In the first article in a four-page report on IT systems in asset finance, Leasing Life and Invigors examine whether lessors are reacting to growing levels of bad debt with improved automated decisioning and single platforms
As a result of the financial crisis, lessors’ IT budgets are under pressure as never before. In last month’s Leasing Life/Invigors Business Confidence survey, 38 percent of lessors expected expenditure on IT to be reduced in the next six months with most predicting cuts of up to 25 percent.
So what are IT departments doing to respond to these budget pressures, and how has the financial crisis reshaped what IT investments are being made?
Interviews with bank-owned and independent lessors, pan-European and UK-based institutions, have showed that in the aftermath of the financial crisis, the back-to-basics approach of most lessors has meant that existing leasing systems are relatively well suited to the needs of the business since nearly all of these systems are mature and have evolved over a period of time.
However, away from the operational aspects of leasing there is much more emphasis on portfolio management, which is leading to a greater requirement for more, and better, information management (IM). This, in turn, is leading Chief Information Officers (CIOs) to invest in better analytic tools as well as technologies that reduce overall infrastructure costs.
Managing bad debt
The sharp increase in bad debt across the industry has brought a renewed focus on arrears management. Some lessors believe this is better managed at a customer level, rather than agreement or contract level.
After all, a leasing company will treat a customer with one out of four agreements in arrears differently to one where all four agreements are behind.
This highlights the importance of having a single view of customer. Previously a holy grail for customer relationship management (CRM), existing leasing systems provide this reasonably well, so is this a non-issue?
Not according to the CIO of one pan-European bank-owned lessor who cites two issues preventing lessors capitalising on a single view of customer – the number of product platforms and data quality.
For institutions with a mixed product base, for example small ticket, middle ticket, commercial mortgages with a mixture of loans, leases and instalment credit, there is always the temptation for the business lines to want a system that is a perfect match for each – the so called ‘best of breed’ approach.
The problem with this is incompatibility between the platforms resulting in islands of information.
To obtain a single view of the customer, this information has to be consolidated, and this requires costly integration tools and increases the complexity of an already complex IT infrastructure.
By contrast, adopting a single-platform approach enables a single view of customer to be built in from the start. Some also believe it also provides a better means of measuring (and hence understanding) the business, as there is a “single version of the truth”.
With multiple platforms there is always the risk of similar information being measured in slightly different ways, which makes consolidation more complex, whereas a single platform ensures there is no need for debate.
There are some downsides to a single-platform approach – it may mean that some products cannot be run on the system resulting in a market opportunity being missed and, across the product base, it will provide only a partial fit to the needs of the business.
However, the CIO of a UK-based lessor considers that its systems have coped with all the products that it needs to, that the fit to the business is “good enough”, and that any constraints imposed by keeping the IT infrastructure lean this way are more than outweighed by the benefits.
The challenge in achieving a single view of customer also involves data quality. While the old adage of ‘garbage in, garbage out’ is well known, ensuring that clean data is captured by the system in the first place is easier said than done.
Instilling the discipline of creating the single view requires systems and processes that minimise the risk of entering duplicate records.
Name and address checking at point of capture is commonplace using systems such as Experian’s QAS, but most lessors still rely on operator judgement in matching new to existing records.
Some lessors are taking this a stage further in removing the decision from the operator by using a new generation of software based on natural language processing.
To obtain a single view of the customer, this information has to be consolidated, and this requires costly integration tools and increases the complexity of an already complex IT infrastructure
These include specialist products such as HiQuality Suite and Data Improver from Human Inference, which also improve the standardisation and overall quality of customer data.
With underwriting policies being tightened across the board, automated decisioning is coming under the spotlight.
Again, it is not necessarily the processes adopted that are the issue, rather the data on which they are based.
Data from credit reference agencies is inevitably retrospective and can at best offer limited prediction of future customer behaviour.
This was acceptable in relatively stable economic circumstances. But the impact of the recession and the associated increase in uncertainty have made some lessors question the validity of historical financial data in the credit decisioning process.
Recently, Patrick Gouin, head of hi-tech at SG Equipment Finance, commented that in some instances lessors were “switching off” their automated decisioning systems in favour of reverting to manual underwriting.
While this may be practicable where volumes of new business are very low, in the longer term it is unlikely to be cost-effective for lessors operating in the high-volume, small-ticket business.
Analysis: Benefits of analytics
In these recessionary times lessors are investing in tools that help to highlight over- and under-performing parts of portfolios
Richard Ryan and Nic Evans