By Michael Feldwick, Head of UK & Ireland, Tinubu Square
Despite all the talk about digital transformation, there remains an inordinate number of legacy practices, processes and technologies in the financial services industry.
Legacy infrastructure alone is so out of date and cumbersome that it is not just slowing progress, it is bringing it to a grinding halt.
Digital transformation may sound challenging to achieve, but most other industries have already done it, or their strategies are firmly in place and the end goal is in sight. Some didn’t even need to transform since a digital approach was embedded from the start. The message for financial services, however, is stark. Transformation is necessary, and it is the most conservative, not the most expansive investment decision that any company in our sector can take right now.
The receivable finance divisions of banks and finance companies are particularly vulnerable to the impact of legacy systems. Globally they manage multiple customers, who themselves have multiple customers, and as a result operate multiple credit insurance policies from different companies. To function efficiently, they must optimise their credit risk programmes, but these can be hampered by old technology that is unable to deliver timely and accurate information relating to collection and invoicing.
Then there is the issue of regulations. Banks offering receivables financing arrangements are obliged to comply with Basel III, and whilst this aims to ensure the solvency of lenders, it also carries with it higher capital requirements and new rules on managing liquidity. A considerable amount of the organisation’s regulatory capital must now be allocated, at least notionally, to every loan or finance arrangement made. As a result, receivables financing companies must be much sharper, not just in terms of governance, but also in finding ways to identify risk, to introduce accurate controls and to aggregate their credit exposure across the ledger. To do this they want greater collaboration with credit insurers so that credit insurance is wrapped around the transaction. How is this possible if the technology they are running is unresponsive or unfit for purpose?
Historically there was a wariness from trade credit insurers to take on the risks passed from banks and financial institutions, and reluctance from banks to go down that road, but in recent years developments have been made which have produced a rapprochement, a new understanding between the two sectors. Now credit insurance is more acceptable to banks for credit risk mitigation. Banks need support from credit insurers and should not be dependent on just one to maintain and grow their businesses, and if they are able to show that technology is in place to support credit risk management, this helps to oil the wheels of the deal.
Credit insurers are fully aware that where receivables financing divisions are already using technology solutions, they can quickly assess a client’s financial performance and make informed credit risk decisions, and this makes the relationship between the two much stronger. But there are many other benefits, including greater visibility across portfolios, the opportunity to make pre-sales processes more reliable and support for rapid decision making which leads to better customer experiences too. Technology solutions reduce the cost of take-on and compliance because they are able to provide a bridge between receivable finance companies and divisions and trade credit insurers in private, public and government export credit agencies.
There is an urgent and fundamental need to embed solutions that are dedicated to supporting processes and this can be done more quickly and effectively through digital transformation. Not doing this will see receivable finance divisions and companies suffer under the continued weight of heavy-duty, old-fashioned practices. Digital transformation is the key that will unlock the door to a new way of doing business and greater success.