Even after years of cost cutting, banks could still be much more efficient if they would only share more utility back-office infrastructure. It’s a simple idea: hard to do in practice.
The chief executive of one leading European bank tells Euromoney: “I believe the way to launch them is in-country, beginning with one partner and then attracting others, rather than by trying to start a shared utility with four or five banks from the outset.”
In May, Finastra – the big provider of next-generation open-source software to financial services firms spanning retail banking, transaction banking, lending, and treasury and capital markets – offered an example of how this might happen.
The company had announced in October that NatWest would be the first bank to integrate its blockchain-based Fusion LenderComm platform to handle all the communication between an agent bank on syndicated loans and the often-large number of lending banks.
Fusion LenderComm had been incubating inside Finastra since 2016. It operates on the R3 Corda blockchain platform. In May, three more banks came on to it, all of them French: BNP Paribas, Natixis and Société Générale.
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Grant Jones, |
Grant Jones, vice-president of Fusion LenderComm at Finastra, talks Euromoney through the project’s journey to this point and provides some suggestions of how it might grow from here.
“We know the syndicated loans market very well,” he says. “For a long time, participants have identified it as a quite inefficient business that technology could improve. The fax machine was superseded years ago, yet this is a market that still sends 19 million faxes a year, albeit these days usually attached to emails.
“Agent banks need to communicate frequently with an often large and changing pool of lenders on a credit. But agents often send very specific messages, for example on collecting payments for delivery to the borrower, on interest falling due, perhaps on a rollover or a suggested documentation amendment.”
While an agent may send those messages with nuggets of new data to hundreds of lenders, none of them has a single view of the whole loan. A small number may make mistakes in inputting new data – recording data digitally when a loan closes, but receiving updates in analog form that have to be re-inputted – and then there are more queries and reconciliations.
Jones says: “The industry has looked at having a centralized database, but most of this information is proprietary and should be accessible only to lenders in the specific loan. It’s a complex problem.”
We have a roadmap. We have ringfenced LenderComm to keep up the innovation culture
– Grant Jones, Finastra
He suggests this technology promises to be the right solution for changing the way agent banks and lenders communicate, without altering other workflows.
“It allows lenders a whole view of real-time data on their loan and removes the operational risks that come with periodically changing data through a digital-to-analog-back-to-digital process,” Jones says.
“For agent banks, it eases capacity constraints. They often have very large teams just answering mundane queries from lender banks on updates on syndicated loans. And this burden is only increasing.”
He adds: “In the US, for example, instead of hundreds of participants, a loan might have a couple of thousand including non-bank asset managers. Now suddenly lender banks will be able to self-serve on incorporating new, reliable digital data.”
Borrowers don’t have to do anything to enable this to happen and they might benefit if the costs of servicing loans come down for agent banks and this is shared with customers.
Jones says: “I was looking at one bank’s internal case study for using this technology, which talks about a 90% reduction in labour costs for lenders and a reduction for agents of 66% in the labour costs of managing the syndicate, including distributing information and resolving queries on a loan.”
‘Unique opportunity’
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Philippe Boulas, |
Philippe Boulas, global head of corporate banking operations at BNP Paribas, says: “We have been fully supportive of the Fusion LenderComm initiative since the beginning, as it prompts the major players of this industry to work together and improve the service we offer to our borrower-clients in terms of quality, reducing delay and costs.
“With the creation of this community and a collaborative mindset, we have a unique opportunity to tackle the operational pain-points we have all been experiencing for years and that constrain syndicated loan market expansion.”
Like all new technology solutions, LenderComm will only succeed if a critical mass of agents and lenders join the system, and it achieves a network effect, whereby agent banks can tell lenders that they need to be on the system because that is the way information will be communicated.
However, banks have cyber security teams and digital architecture groups that must be convinced of any new technology.
Finastra’s Jones says: “We looked at different blockhains and came to the conclusion that R3 Corda was the only such enterprise-grade technology with security that we could take to the banks and that they would find robust and adoptable.
“A lot of banks are using R3. They have experience with it and as there are more and more pilot projects and a few in production, I have sensed a shift on distributed ledger in the last year to a much broader acceptance among banks.”
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Frédéric Dalibard, |
Frédéric Dalibard, head of digital for corporate and investment banking at Natixis, agrees.
“R3’s Corda is the perfect technology to enable the sharing of information between agents and lenders on a need-to-know basis while being fully compliant with our stringent IT security policies,” he says.
Growth
How does the network grow? It’s noteworthy that the first group to join after NatWest were all French. It might proceed in clusters.
Jones says: “I was in Paris recently with three banks in the room and two more on speaker phone and it is very rewarding to work with banks that now want very proactively to work with each other.
“We have another bank in user-acceptance testing that is a top-10 global player in this business. We have been very active in Germany, where there are a couple of very strong agent banks and then a next tier of large lenders.”
He adds: “That’s a nice kind of community for us to address. We have met four of the top five Australian banks, who all seems to get it and will talk about moving forward together.”
However, banks each move at their own pace. Banks were talking about syndicated loans on blockchain four years ago, yet the first was only launched that way in November with BBVA leading a €150 million multicurrency deal for Red Eléctrica.
Initial excitement over blockchain’s potential can quickly give way to disappointment. There was much noise two years ago over secondary loan trading on blockchain on Synaps, a joint venture between Ipreo and Symbiont. Not much has been heard since.
“We have a roadmap,” says Jones. “We have ringfenced LenderComm to keep up the innovation culture.
“A next step might well be to move into secondary loan trading, where there is a need to fix the high costs associated with settlement, and address the long delays between trade date and transfer of ownership.”
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