As a guest columnist for the ASPstreet.com Web site, Richard Levy, president of commercial and wholesale lending, talks about the strategic role of application service providers. The following article appeared on ASPstreet.com in April 2002.
Most people think of an application service provider (ASP) primarily in terms of cost containment. They see ASPs as a good tactic to save money and keep staff requirements under control. They probably don’t consider how ASPs are starting to play a much larger and more strategic role in our economy, by encouraging competition and making more working capital available to America’s businesses.
Take banking as an example. Theoretically, financial reform has made America’s 9,000-plus banks free to compete with each other in most financial services markets. In actuality, the high cost of maintaining IT infrastructure has long limited competition in such critical markets as high-end commercial lending.
Industrial-strength commercial lending systems don’t come cheap. Systems that are robust, secure and flexible enough to syndicate and process large commercial loans have generally been too expensive for smaller lenders. So the market for syndicated commercial loans has been dominated by a few giant money-center banks headquartered in financial centers like New York and London.
For decades this centralized market structure worked pretty well. But as banks and borrowing corporations kept growing larger and larger, so did credit exposures. Along came Enron and the telecom bust, and suddenly the major players were stuck with billions of dollars in bad loans. The limited distribution of risk associated with these huge loans intensified the impact of these disasters and the resulting losses may still be slowing the pace of economic recovery in the United States.
The whole idea behind loan syndications, where a number of bankers and investors take participations in large loans arranged by one "lead" bank, is to distribute risk. But a bank that takes a piece of a syndicated loan must treat that piece like any other loan on its balance sheet. If it doesn’t have the software to do this, it can’t really operate in this market. In a very real sense the distribution of credit risk for large commercial loans has been limited by the cost of software.
The vast majority of the nation’s banks are regional and community institutions with loan portfolios tied to local economies. Disastrous weather in an agricultural area, a major plant closing in a small town and these smaller banks can experience their own localized versions of an Enron collapse. Many would like to diversify their loan portfolios and credit-risk profiles through greater participation in loan syndications, but cannot afford the IT capabilities necessary to play.
Here’s where the ASP option can really make a difference. By providing access to a major-league commercial lending system through an affordable ASP arrangement, a software developer can make it possible for smaller banks to participate in loan syndications. These banks may even arrange smaller syndications of their own and sell participations to other community financial institutions throughout the country.
The advantages of the ASP option aren’t limited to banks. Many manufacturing companies arrange financing for customers who buy their products. These asset-backed loans also require sophisticated software to originate and administer. ASP access to modern commercial lending software will allow these manufacturers to arrange financing packages more quickly, at less cost to themselves and their customers. As a result, both lender and borrower become more competitive. The ASP option may also allow smaller manufacturers to offer financing arrangements they couldn’t afford to offer before, thereby enabling them to compete for business previously beyond their reach.
For banks lending systems are mission-critical applications. These enterprises can and will rely on ASP arrangements to run mission-critical applications. As part of the process, they may also acquire the capabilities they need to compete in new markets. Increased competition means lower rates for credit, better distribution of risk and more growth and stability in the economy at large. When it comes to the financial sector, ASPs are clearly a win-win strategy for everyone.