Published on 23 May 2008

In fact, one of the sessions at last year’s ELFA Executive Roundtable highlighted how there was too much cash chasing too few deals in our business. For many in attendance, the session’s title, As Good as It Gets, resonated soundly. Competition for every deal meant processing efficiency was the name of the game. With plenty of liquidity around, and if you were efficient, life was good.

What a difference a few months makes. Liquidity, or the lack thereof, has now become arguably the most significant challenge facing our industry.

The recent ELFA Investors Conference in New York brought the issue to the forefront, highlighting the liquidity challenges all firms are facing - especially those that rely on capital markets for their funding. Rick Wolfert, a senior advisor of Aquiline Capital Partners, LLC, opined during his presentation that investors in capital markets are demanding “more transparency and real collateral”.

Now, to be successful, you have to both operate efficiently and have access to capital. Life has gotten harder. In some cases, a lot harder.

The good news for the equipment finance industry is that technology providers are listening. Next-generation platforms are delivering transparency and opportunities for improved performance.

Transparency

In our industry – like virtually all others – the foundation for transparency and trust in financial statements is built on effective deployment of financial controls within the organization's business processes. The firm's various systems of record, including the origination and servicing platform(s), play a key role in deploying financial controls. In simple terms, when “much is known by many” regarding the processes and systems in place, transparency and a corresponding trust in financial transactions (and capital markets) is strengthened.

In recent years, improving systems, processes, and practices has been a significant undertaking by the equipment finance industry, both to assure compliance with government regulations – like Sarbanes Oxley and Basel II – and improve productivity and profitability.

However, for others in our industry, legacy systems and processes remain, given a lease of life by firms not subject to regulatory scrutiny or those that have more left to do.

Delivering Improved Performance

Can existing legacy platforms deliver both improved performance and transparency?

The answer may lie in a finding published in the most recent ELFA Business Technology Performance Index (BTPI). It reported that approximately 35% of respondents report that they will be undertaking initiatives to replace either their front-end (originations) or back-end (servicing) platforms within the next 18 months.

For those ahead of the curve, adoption of updated processing platforms are bringing necessary improvements in automation of both transparency and controls coveted by capital markets, while at the same time bringing significant improvements in business processes and efficiency.

How are next-generation technology platforms helping firms in the equipment finance industry? One way is by reducing or eliminating transparency inhibitors.

Eliminating Transparency Inhibitors

The following section is a summary list of common legacy practices that inhibit transparency in the equipment finance industry. It also features corresponding systems improvements that help improve transparency, controls and – ultimately – investor trust.

Transparency Inhibitors	Technology Improvements
Significant use of multiple platforms and off-system, user-maintained spreadsheets and/or databases, used as workarounds to remedy deficient legacy platform functionality.	Enhanced functional depth improves flexibility and eliminates use of off-system spreadsheets. Leases, loans (monthly and daily interest), and wholesale/inventory finance can now be originated and managed using a single platform.
Workflow deployed only partially in the organization. Undocumented business processes and workflow. Business processes/workflow where documentation is not kept current, or where actual practices diverge from those documented.	Transaction workflow is both comprehensive (e.g. end-to-end) and self-documenting by the origination and/or portfolio management system(s) through the use of process visualization. Process Visualization: A system-generated visual record of all workflows in use. It can referenced by both regulators and business process owners at any time.
Customer delinquency and exposure capture processes not aligned to the needs of the securitization and capital markets functions.	Systems are utilizing process visualization to improve understanding of system processes. Improved cross-system exposure capabilities (including in-process and approved transactions) using a single database (single version of the truth) for both originations and portfolio management. Deployment of graphical, visual business rule engine functionality.
Inconsistent use of standard asset descriptions in system(s) of record. Introduces risk and uncertainty in both the asset pool selection process and the corresponding assessment from rating agencies.	Use of predefined, parameterized asset catalogues during the originations process ensures consistent and correct asset descriptions are being used downstream. The catalogue is a visual record of asset description assignment.
'Back doors' in legacy platforms where the potential exists for users to make changes to transactions while bypassing systems.	New platforms are 'locked down', using a single point of entry and login-based role authority. All changes to the system, be it workflow-related or a modification to a customer record, can only be initiated by a sanctioned user. Changes are date and time-stamped with both the 'before' and 'after' modifications, and the person making the change. Audit reports are system-generated and provide a visual record of system changes.
An over-reliance on automated scoring models for credit adjudication, without adequate levels of human intervention. Static credit evaluation conditions that are difficult to update.	Process performance across all aspects of the system is managed through the use of business rules created, deployed, and maintained through the use of a business rule engine. Business rule engine-managed credit adjudication processes provide both a means to create or update a business rule and see a visual representation of same. Credit evaluation is condition-driven with increased opportunities for human oversight. Quick deployment of evaluation rule updates is possible using visual business rule engine editors.

Technology Improvements:

Enhanced Functional Depth

The days of maintaining separate leasing, lending, and wholesale finance origination and servicing platforms, and the complexities associated with maintaining multiple systems of record, are waning.

Next-generation platforms are now capable of handling any type of asset finance product, including monthly and daily interest financial products. Consolidated platforms enable both greater transparency and improved efficiency.

Process Visualization

The ideas that systems are “self documenting” and generate an on-demand “visual record” are evolutionary, if not revolutionary, examples of how systems improvements are making transparency inhibitors a thing of the past. This is done in new systems that utilize process visualization.

The example below shows how process visualization creates a visual record of any process workflow in the system. Authorized users can access views of all system workflows at any time (see A). Highlighting a specific workflow delivers a complete visualization of the process (see B).

The equipment finance company users get to see, own, and trust what is happening in the system. Regulators and the rating agencies are comforted knowing that all processes are both documented and maintained. Last but not least, investors win when the confidence of regulators, rating agencies, system users, and the company manifests itself in improved investor trust.

Single Version Of The Truth

The separate-platform scenario common to legacy environments (e.g. separate lease, loan, and originations platforms) means that multiple databases, including staging databases, are being used to store transaction and customer information. Multiple databases can mean multiple records for the same customer; records that need to be summarized and reconciled to gain an accurate understanding of exposure.

As mentioned earlier, next-generation platforms have evolved to manage all types of financing products, including leases and loans. In a single-system metaphor, all transactions are stored on single, rather than multiple, databases. Customer exposure calculations are simplified. A “single version of the truth”, the single database offers improved transparency and performance compared to a legacy, multi-platform, multi-database model.

Consistent and Correct Asset Descriptions

Inconsistent asset descriptions applied across the portfolio are the bane of any asset finance firm engaged in capital market activities. It is also an area where equipment finance firms, in the name of booking the deal quickly, can be remiss in the amount of care and control they place on ensuring asset descriptions are accurate.

Next-generation platforms improve transparency through the employ of automated asset catalogues working in conjunction with parameterized controls that ensure correct and complete asset descriptions are included in transactions.

Transparency – and ultimately investor trust – are optimized.

Single Point Of Entry

It should go without saying that documenting material changes to any system record, whereby the change is tracked and logged, should be a key control mechanism to any platform. However, even in today’s highly regulated, compliance-driven environment, some legacy platforms and processes are deficient in their controls – particularly financial processes that use a large number of spreadsheets or other external workarounds.

Next-generation platforms are locked down. Functionality improvements are taking spreadsheets out of the picture. There are no opportunities for uncontrolled workarounds and no changes, material or otherwise, can be made without an audit trail providing a quantum leap in both operating efficiency and transparency.

Business Rule Flexibility

What happens when an asset finance firm needs to make a change in an origination and/or servicing platform business process?

For firms using legacy platforms, processing changes can require customizations that take time to implement and require additional financial investment. Both the time and investment required to make a customization can act as a deterrent to any system change and encourage the use of transparency, inhibiting off-system workarounds.

Through the use of business rules engine (BRE) functionality, next-generation platforms are bringing greater degrees of flexibility with a higher level of financial controls.

BRE functionality is similar to process visualization in that both use visual methods to create, manage, automate, and document business rules.

A BRE visual editor similar to the example below can be used by company subject matter experts to construct and deploy new business rules using a “drag and drop” (see A) metaphor and real-time rule narrative feedback (see B). The same visual editor can be used to edit and redeploy existing business rules quickly without the need for costly or time-consuming customizations common to older, legacy-based platforms.

Looking Ahead

Will the equipment finance industry see a return to As Good As It Gets any time soon? When will liquidity make a comeback? Will equipment finance member firms continue to improve their productivity and efficiency?

Our industry is undergoing a period of rapid change. Investors and other interested parties are demanding higher levels of financial transparency than ever before. Liquidity will come back when trust is enhanced.

New technology platforms are making a real difference. The technology improvements summarized in this article represent only a partial list of the improvements that are present in next-generation platforms. The detailed examples of process visualization and business rules engine functionality are two visual examples of how technology is delivering both greater transparency and improved process efficiency.

When it comes to marrying transparency with improved performance, technology can make 2008 the year for “When Much Is Known By Many”.