Having the right software in place can make the difference between success and failure in block discounting. Antonio Fabrizio assesses the market
Block discounting is currently suffering from a perceived “riskiness” that has caused a number of major finance companies to move away from the market.
However, if it the sector is to be revived, it will need to have decent software supporting it.
At the roots of block discounting there is a relationship between the block discounter and the finance company, and systems must reflect the needs of both parties in that relationship to be successful, experts say.
John Allen, formerly MD of Geoplex, which was acquired by Field Solutions earlier this year, says that the company’s Finlex is a finance administration system which can easily manage leases against block discounting funds.
According to Allen, who is now business development director at Field Solutions, there are two levels of system requirements to consider when doing block discounting.
He says that the small finance company has an internal requirement to report how much it intends to pay each month, and how this will affect its cash flow for its leasing deals, which usually vary between two and four years in length, and block discounting deals, which are paid off over three years.
“You have to balance your agreement covering that spread, otherwise you may end up with a period where you are paying out money to the block discounter that has a negative cash flow effect on you,” he says.
The other major requirement, Allen adds, is the ability to “audit information back to the block discount provider simply, reporting accurately […] and also clarifying within the system that agreements are only blocked with one person”.
NetSol Technology is another software company with a number of clients involved in block discounting.
Tony Langford, NetSol’s head of sales in the UK, points out that initial quality data capture is “the key starting point”.
“It’s important to be able to identify the types of deals being written, the client type, the finance product, the asset information, and everything else that will impact the decision as to whether a particular agreement is suitable for inclusion in the block,” he says.
As a consequence not all agreements will be suitable, because deals that are deemed “higher risk” will need to be identified and “filtered out” of block inclusion.
For Langford, equally important is that the system can work with “dynamic” blocks, so that an agreement that falls into arrears will no longer qualify for inclusion in the block.
The non-conforming agreement has to be identified and replaced with an “acceptable” agreement, which maintains the required security for the block discounter.
“The system should have a clear way of segmenting and identifying those agreements that comprise the block, allowing for multiple blocks,” Langford says.
One key factor is the capability to regularly verify the ongoing performance of block deals.
For that, there needs to be an audit process in place, which can be a burden, but can be made easier if a system is capable of reporting agreement performance.
GFKL’s UK subsidiary Virtual Lease Services (VLS) provides management and audit services for block discounting.
The company – which works with block discounters and audits for them the deals that are being managed by small finance companies – uses two systems for managing portfolios: NetSol’s LeaseSoft, and CHP Consulting’s ALFA system.
Its auditing job is to make sure that the deals that make up the block are still good deals – in other words, that they are not in arrears, that the customers are still paying, that the deals haven’t been terminated early, and generally that the whole collection and accounting mechanism is being managed correctly.
For Neil Richards, a VLS director, at the end of the day system requirements are as simple as those for a loan – something that is very straightforward in terms of accounting.
He adds: “From our point of view, what we want from our systems is that, if a client goes bust, we can take the portfolio on quickly, extract the data from both systems and upload them quickly.”