Published on June 06 2008

This is especially true for firms that rely on the capital markets for funding. Investors are placing a much greater emphasis on transparency than ever before as they carefully scrutinize the balance sheets and business practices of both public and private asset finance firms.

The foundation for investor trust is built largely on the deployment of effective financial controls within the asset finance organization. A firm’s systems, including front-end origination and back-end servicing platforms, play a key role in this effort. Transparency and trust in financial transactions are strengthened when there are no obvious or hidden concerns regarding business processes and financial controls.

A significant push has been underway within the equipment finance industry in recent years to improve systems, processes and practices. In fact, according to the most recent Equipment Leasing and Finance Association (ELFA) business technology performance index, 35 percent of respondents said they will be replacing their front- or back-end platforms within the next 18 months.

Such efforts not only assure compliance with government regulations – like Sarbanes Oxley and Basel II – but also improve productivity and profitability. The new processing platforms also provide transparency and the financial controls coveted by the capital markets as they evaluate funding opportunities.

While next-generation platforms are gaining in popularity, legacy platforms still have a foothold in the market. Unfortunately, due primarily to their limited functionality, many of these older platforms feature transparency challenges.

The next-generation technology platforms available today, however, help minimize or eliminate these concerns. The following advancements featured on today’s next-generation technology platforms foster transparency:

Platform Consolidation The need for lessors and asset finance companies to maintain separate leasing, lending and wholesale finance origination and servicing platforms is quickly disappearing. Next-generation platforms provide much greater product coverage and end-to-end functional capabilities to handle virtually any type of asset finance product, including monthly and daily interest financial products. From an investor’s perspective, these consolidated platforms provide greater transparency and improved efficiency.

Workflow and Process Visualization

The confidence of regulators and rating agencies rises when an asset finance company’s business processes and related workflows are both documented and maintained. Next-generation platforms are “self documenting” and generate an on-demand visual record of any process workflow in the system. As a result, users see, own and trust what is happening in the system. This growing confidence in the organization’s business processes by all parties manifests itself in improved investor trust.

Single Entry Point

Any system of record should feature control mechanisms to document material changes. However, even in today’s highly regulated, compliance-driven environment, some legacy platforms and processes lack such controls. This is particularly prevalent among financial processes that feature a large number of spreadsheets or other external workarounds. Conversely, next-generation platforms are locked down. There are no uncontrolled workarounds and no changes – material or otherwise – can be made without an audit trail demonstrating an improvement in efficiency and transparency.

Business Rules Flexibility

For firms using legacy platforms, making a change to a business process requires customizations that take time to implement and often require additional financial investment. The use of business rules engine (BRE) functionality provided by next-generation platforms brings a greater degree of flexibility with greater financial controls. BRE functionality is similar to process visualization in that both use visual methods to create, manage, automate and document business rules. The same type of visual editor is used to edit and redeploy business rules quickly without the need for costly customizations common to older platforms.

Common Database

Multiple databases, including staging areas, are often used in conjunction with legacy platforms to store transaction and customer information. This approach often means there are multiple records for the same customer, sometimes making it harder to quickly gain an accurate understanding of its exposure and risk management. Next-generation systems feature a single database, making customer exposure and risk management calculations that much easier. This greatly enhances transparency and performance of the platform.

Accurate Asset Descriptions

One of the greatest headaches for asset finance firms, especially those that engage the capital markets, is the inconsistent use of asset descriptions in their platform(s). Many readily acknowledge they could do a better job in the care and control they place on ensuring asset descriptions are accurate. Next-generation platforms employ automated asset catalogs that work in conjunction with parametrized controls to assure all transactions use and include correct and complete asset descriptions.

Transparency Challenges of Legacy Technology Platforms	Transparency Enablers of Next-Gen Technology Systems
Multiple platforms and off-system, user-maintained spreadsheets and databases, used as workarounds to remedy poor functionality.	Enhanced functional depth improves platform flexibility and eliminates the use of off-system spreadsheets. Leases, loans and wholesale/inventory finance managed from a single platform.
Partially deployed Workflow; undocumented business processes.	Transaction workflow is both comprehensive (end-to-end) and self-documenting by origination or portfolio management system through the use of Process Visualization.
Customer delinquency and exposure processes are not aligned to the needs of the securitization and capital markets functions.	Improved cross-system exposure and risk management capabilities using a single database for both originations and portfolio management.
Inconsistent use of standard asset descriptions in systems of record.	Use of predefined, parametrized asset catalogs during the originations process. The catalog acts as a visual record of the asset description.
Legacy system “back doors” to bypass system controls.	New platforms are locked down, using a single point of entry and login-based role authority. All changes to system, whether workflow-related or modification to a customer record, can only be initiated by a sanctioned user. Audit reports are system-generated and provide a visual record of system changes.
Over-reliance on automated credit-scoring models; static credit evaluation standards.	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 rules engine. This tool manages the credit adjudication processes that provide both a means to update a business rule and see a visual representation of the same. Credit evaluation is condition-driven with increased opportunities for human oversight. Quick deployment of evaluation rule updates.

Reproduced by permission of the publisher.