To mark the upcoming Credit & Collections Management Conference,
June 3–5 in St. Petersburg, Florida, Equipment Leasing & Finance
reached out to a group of seasoned credit risk professionals to size up the current state of affairs and get their thoughts as to what the future holds for 2019 and beyond. Some of the prominent issues from 2018, like compliance, have become a function of doing business as usual, while new concerns have emerged. Key Equipment Finance’s Sarah Palmer, Marlin Business Services’ Lou Maslowe, Volvo Financial Services’ (VFS) Nicholas Jones and Wintrust Specialty Finance’s Chris Maudlin spoke to an array of issues, including the need to combat the intensifying threat of fraud.
As for the current state of affairs, the general consensus is positive. Maslowe sums it up, “I would say that overall credit performance is in a good place as delinquencies and credit losses remain at very acceptable levels.” As a captive, VFS’ Jones reports that credit and collections are actually very stable and performing at high levels. “That’s a good message to be able to deliver right now,” he adds.
For Palmer, the question that remains is not if
the cycle will turn, but when
it will turn. She says, “The slow growth in the economy has been continuing for a long time, and today we’re wondering when the other shoe is going to drop.”
Maudlin concurs. “We’ve been asking that question for a couple of years now. Given how long this cycle has lasted, we’ve seen a shift on the collections side. We’re asking ourselves, ‘Do we have the right staffing and systems in place?’ We’re not sure when it’s going to hit, but we’re working hard to make sure we’re prepared for it.”
Palmer notes some concerns on the horizon. She states, “Growing political risks, trade friction with China and increased debt costs in the form of higher interest rates are concerns for many credit professionals. These things add uncertainty because of the downstream effect they can have on credit quality.” At the level of industry trends, Palmer notes the following: “It’s worth mentioning that we experience continued pressure for more relaxed underwriting and looser documentation, and this is happening amid increased competition.”
So, what’s changed in the last year? Jones says, “Although we’re doing well, we’re keeping an eye on regional and global macroeconomics for potential changes in each market. With the portfolio stability we’ve experienced, we’re primarily focusing on raising our already high customer satisfaction levels by continuing to train and develop our employees. Our intention is to build an even stronger customer focus mindset through cross-training programs, particularly for early career professionals. We’ve always had a focus there, but we’ve been ramping up those efforts even more.”
We are looking into more ways we can use technology to identify and combat fraud.
—Sarah Palmer, Key Equipment Finance
Expectations for 2019 and Beyond
As they look to 2019, there are few expectations for significant shifts in the near future. Palmer states, “As far as portfolio performance goes, we don’t see anything directionally that is raising a red flag. My expectation is this will stay more or less the same as long as people in our industry maintain discipline and diversity in managing their portfolios.”
Maslowe agrees. “We’re cautiously optimistic about a continued healthy economic environment in 2019, which is key for us to continue to achieve our 20% annual growth objective.” Despite some economic headwinds—namely economists’ predictions for a downturn in 2020—Maslowe points to the fact that overall business optimism indices remain at near-record highs.
Maudlin adds, “I don’t think what you’re seeing with markets and the turmoil in Washington, D.C., is playing out in the same way on Main Street. I expect to see some deterioration in portfolios, although nothing at catastrophic levels. However, when you compare it with what we’ve been used to, it’s going to be a bit of a wake-up call for some institutions.”
[W]e’re prepared for any movement in the credit cycle whether it’s an upturn or a downturn.
—Nicholas Jones, Volvo Financial Services
Jones sees things similarly. He notes, “If we experience a macroeconomic change, I expect the collections environment will become more demanding as time goes on. But overall, our current expectation is that we will continue to experience competitiveness within a stable environment.”
He further notes, “In the transportation industry, there has been a backlog of new equipment orders, and it’s a bit too early to tell if that will level off as the year progresses. We will also have to wait and see how that will affect secondary market prices and used equipment values.”
With the overall sentiment being one of steadiness and stability, credit managers are still keeping an eye on emerging trends that pose future risks. Palmer says prudent credit managers may want to ask themselves the following: how well diversified are their portfolios and how prepared are they for any kind of slowdown? Moreover, what kind of threat will higher interest rates impose on consumers, and what will be the outcome?
Still, she says, skilled credit professionals can turn those challenges into opportunities with enough foresight. “If your portfolio is performing well, you might have the available capital and the ability to take market share in the event of a downturn while your competitors are struggling with other issues.”
Maslowe also focuses on the opportunities. “From a risk perspective,” he states, “a key challenge is always balancing growth with portfolio quality. An example of a key opportunity is leveraging the increasing amount of data available through third parties, whether it’s social media or credit data sources. We’re looking to incorporate additional data into our models, and to increase the use of risk-based pricing and behavioral scoring.”
Maudlin offers, “From a day to day standpoint, I continue to see credit teams being asked to do more with less—specifically, to make decisions with less information. I think it has a lot to do with heightened competition and the prevalence of alternative lending sources.”
Jones notes, “Even though the market has been stable for several years, we recognize it’s important not to become complacent. As such, we’re prepared for any movement in the credit cycle whether it’s an upturn or a downturn. As a captive, we are focused on Volvo Group customers, and we need to be there for them in good times and in more challenging times.”
From Maudlin’s perspective, bank-affiliated equipment finance companies are charged with finding ways to compete effectively with the independents while incorporating regulatory effectively and compliance requirements. He says, “Regtech was a term we were using at last year’s ELFA Credit and Collection Conference where we tried to tackle integrating all the different regulations and compliance requirements into a more streamlined process. The aim was to manage all of the pain on our side while the customer never feels it. I think this is a key challenge and the folks who are able to accomplish this will differentiate themselves from the rest of the pack.”
I expect to see some deterioration in portfolios… when you compare it with what we’ve been used to, it’s going to be a bit of a wake-up call for some institutions.
—Chris Maudlin, Wintrust Specialty Finance
As for the overall impact of compliance and regulatory matters, this panel has little to say beyond the fact that it’s a reality that’s here to stay. Palmer states, “It’s become a cliché, but it is what it is. There was some speculation that regulations would become more relaxed, but I’ve not experienced that. In the end, there is still a lot of time and effort, not to mention money, that is spent to make sure we’re compliant.”
Maslowe notes, “Over the past couple of years, things on the regulatory front have been more or less stable. The most significant regulatory issue getting our attention right now is CECL. With the Jan. 1, 2020 implementation deadline looming, it is one of our top priorities to make sure our CECL allowance methodology meets requirements.”
Beware the Bad Guys … A Lurking Concern
While delinquencies have remained at historically low levels and compliance matters stabilized, Maslowe is quick to point out an important shift in 2018 and going into 2019—fraud. He says, “This is the biggest change that stands out for me. In fact, fraud risk mitigation will be a session topic at the upcoming ELFA Credit & Collections Conference in June. Some of this has to do with the digitalization of our business with more applications coming in through online portals. The bad guys are learning new tricks, and we’re focused on combatting those tricks with tools like e-mail and IP address fraud risk assessment, as well as bank account payee validation to make sure lease proceeds are making it to the intended recipients.”
We’re looking to incorporate additional data into our models, and to increase the use of risk-based pricing and behavioral scoring.
—Lou Maslowe, Marlin Business Services
And to be sure, this is not solely a Marlin phenomenon, but one that has an impact industry-wide. Palmer states, “In terms of what’s in the forefront of my mind, we are looking into more ways we can use technology to identify and combat fraud. We are in an environment in which the bad guys are committing fraud in various ways—by hacking into systems and perpetrating corporate and personal identity theft. These days, not only do we have to be on top of the compliance and regulatory issue and expert at managing our portfolios, but also aware of a third arm of risk—combatting fraud.”
Behold the Brighter Side: Innovation
When it comes to new processes and procedures, all agree as to the importance of leveraging technology to simplify and enhance their customers’ experience as well as to improve efficiency and mitigate risk. Still, each of their institutions approach the issues at hand somewhat uniquely.
At Key Equipment Finance, Palmer notes, “Our quantitative analytics group is growing, and we are looking to reduce the time spent processing credit decisions. In addition, we’re looking at ways to improve our customers’ experience through the use of technology by offering self-serve options for their leases and loans. As an industry, if we’re going to compete with Fintech and other alternative loan sources, we need to offer more digital-friendly options.”
At Volvo Financial Services, one solution lies in collaboration. Jones explains, “Last October, we launched our ‘iLabX by Volvo Financial Services’ program, which provides entrepreneurial companies in Fintech and other fields with the opportunity to collaborate with VFS. We had more than 140 applicants apply for the program in 2018. A select group of those applicants met with us in January to present new ideas and ways of working in conjunction with VFS to enhance our customers’ experience as well as to drive business performance through digital transformation.”
For Maudlin and his colleagues at Wintrust Specialty Finance, the emphasis is on finding ways to leverage technology to be less intrusive, such as finding third-party data sources that are both trustworthy and accurate. He states, “These third-party data sources can play an important role in order to mitigate risk and to meet our day-to-day demands of doing business.”
Maslowe shares that Marlin has been at work on enhancing its capital markets function. He says, “This allows us to optimize the asset mix that we keep on our balance sheet. For example, we syndicate low-yielding business that’s at the top of the credit spectrum that fits better on a bigger bank’s balance sheet. Conversely, we have a syndication arrangement with a hedge fund to which we sell high-yielding business at the bottom end of the credit box, which is potentially too volatile for our balance sheet. This way we can satisfy all the financing needs for our dealer and vendor partners by approving applications throughout the credit spectrum.”
From fostering innovation to stay atop emerging credit risks and compliance and regulatory matters in a competitive environment, to optimizing efficiency and preparing for a downturn, there’s much to manage. For today’s credit managers, it’s all in a day’s work.
Don’t miss the 2019 Credit & Collections Management Conference, June 3–5 at the Hilton St. Petersburg Bayfront in St. Petersburg, Florida. For details visit www.elfaonline.org/events.