit approvals and other details electronically, reducing the manual labor involved.
At some point soon, I believe these disparate technology systems will converge as borrowers seek the same level of efficiency and consistency that governs capital markets transactions. This unified protocol will not only make it easier to process lease and loan applications, but it will strengthen servicing by speeding up credit checks, electronic document management and other critical processes.
The next logical step in this evolution is for lenders to try to make sense of the sea of data they will have at their disposal as a direct result of the first two developments–market fragmentation and a fixed protocol.
In the capital markets arena, it did not take long for leading players to realize that they could apply computer algorithms to the business of trading to help investors determine the best places and least expensive ways to trade. With computers empowered to transact the trades more efficiently than humans, investment houses have been able to focus more intently on managing the risks surrounding those trades. It is no surprise then that algorithm-enabled, high frequency trader’s account for the majority of trades made on U.S. equity markets today.
"Already, banks and independent lenders are using market information provided by Dun & Bradstreet and other alternative sources like social media to perform algorithm-based credit checks." But market players are also deploying their own proprietary information to identify lending and leasing trends. At CIT, as an example, we are able to spot trends in equipment lease types, renewal rates and frequency, and other data points to assist our customers across the industries we serve.
Once a fixed protocol is established, the amount of information available will multiply exponentially and business borrowers will be big beneficiaries. Today, for instance, loan and lease pricing terms tend to be set manually. As information is streamlined and we get a clearer picture of a borrower’s total risk exposure, such pricing decisions could be made automatically.
As a result, lenders will either get more comfortable offering a competitive rate or simply syndicate the loan to others who are willing to take on the higher risk. With the fixed protocol governing electronic communications, this process will happen seamlessly and continuously, rather than on a case-by-case basis.
While it is difficult to predict how quickly these developments will transpire in the lending and leasing industry, we do know one thing: expertise will still play a critical role in supporting financing decisions. As a business owner, you want to know not only that your lender is working to get you the best deal, but that the transaction fits into your long-term strategic vision. It is exciting to think how technology is going to transform the business of lending and leasing, but it is equally encouraging to know that when all is said and done, there’s someone on the other side of the table who understands your business and industry.