The world around us
The global economic growth is slowing, confidence has weakened and trade and industrial output have declined. In Europe, there are concerns over budget problems in Italy and the UK’s planned withdrawal from the EU.
The world is continually changing at a rapid rate, therefore the industry has to adapt and evolve quickly. In addition to new regulations and volatile market conditions, the increased digitalisation and automation of internal processes and client processes is in direct response to the changing expectations of customers. Responding to such needs was a major factor in the decision to merge ABN AMRO Commercial Finance and ABN AMRO Lease to form ABN AMRO Asset Based Finance (ABF) as a 100% subsidiary of ABN AMRO Bank, fully guaranteed.
Yet we’re never afraid to face the facts: one of the big changes for asset based finance is high levels of liquidity in the market, there is too much money around. Banks are chasing business borrowers with low rates, fuelled by quantitative easing (QE). Borrowers have the upper hand right now, especially compared to the years after the crash of 2008, when active lenders could perhaps afford to take a firmer lead. But that’s not always going to be the case.
Certainly if QE slows, throttling back liquidity and raising interest margins, we’ll see banks soften their search for yield, driving up the price of financing. But cheap money and a degree of complacency among many banks and businesses ought to have us all wondering: what’s next? And are we ready for change?
The big picture
There’s been clear uptick in VUCA (volatility, uncertainty, complexity and ambiguity) over the past couple of years. Brexit, the prospect of trade wars (and even real ones), rate-rises and technological change has made identifying and managing risks much tougher. It’s been a major factor in finance, too, especially longer-term facilities. We’ve seen a spike in the risk premium of financing on a five year plus horizon as a result of a VUCA. Of course there have always been economic cycles that play out.
But when we start to see more bankruptcies – of the kind we have seen recently – you know that the VUCA risks are starting to bite in real businesses, too. As specialist lenders – not just around invoice discounting, but also vehicles, stock and plant and machinery – we can help businesses secure a little certainty in amongst the chaos, by giving them access to finance quickly and reliably based on the assets already owned or providing finance to secure those assets. When opportunities arise, we know businesses need to act fast to invest in line with their commercial activities.
Additionally, we’ve seen a step-up in financial services regulation. Regulators have looked to strengthen protection for consumers and investors, and to ensure the long-term stability of the financial system. In recent years, we’ve seen new proposals on capital requirements from Basel IV and others. There have also been new regulations in data protection, as well as stricter rules on both the use of internal risk models and on financial reporting. We’re also stepping up customer due diligence – to help in the fight against money laundering and financial crime
However, that’s not the only way in which we need to respond to the shifting expectations of our society. The 2015 Paris Agreement calls on businesses to play their part in fighting climate change. Making a profit is no longer enough; society also expects companies to help tackle social and environmental issues. Financial companies have a role in mobilising resources to support the UN’s sustainable development goals and to help combat financial crime.
The goal must be to grow the portfolio in a client focused, scalable and most importantly sustainable manner. This means continuous innovation with digital products based on customer needs. If at the same time we can also help our clients in the transition towards a more sustainable business model, then we will be looking after the needs of our clients for generations to come.
Reinventing the customer experience
Of course – I think we all want to give clients fast, flawless service, a service that is right first time and every time. The goal has to be to take the hassle out of applying for finance, but an improvement in customer experience requires a continual investment in digitisation. With digital technology, clients expect quick, ‘frictionless’ service.
New technology, such as artificial intelligence and chatbots, will play an important role in the interaction with customers too. Service will improve and become more efficient; we’ve already seen this in the smaller ticket segment. The middle ticket market will no doubt follow when and where it feels right to do so. One thing is undeniable - data is becoming increasingly important in enhancing customer benefit and experience. The use of data will allow even greater improvements to products and services, allowing us to increase relevance and timing. There also needs to be more focus on ‘customer journeys’ – to ensure we all increase contact with our clients and better understand their needs. Those who fail to adapt with the changing landscape will struggle to survive.
A future proof industry
We want to build a future-proof bank; this means continuing to engage our employees, developing new skills and improving internal processes. It also means attracting new talent and investing in employee development. As part of this approach, we’re adapting our working environment. We are bringing on skills in areas like digital technology, analytics and sustainability – skills that are crucial to our strategy. This is part of a new, more agile way of working. Ultimately, we want to build a purpose-led organisation – one that encourages high performance, engages employees and allows us to attract the best talent.
I believe the next 10 years will witness further digitisation of processes, to create faster and more efficient customer service. In addition to delighting our customers it also assists to alleviate the enormous regulatory burden and pressure on margins. As an asset based lending (ABL) industry, we have been slow to make our mark, creating room for fintech disruptors and challengers – but in this lies opportunity. Fintechs and neobanks have been incredibly positive for the whole banking sector. We need to redefine our core operations to support changes in technological advances and meet customer expectations. Having fast-moving competition has really forced the ABL industry to up their game. It’s all about applying a new fintech philosophy driven by an agile working environment.
In addition, digitalisation will help to identify solutions towards mitigating the Basel IV securities (cost control or product development) that financial institutions will be required to adhere to.
Since the financial crisis, we’ve seen significant changes in capital rules for banks. Basel III, agreed in 2010, ties the amount of capital banks must set aside to the amount of risk on their books. New proposals from regulators mean, in future, we would have to use regulatory models for our calculation putting a higher risk weighting on part of our corporate loan books. Implementation isn’t due to begin till 2022 but we must all prepare by re-evaluating our products.
Supporting the transition to sustainability
We want to help our clients make the switch to sustainability. We see this as a business opportunity because we know our clients care about this too, but we know that, in helping our clients, we’ll also support the wider fight against climate change.
There is an acceleration towards the pursuit of the circular economy, where energy and raw materials are utilised with greater awareness and more efficiency. This requires changing from a supply chain that is based upon making, using and discarding products to a supply chain where one party’s waste is another party’s raw material. A circular economy reduces the risk of scarcity driving innovative use and reuse of energy, products, parts and raw materials. Through innovation and quality improvement, products have a longer useful life and a wider range of applications. Circular business models help to encourage innovation, a stable economy and a sustainable society.
The future is green
Our industry is facing challenges from economic and political developments, historically low interest rates, pressure on profits and increased social expectations. Underpinned by ABN AMRO’s excellent rating and outstanding capital resources, ABF has a strong foundation to enable us to take a longer term view towards a positive outlook for generations to come. Yet the entire industry must push ahead to invest in a long term IT and digital infrastructure, whilst working with clients to reinvent their customer experience. This does mean humans will be replaced, but also allows them to do what they do best, as people ultimately buy from creative, smart individuals. Yet there’s more we can do. If we could do all in our power to accelerate the shift to more sustainable business models as well, then that would be an excellent step forward.
This article was originally published in the World Factoring Yearbook 2019.