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Standby Servicing For The New World

26 August 2021

By Owain Chambers, Product Owner – Standby Servicing, EQ Credit Services

Standby servicing has always been a somewhat overlooked niche in the credit services market – indeed many lenders today would rather not have to think about it, and many outsourced servicing and asset management businesses have less and less appetite for it.

Generally speaking, a standby servicer would be a requirement from the funder: any lender needing external funding would usually meet with an insistence that a standby resource be in place so that, should anything go wrong, customers can continue to be serviced, receivables collected and regulators satisfied.

Market changes

On the servicer side, it is interesting to see several names in outsourced servicing either backing away from certain standby contracts, or exiting the space altogether. This is perhaps because they believe that for a relatively low fee, the requirement to have resources and people on standby is not profitable for them. Also, the increased unpredictability of cataclysmic events makes the risk too unpalatable for some.

The reality, however, is that it is entirely possible – provided a servicer has the pre-existing scale and infrastructure – to make a standby servicing contract into a mutually profitable relationship and a rich seam of opportunity for new business.

Cold, warm and hot

Most credit markets recognise standby contracts according to the “heat” categories of cold, warm and hot. Cold standby contracts are relatively rare because they are based on an understanding that the lender is so well established or unlikely to go under (essentially too big to fail) that a backup servicing system is all but unnecessary.

Likewise, hot contracts are very rare because they assume that the lender is extremely likely to fall down and that emergency measures are imminent. For these risk levels, they would require a full team and platform on 48-hour standby, which would be prohibitively expensive.

The majority of the movement in the market, therefore, is in the warm standby contracts. We have rapidly grown our own standby book on this basis, standing behind billions’ worth of credit books from mortgages and SME lending to auto finance and peer-to-peer.

We send our own expert in to look at the entire business model, including assets, products, managers, operations, infrastructure, technology, applications that hold accounts and even a compliance review as added value.

Old v new

The traditional approach is to conduct a costly data mapping exercise up front and then migrate the entire operation onto the servicer’s system in the event of disaster. However, we have found that there is a far better method that delivers more value throughout the relationship.

Essentially, it is far preferable to be able to parachute a management team into a lender in need, rather than migrate everything out and into a new building at greater risk.

If the servicer gets the call to invoke the standby contract, it makes sense not to suddenly conduct a massive and high-risk data migration on day 30. By instead moving a management team into that business, we are able to do any necessary data migration needed further down line when we have a better understanding of the longer-term position.

At the beginning, instead of a data mapping exercise we recommend a discovery project. For one, this doesn’t distract the lender’s IT team away from their daily operations. Instead we send our own expert in to look at the entire business model, including assets, products, managers, operations, infrastructure, technology, applications that hold accounts and even a compliance review as added value.

Lenders love this approach because it is easy to buy, easy to consume, lighter touch, gives them genuine insight and de-risks the entire process. And of course, it puts the onus on the servicer, rather than themselves.

This can be done remotely too – now that sitting in other companies’ offices is no longer a given since the pandemic.

Standby for the future

When done well, we have seen time and time again that a standby servicing contract is a starting point for mutually beneficial and long-term relationships. Firstly, it allows like-minded servicers and funders to get to know each other. If the funder finds a servicer whose approach they like, they will know who to call every time they fund a new lender.

Such a relationship can position the servicing partner to become a partner of choice, to give advice on the marketplace and even to help source new funding arrangements – all the time growing to understand the lender’s business while providing a reliable, easy to consume, backstop behind the scenes.

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