The current credit crunch in the United States is becoming increasingly contentious. Fingers are being pointed in multiple directions. The problem involves ordinary citizens, commercial, investment and mortgage banks and the government. However, technology has reshaped the face of the corporate world in a positive way, but the misinterpretation and inefficiency of technology could be met with drastic consequences. The issuance of mortgage-backed securities (the foundation of this credit crisis), which was recklessly sold to the homebuyers, uses a credit assessment system to determine eligibility for these securities. While these securities were recklessly issued, the scoring assessment models were inadequate and as a result, have misled the banks by excluding a host of risk factors in the determination of the FICO score.
In the article titled “The reverse reengineering of risk”, Clark Abrahams explains a new credit scoring system used for evaluating credit risk - The Comprehensive Credit Assessment Framework (CCAF). The CCAF “uses advanced technology and a safe sound model to develop and validate scoring processes. It considers all primary credit factors and takes appropriate action relative to those assigned segments. It also monitors the implications of these actions in a comprehensive and efficient manner”. It does this and distinguishes itself from the old system in such a way that it considers secondary factors, such as good consumer behavior, which could include payment of utility bills. It also factors a borrowers capital. Borrowers with a lot of debt and a lot of capital will be placed in a different category as someone with a lot of debt and no capital. Next, cash basis customers who save will no longer have subtle terms compared to installment debt carriers. Bank balances and a history of deposited savings will now be built onto the risk model using the CCAF. In addition, the CCAF will now take action in each scoring segment that allows the lender to determine what loan product the borrower will be successful at paying off and what he or she could afford. Furthermore, it possesses a feedback mechanism that considers macro economic conditions in the society such as interest rates, unemployment rates, inflation and housing price escalation to determine who qualifies and under what condition. Finally, while the old system looks at the past, the CCAF looks at the future and determines the worst-case scenario when economic factors come into play. For example, if interest rates go up, the CCAF determines the lowest possible default a borrower can issue, considering the concomitant rise in inflation rate. This is a powerful tool for the risk management division of banks.
On the other hand, some may argue that this new system while building a lot of new segments and factors in its model could lead to unfair lending. This may be the case; however, it may be necessary in issuing complex and expensive securities, such as mortgage securities. This new system may be seen as non-profitable in the short run, but will allow stability in the long run. It will not just influence people on how to save and manage money, but will also influence banks to realize the necessary elements and conditions that allow for ability to buy a risky security. This new carefully developed credit model may not be the solution to prevent another crisis. Human factors also need strong attention. At the end of the day, the bankers themselves say whether a loan could be given or not, in which greed is a large component of their decision. Combining a sound judgment with a carefully structured credit risk model will prevent another sub prime mortgage crisis from happening and will also stress the importance of technology in the economy, especially in the banking industry.
http://www.americanbanker.com/btn_article.html?id=20080929C4VN8N2E&pagenum=1&numpages=3&showallpages=true
Wednesday, October 8, 2008
Could IT have prevented the Financial Meltdown?
As things for better or worse continue to unfold in the Financial Crisis, the feds and surviving financial institutions are working diligently to unravel the loans, MBSs, CDOs and other toxic investments that have come to surface over the past year. Which makes us wonder: Does the technology exist to do that? If it does, then wouldn’t this technology have been helpful in giving us some indicators that could have helped prevent the financial meltdown we are now seeing in world markets? As this article points out, things may not be that simple. The fact of the matter is that even with regulations such as SarbOx, there are currently very few regulations on the origination of loans and how they are broken up, resold and resold again.
Some Background
Though it may seem rudimentary, one of the fundamental factors leading to this crisis was debt discipline. The finance industry has an accepted principle that home seekers should provide a 20% down payment on their desired house and finance the additional 80%. When banks began taking the misstep of offering the customers 100-percent-plus variable mortgages without any security, they were abandoning that discipline which is a pillar of the credit system. However lending firms were not solely to blame here, the Financial institutions of this country, most of which have gone under or been bought out, took this ignorance of debt discipline to another level.
Though the buying and selling of pooled loans called Mortgage Backed Securities is nothing new, Fannie Mae was established in 1938 for this purpose, the complex financial assets that were being created by world financial institutions were of a kind which we have never seen before. Financial firms were cutting these loans into 5, 10 or in some cases 20 slices and reselling them to 5 or 10 different organizations, making it extremely difficult to track who was involved and who was taking on the risk. Again the slow movement away from debt discipline is evident.
In theory these financial institutions knew the risk they were taking on with each loan and had a way to gauge if they had enough liquidity to support then if they went south. But as indicated by this article, most firms geared their analytic scenarios to favor positive outcomes in order to justify keeping less money in reserves. Josh Greenbaum, principal at Enterprise Applications Consulting, is quoted in the article saying, "A large number of buyers of these kinds of instruments really didn't care about the value. They just wanted to flip it. A lot of people just didn't want to know."
Even in this oversimplified version of how the world landed in this financial crisis, the ignorance of debt discipline is everywhere. Don’t get me wrong, borrowing money is good. Highly leveraged firms have higher rates of return compared to those firms that chose a more conservation route. However it is expected of these financial institutions, which are trusted with so much of our economy’s money, that debt is taken on in a responsible manner. This means that every measure possible is taken to assess the risk of that debt and the possibility of default. This also means that these institutions should acquire debt that is for the long-term benefit of the company and that the it can be paid off if needed.
Back to the real Question
So now that we see where things went wrong, we come back to the question: Could we have used IT to prevent this financial meltdown? The answer is: Prevent the meltdown? No, but IT could have given us some bright red warning signs of what was to come. Had these financial service agencies drawn out a few matrices giving the ratios of their cash reserves vs. their debt, some telling answers would have be found. As stated in the article, this process generally goes slow and ends with numbers having to be manually entered into Excel.
There are however some other options, particularly Complex Event Processing (CEP) and Operational Business Information (BI). These systems can analyze massive amounts of transactions as the article explains, “100,000 messages per second with millisecond response time, triggering remedial actions by other systems. But they can also be slowed down and used by analysts as a decision support tool. Tools such as Aleri's Liquidity Management System already exist to help treasurers in global banks gauge their liquidity position in real time” So yes there is technology out there that could have helped our preparedness for crisis that was coming.
Where do we go from here? Better late than never!
One of the major concerns now, is that there is another bunch of mortgages that are coming up in 2010 and 2011. Though these mortgages are primarily not “sub-prime”, we cannot be sure how they will effect our financial institutions or the global economy. What should we be doing then? Companies now, having seen the devastation, should be using CEP and Operational BI to help predict how these mortgages will alter the global economic scene. They should be using their advanced IT capabilities to develop more complex and fine tuned models specifically for this cause.
As we move on from here, it is assured that the Government will impose an array of restrictions on the financial markets and institutions. There is no doubt that these will entail quite of bit of regulation designed to keep debt discipline in line. With a new set of rules to play the game by and some new technology to help us avoid repercussions from past mistakes, global market will being the long process of rebuilding the world economy.
"How IT could have prevented the financial meltdown." TMCNet.com 24 Sept. 2008. http://www.tmcnet.com/usubmit/2008/09/24/3669282.html
Some Background
Though it may seem rudimentary, one of the fundamental factors leading to this crisis was debt discipline. The finance industry has an accepted principle that home seekers should provide a 20% down payment on their desired house and finance the additional 80%. When banks began taking the misstep of offering the customers 100-percent-plus variable mortgages without any security, they were abandoning that discipline which is a pillar of the credit system. However lending firms were not solely to blame here, the Financial institutions of this country, most of which have gone under or been bought out, took this ignorance of debt discipline to another level.
Though the buying and selling of pooled loans called Mortgage Backed Securities is nothing new, Fannie Mae was established in 1938 for this purpose, the complex financial assets that were being created by world financial institutions were of a kind which we have never seen before. Financial firms were cutting these loans into 5, 10 or in some cases 20 slices and reselling them to 5 or 10 different organizations, making it extremely difficult to track who was involved and who was taking on the risk. Again the slow movement away from debt discipline is evident.
In theory these financial institutions knew the risk they were taking on with each loan and had a way to gauge if they had enough liquidity to support then if they went south. But as indicated by this article, most firms geared their analytic scenarios to favor positive outcomes in order to justify keeping less money in reserves. Josh Greenbaum, principal at Enterprise Applications Consulting, is quoted in the article saying, "A large number of buyers of these kinds of instruments really didn't care about the value. They just wanted to flip it. A lot of people just didn't want to know."
Even in this oversimplified version of how the world landed in this financial crisis, the ignorance of debt discipline is everywhere. Don’t get me wrong, borrowing money is good. Highly leveraged firms have higher rates of return compared to those firms that chose a more conservation route. However it is expected of these financial institutions, which are trusted with so much of our economy’s money, that debt is taken on in a responsible manner. This means that every measure possible is taken to assess the risk of that debt and the possibility of default. This also means that these institutions should acquire debt that is for the long-term benefit of the company and that the it can be paid off if needed.
Back to the real Question
So now that we see where things went wrong, we come back to the question: Could we have used IT to prevent this financial meltdown? The answer is: Prevent the meltdown? No, but IT could have given us some bright red warning signs of what was to come. Had these financial service agencies drawn out a few matrices giving the ratios of their cash reserves vs. their debt, some telling answers would have be found. As stated in the article, this process generally goes slow and ends with numbers having to be manually entered into Excel.
There are however some other options, particularly Complex Event Processing (CEP) and Operational Business Information (BI). These systems can analyze massive amounts of transactions as the article explains, “100,000 messages per second with millisecond response time, triggering remedial actions by other systems. But they can also be slowed down and used by analysts as a decision support tool. Tools such as Aleri's Liquidity Management System already exist to help treasurers in global banks gauge their liquidity position in real time” So yes there is technology out there that could have helped our preparedness for crisis that was coming.
Where do we go from here? Better late than never!
One of the major concerns now, is that there is another bunch of mortgages that are coming up in 2010 and 2011. Though these mortgages are primarily not “sub-prime”, we cannot be sure how they will effect our financial institutions or the global economy. What should we be doing then? Companies now, having seen the devastation, should be using CEP and Operational BI to help predict how these mortgages will alter the global economic scene. They should be using their advanced IT capabilities to develop more complex and fine tuned models specifically for this cause.
As we move on from here, it is assured that the Government will impose an array of restrictions on the financial markets and institutions. There is no doubt that these will entail quite of bit of regulation designed to keep debt discipline in line. With a new set of rules to play the game by and some new technology to help us avoid repercussions from past mistakes, global market will being the long process of rebuilding the world economy.
"How IT could have prevented the financial meltdown." TMCNet.com 24 Sept. 2008. http://www.tmcnet.com/usubmit/2008/09/24/3669282.html
IT in Banking
Banking is considered one of the most important sectors of the financial community and the economy. Banks eases the disparities between surplus and deficit units through the transfer of money and credit. The emergence of information technology has revolutionized the industry in a positive manner.
Subsequently, the dependency on information technology has strengthened and made banking ‘IT sensitive’; information technology continues to foster the industry’s growth and innovation. Despite the current financial distress and the gloomy economic conditions, financial sectors continue to invest in information technology. According to an article posted on the American Banker, a highly respected source in the banking and financial services sector, International Business Machines Corp recently acquired servicing deals with Allied Irish Bank, Standard Bank Group Ltd of Johannesburg, and the Bank of London and the Middle East PLC.
Accordingly, the strengthening of information technology in the banking industry is a growing trend. Financial analysts predict that banks will spend a total of $170 billion on technology in 2008. In my opinion, the present value of the cost appears relatively high given the extensive losses in the financial sector and the current economic state. However, it illustrates that the industry is planning for future success. A well organized and highly innovative company possesses a greater competitive advantage and captures larger profits and more growth. Some of the current financial distress is a direct result of mismanagement and flawed internal structures; therefore, utilizing innovative tools to internally restructure will improve efficiency and lead to success. For example, consolidating data and making it more easily accessible cuts cost and improves productivity. Ultimately, society is more heavily relying on information technology to modernize the business world and improve market efficiency.
The banking industry’s welcoming attitude toward information technology is a change from earlier decades. Previous research suggested that IT was perceived to have a negligible impact on banking. According to “Information Technology and Productivity Changes in the Banking Industry,” a study published in the Economic Note, a prominent source that discusses the latest developments in the banking, finance, and economics, the authors hypothesize and mathematically prove that productivity and profits rose and costs lowered once the industry fully acclimated itself with technology. The authors validly claim that previous studies failed to factor in industry related variables and the need for an adjustment period when they hypothesized that productivity remains unchanged after the inauguration of new technology.
The increasing trend toward IT dependency makes it difficult to imagine the business world existing prior to the creation of information technology. Subsequently, personal biases made it difficult to analytically evaluate the study. In my opinion, growing up during the IT’s coming of age makes me non-partial towards the subject matter; consequently, I was closed minded toward alternative hypothesis outcomes and unable to challenge the authors’ opinion.
However, I did have some apprehensions regarding the structure of the study. I was concerned about the subjectivity in the design; I thought is almost impossible to objectively assign numeric figures to factors such as efficiency. Slight miscalculations or errors in estimates can have serious consequences on the conclusion. In addition, I thought the conclusion was based on a limited sample. Although the authors included theoretical research from other studies, the empirical data was limited to Italian Banks. Despite factoring in economic variables, focusing on only one country’s banking industry narrows the scope and the results.
Although it is impractical to expect any one study to consider every effectual variable, the analysis appears to accurately factor in a number of the important ones, such as deregulation and macroeconomic shock. Ultimately, the authors’ conclusion was exactly what I predicted. IT tremendously impacted the banking industry’s productivity, profits, and costs. The authors accurately point out that previous studies failed to grant banks an adjustment period to acclimate itself with new technology. The implementation of IT involves drastic reorganization and proper training in order to benefit. In addition, the quality of output that resulted from the shift changed so tremendously that it was originally difficult to accurately measure. Although, the study is well developed and researched, I would go as far as to say that it is difficult to accurately place a number or percentage on the effects of IT; therefore, I believe there is possibility that the article undervalues the full impact.
Bills, Steve. "IBM Sees Three Foreign Deals as Promising Sign. " American Banker [New York, N.Y.] 17 Jan. 2008,13. Banking Information Source. ProQuest. 7 Oct. 2008
Casolaro, Luca. "Information Technology and Productivity Changes in the Banking Industry." Economic Notes 36:125 May 2007 43-76. 7 Oct 2008.
Subsequently, the dependency on information technology has strengthened and made banking ‘IT sensitive’; information technology continues to foster the industry’s growth and innovation. Despite the current financial distress and the gloomy economic conditions, financial sectors continue to invest in information technology. According to an article posted on the American Banker, a highly respected source in the banking and financial services sector, International Business Machines Corp recently acquired servicing deals with Allied Irish Bank, Standard Bank Group Ltd of Johannesburg, and the Bank of London and the Middle East PLC.
Accordingly, the strengthening of information technology in the banking industry is a growing trend. Financial analysts predict that banks will spend a total of $170 billion on technology in 2008. In my opinion, the present value of the cost appears relatively high given the extensive losses in the financial sector and the current economic state. However, it illustrates that the industry is planning for future success. A well organized and highly innovative company possesses a greater competitive advantage and captures larger profits and more growth. Some of the current financial distress is a direct result of mismanagement and flawed internal structures; therefore, utilizing innovative tools to internally restructure will improve efficiency and lead to success. For example, consolidating data and making it more easily accessible cuts cost and improves productivity. Ultimately, society is more heavily relying on information technology to modernize the business world and improve market efficiency.
The banking industry’s welcoming attitude toward information technology is a change from earlier decades. Previous research suggested that IT was perceived to have a negligible impact on banking. According to “Information Technology and Productivity Changes in the Banking Industry,” a study published in the Economic Note, a prominent source that discusses the latest developments in the banking, finance, and economics, the authors hypothesize and mathematically prove that productivity and profits rose and costs lowered once the industry fully acclimated itself with technology. The authors validly claim that previous studies failed to factor in industry related variables and the need for an adjustment period when they hypothesized that productivity remains unchanged after the inauguration of new technology.
The increasing trend toward IT dependency makes it difficult to imagine the business world existing prior to the creation of information technology. Subsequently, personal biases made it difficult to analytically evaluate the study. In my opinion, growing up during the IT’s coming of age makes me non-partial towards the subject matter; consequently, I was closed minded toward alternative hypothesis outcomes and unable to challenge the authors’ opinion.
However, I did have some apprehensions regarding the structure of the study. I was concerned about the subjectivity in the design; I thought is almost impossible to objectively assign numeric figures to factors such as efficiency. Slight miscalculations or errors in estimates can have serious consequences on the conclusion. In addition, I thought the conclusion was based on a limited sample. Although the authors included theoretical research from other studies, the empirical data was limited to Italian Banks. Despite factoring in economic variables, focusing on only one country’s banking industry narrows the scope and the results.
Although it is impractical to expect any one study to consider every effectual variable, the analysis appears to accurately factor in a number of the important ones, such as deregulation and macroeconomic shock. Ultimately, the authors’ conclusion was exactly what I predicted. IT tremendously impacted the banking industry’s productivity, profits, and costs. The authors accurately point out that previous studies failed to grant banks an adjustment period to acclimate itself with new technology. The implementation of IT involves drastic reorganization and proper training in order to benefit. In addition, the quality of output that resulted from the shift changed so tremendously that it was originally difficult to accurately measure. Although, the study is well developed and researched, I would go as far as to say that it is difficult to accurately place a number or percentage on the effects of IT; therefore, I believe there is possibility that the article undervalues the full impact.
Bills, Steve. "IBM Sees Three Foreign Deals as Promising Sign. " American Banker [New York, N.Y.] 17 Jan. 2008,13. Banking Information Source. ProQuest. 7 Oct. 2008
Casolaro, Luca. "Information Technology and Productivity Changes in the Banking Industry." Economic Notes 36:125 May 2007 43-76. 7 Oct 2008
In light of recent bank failures, Electronic Platform for CDS is proposed
In light of recent bank failures, Electronic Platform for CDS is proposed
By: Ryan Van Parys
At the urging of the Federal Reserve and SEC, a hedge fund in Citadel and a clearinghouse in CME(Chicago Mercantile Exchange) group have announced a plan for a joint venture which would introduce the first electronic exchange for Credit-Default Swaps which would bring standardization and improved liquidity to a market which is in part to blame for the current financial crisis. The market currently covers $55 trillion in assets and has been in part responsible for the demise of financial giants such as AIG, Bear Stearns, and Lehman Brothers.
Credit-Default Swaps are derivative instruments which act as essentially insurance for defaults on issued bonds, mortgages, and other leveraged securities. If, for example, Bank of America were to default on their corporate bonds tomorrow, bond holders would not get paid (outside of collateral), but CDS holders theoretically would get paid some sort of premium. Likewise, if Bank of America does not default, then bondholders get paid and the seller of CDS securities also gets paid (think insurance company). However, CDS markets in current form are unregulated over-the-counter markets (OTC’s) where it is uncertain whether or not the seller of a CDS is backed by any collateral, making the investments highly speculative in nature. In addition to the complexities involving the actual issuing, the pricing on CDS securities is often even more cumbersome. Currently, there are very few standardized pricing agencies for CDS, since the securities are traded over the counter; and since the price includes risk from default from the company, contractual obligations AND default from the seller.
In addition to the bad debt that CDS swaps have presented, they have also become particularly harmful to both the bond and equity markets. When institutional investors wish to understand the likelihood of default by a company, they often look to the CDS markets to see what interest rates CDS policies are currently demanding. In the equity markets this often causes downward pressure on stocks(especially in the current market), and in the corporate debt market it forces corporations to offer higher interest rates when issuing debt.
The article discusses how CME group and Citadel plan on launching an electronic exchange in early November where investors can trade anonymously with the advantage of standardized contracts, regulated pricing, and a clearinghouse which will guarantee payment on CDS securities. The move from an archaic over-the-counter system with many problems to an official exchange which utilizes regulation through technology will hopefully bring more transparency and liquidity to a market which desperately needs it. In order to encourage activity, the exchange is offering up to 30% equity and the ability to become market makers for current large institutional investors already entrenched in the CDS business. The new exchange also hopes to partner with other clearinghouse and pricing groups in order to bring more liquidity and standardization to the market.
While the market seems like the right thing to do for the economy, it is unclear as to whether investors of CDS securities will actually participate. Since the market is currently unregulated, the OTC market makes it easier for large investors to manipulate spreads and often lead to higher returns. However, Citadel has a very strong reputation in the CDS market and could very well draw many of the big names to the exchange. Regardless, the Fed has set up a meeting with CME, Citadel, and other companies considering starting their own CDS exchanges to discuss progress within the upcoming weeks.
The exchange introduced by CME and Citadel utilizes information technology in a number of ways. First, one of the main issues with the current CDS market is its lack of transparency and inability to collect off of a bad debt. With a new, highly automated electronic exchange being implemented, it will make it much easier for buyers and sellers to collect on their debt which, in some cases, has been outstanding for years. Additionally, the technological platform will make it easier for liquid assets to flow as spreads and contracts will be more standardized and research will be easier to come by. Finally, the electronic exchange will help liquidity in the market by providing open access to more buyers and sellers through the exchange. This will bring more competition to a market which is currently very exclusive.
While I do believe an exchange for the CDS market is a step in the right direction, it is unclear to me as to why this market is not currently regulated by the SEC or even Congress. From the articles I have read, it seems that they are not regulated because they are simply so misunderstood. I find that inevitably hard to believe as there is currently over 55 trillion dollars in debt outstanding with a high percentage of that number in absence of collateral. I think the federal reserve would like to do something about cleaning up the market, and the implementation of an exchange seems to be the first step.
http://www.247wallst.com/2008/10/what-a-cds-exch.html
http://www.forbes.com/markets/2008/10/07/cme-citadel-update-markets-equity-cx_cg_1007markets32.html
Tuesday, October 7, 2008
Syndicated lending declines as banks tighten credit facilities
The article talks about how the lending of credit facilities has decreased substantially in the United States as well as in Europe, the Middle East, and Africa (EMEA). While the slowdown has been substantially less in EMEA than in the United States it is still very prominent. Reuters Loan Pricing Corporation has said that longer maturities are the lowest they have been in 19 years and which shows that no one wants to loan for extended periods of time. The volume of three year loans has risen from 2007 to 2008 by almost four times showing that some of the loans are being shortened and not completely eliminated.
The article discusses the shorter loans, higher interest rates, and decreased volume in terms of numbers, but does not deal with the overall effect this will have on the companies. The first thought that comes to mind is that the holiday season is going to be rough on families because they might not have enough money for the usual travel and purchases that go on. This will return to hurt the stores because they rely on their holiday sales to pull them through. When holiday season comes into full swing it will be interesting to see the effects on the market. Current loans that have been taken out might not be able to be paid back thus making the credit situation worse; more companies may go bankrupt after the holiday season is over.
From the data it appears as though the tightening of credit lines is just starting to hit Europe and will most likely follow the same path that credit has in the United States. This will cause increasing problems for global corporations as their loans in other countries also get cut off. It will also hurt our economy as business overseas fall under because they won't be able to provide the United States with the imports that it usually takes in. This could be both good and bad for the United States because while it will decrease our reliance on other countries, it will probably also cause a rise in prices. Additionally, it might cause a slide back from the globalization that we have seen over the past few years during which economies were striving. Less companies will expand overseas in the coming years because they don't have the funds to do so which will, for the time being, stop the sending of jobs overseas. Globalization will have to be put on hold until companies are able to pay off their debts and banks increase their lending again.
The article discusses the shorter loans, higher interest rates, and decreased volume in terms of numbers, but does not deal with the overall effect this will have on the companies. The first thought that comes to mind is that the holiday season is going to be rough on families because they might not have enough money for the usual travel and purchases that go on. This will return to hurt the stores because they rely on their holiday sales to pull them through. When holiday season comes into full swing it will be interesting to see the effects on the market. Current loans that have been taken out might not be able to be paid back thus making the credit situation worse; more companies may go bankrupt after the holiday season is over.
From the data it appears as though the tightening of credit lines is just starting to hit Europe and will most likely follow the same path that credit has in the United States. This will cause increasing problems for global corporations as their loans in other countries also get cut off. It will also hurt our economy as business overseas fall under because they won't be able to provide the United States with the imports that it usually takes in. This could be both good and bad for the United States because while it will decrease our reliance on other countries, it will probably also cause a rise in prices. Additionally, it might cause a slide back from the globalization that we have seen over the past few years during which economies were striving. Less companies will expand overseas in the coming years because they don't have the funds to do so which will, for the time being, stop the sending of jobs overseas. Globalization will have to be put on hold until companies are able to pay off their debts and banks increase their lending again.
What's Ahead In Business Credit Technology
What's Ahead In Business Credit Technology?
Tom Diana. Business Credit. New York: Oct 2006. Vol. 108, Iss. 9; pg. 32, 2 pgs
Technology has played marvelous innovations in the financial industry for the last 20 years. Today, business professionals have a wide range of financial tools for credit scoring, collections and obtaining credit information from potential customers. New and improved internet and software have revolutionized the financial industry. A major change that we are experience in the 21st century is the process of automation in the credit firms. This is primarily due to the advancement in technology. Powerful software has been developed to facilitate various functions in the financial industry. One of the most unique features of this improvement is the ability to integrate technology into credit scoring. Credit scoring represents the creditworthiness of a person calculated based on the information maintained by the major credit bureaus such as Equifax, Experian, TransUnion and Innovis. These independent credit bureaus electronically maintain a history of consumer’s payment record, control of debt, credit inquiries made by other lending institutions, outstanding amount of debt the person is obligated pay and the time-span of each account the consumer has. As a result, lending institutions now have the capability to electronically report and access a person’s credit history retained by these credit bureaus within few minutes and decide whether they can extend a line of credit to that person within very short time.
One of the most unique features of development of new and improved credit management software is their ability for firms to use them to gain a proprietary advantage over their rivals. Financial industry is seeking a cost advantage by managing their IT resources more effectively. This extends from developing new software or improving their current software, outsourcing or even using remotely-hosting their software. This article explains the benefits of remotely-hosted software in the credit industry, rather than software installed on a company's own servers. According to this article, Michael Banasiak, President of Predictive Metrics, believes in cost advantages of outsourcing the hosting and maintenance of software to companies that specialize in that service. He says "It becomes more efficient. We outsource tasks in which we are not experts; it provides an economic edge."
As IT enables these changes, it creates a competitive credit market and the competitiveness ultimately benefits the consumer by lowering prices. Today, consumers have the capability to get unlimited access to his or her credit repot and monitor them real-time just by paying fraction of the money they would have to pay few years ago. Technology has created a gateway for other firms to look into new forms of business with the credit industry. Business like real-time credit monitoring, scoring and identity theft protection didn’t exist few years. It is because of technology that they are becoming more and more profitable today.
Tom Diana. Business Credit. New York: Oct 2006. Vol. 108, Iss. 9; pg. 32, 2 pgs
Technology has played marvelous innovations in the financial industry for the last 20 years. Today, business professionals have a wide range of financial tools for credit scoring, collections and obtaining credit information from potential customers. New and improved internet and software have revolutionized the financial industry. A major change that we are experience in the 21st century is the process of automation in the credit firms. This is primarily due to the advancement in technology. Powerful software has been developed to facilitate various functions in the financial industry. One of the most unique features of this improvement is the ability to integrate technology into credit scoring. Credit scoring represents the creditworthiness of a person calculated based on the information maintained by the major credit bureaus such as Equifax, Experian, TransUnion and Innovis. These independent credit bureaus electronically maintain a history of consumer’s payment record, control of debt, credit inquiries made by other lending institutions, outstanding amount of debt the person is obligated pay and the time-span of each account the consumer has. As a result, lending institutions now have the capability to electronically report and access a person’s credit history retained by these credit bureaus within few minutes and decide whether they can extend a line of credit to that person within very short time.
One of the most unique features of development of new and improved credit management software is their ability for firms to use them to gain a proprietary advantage over their rivals. Financial industry is seeking a cost advantage by managing their IT resources more effectively. This extends from developing new software or improving their current software, outsourcing or even using remotely-hosting their software. This article explains the benefits of remotely-hosted software in the credit industry, rather than software installed on a company's own servers. According to this article, Michael Banasiak, President of Predictive Metrics, believes in cost advantages of outsourcing the hosting and maintenance of software to companies that specialize in that service. He says "It becomes more efficient. We outsource tasks in which we are not experts; it provides an economic edge."
As IT enables these changes, it creates a competitive credit market and the competitiveness ultimately benefits the consumer by lowering prices. Today, consumers have the capability to get unlimited access to his or her credit repot and monitor them real-time just by paying fraction of the money they would have to pay few years ago. Technology has created a gateway for other firms to look into new forms of business with the credit industry. Business like real-time credit monitoring, scoring and identity theft protection didn’t exist few years. It is because of technology that they are becoming more and more profitable today.
What's Ahead in Business Credit Technology?
This article does not deal with credit in the banking sense, but instead refers to business credit, which usually involves one business giving credit to another business that seeks to purchase products or services from the former. Similar to banks, many businesses have credit departments that use specific technology for credit scoring, collections and assessing risks in issuing credit. What this article focuses on are the foreseeable advances and innovations in technology for the business credit sector.
The author starts off with the usual benefits that can be gained from applying technology – cost-savings, speed, efficiency and interoperability between systems and departments. Considering the publish date of the article (October 2006), all of these benefits appear today as both taken for granted and applicable to any business department, not just the credit one. However, in my opinion, the article provides one exceptional insight into the future workings of credit departments and perhaps the credit industry as a whole – the utilization of Web 2.0 capabilities in issuing credit.
There is no specific mention of Web 2.0 (probably because the name was not used very broadly in 2006), but two of the interviewed executives – Joshua Burnett of 9ci, Inc. and Michael Banasiak of Predictive Metrics, discuss the enormous potential for credit departments in online collaboration and data and information sharing between users in businesses – two of the main characteristics of Web 2.0. The article even goes as far as saying that social networking groups like MySpace and LinkedIn would eventually evolve within the credit industry (CreditBook.com or CreditBlogSpot.com anyone?).
It is interesting to try and estimate some of the benefits from such interconnected groups. Among the obvious benefits is that businesses will be able to share information on credit-worthy customers and at the same time warn each other of risky ones – a sort of eBay-rating-like system. Additionally, the consolidation of information among many small businesses will begin to rival that of major banks and institutions, thus empowering such credit networks to rely less on the expensive proprietary information of others and to protect themselves from the inaccuracies and anachronisms that are sometimes inherent in external data sources.
According to the article, the impact of these collaborative business networks would be felt most noticeably at the small business level. Nevertheless, given the current financial situation in the country, one could wonder whether the existence of enough shared data between banks and lenders could have mitigated the effects of the subprime crisis by providing more comprehensive risk assessment capabilities.
And on a final note, there is always the threat of having too much information in one place, even if it is accumulated by many sharing entities. Many people would probably dislike the idea of having their future car dealer know about that one time their credit card was rejected at the restaurant, just as businesses would dislike the idea of not being able to start off with a “clean slate” when they go to a new lender. But then again, all that is probably already stored in a database somewhere, just as this innocent little blog post will be.
Main Article: What's Ahead in Business Credit Technology
Author: Diana, Tom
Publication Title: Business Credit. New York: Oct 2006. Vol. 108, Iss. 9; pg. 32, 2 pgs
ISSN: 08970181
ProQuest document ID: 1150835061
Document URL: http://proquest.umi.com.proxyau.wrlc.org/pqdweb?did=1150835061&sid=1&Fmt=4&clientId=31806&RQT=309&VName=PQD
Database: ProQuest, Banking Information Source
The author starts off with the usual benefits that can be gained from applying technology – cost-savings, speed, efficiency and interoperability between systems and departments. Considering the publish date of the article (October 2006), all of these benefits appear today as both taken for granted and applicable to any business department, not just the credit one. However, in my opinion, the article provides one exceptional insight into the future workings of credit departments and perhaps the credit industry as a whole – the utilization of Web 2.0 capabilities in issuing credit.
There is no specific mention of Web 2.0 (probably because the name was not used very broadly in 2006), but two of the interviewed executives – Joshua Burnett of 9ci, Inc. and Michael Banasiak of Predictive Metrics, discuss the enormous potential for credit departments in online collaboration and data and information sharing between users in businesses – two of the main characteristics of Web 2.0. The article even goes as far as saying that social networking groups like MySpace and LinkedIn would eventually evolve within the credit industry (CreditBook.com or CreditBlogSpot.com anyone?).
It is interesting to try and estimate some of the benefits from such interconnected groups. Among the obvious benefits is that businesses will be able to share information on credit-worthy customers and at the same time warn each other of risky ones – a sort of eBay-rating-like system. Additionally, the consolidation of information among many small businesses will begin to rival that of major banks and institutions, thus empowering such credit networks to rely less on the expensive proprietary information of others and to protect themselves from the inaccuracies and anachronisms that are sometimes inherent in external data sources.
According to the article, the impact of these collaborative business networks would be felt most noticeably at the small business level. Nevertheless, given the current financial situation in the country, one could wonder whether the existence of enough shared data between banks and lenders could have mitigated the effects of the subprime crisis by providing more comprehensive risk assessment capabilities.
And on a final note, there is always the threat of having too much information in one place, even if it is accumulated by many sharing entities. Many people would probably dislike the idea of having their future car dealer know about that one time their credit card was rejected at the restaurant, just as businesses would dislike the idea of not being able to start off with a “clean slate” when they go to a new lender. But then again, all that is probably already stored in a database somewhere, just as this innocent little blog post will be.
Main Article: What's Ahead in Business Credit Technology
Author: Diana, Tom
Publication Title: Business Credit. New York: Oct 2006. Vol. 108, Iss. 9; pg. 32, 2 pgs
ISSN: 08970181
ProQuest document ID: 1150835061
Document URL: http://proquest.umi.com.proxyau.wrlc.org/pqdweb?did=1150835061&sid=1&Fmt=4&clientId=31806&RQT=309&VName=PQD
Database: ProQuest, Banking Information Source
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