It’s common knowledge that selecting the right servicing partner is critical in achieving success for any Fintech. What some people don’t understand in this sometimes volatile industry, however, is the importance of quality backup servicing.
The dynamics of backup servicing are steadily changing through technology, out-of-the-box thinking, and a keen focus on supporting our clients’ needs. To truly understand what is needed to create a reliable backup servicing contingency, it is essential first to define the role of a backup servicer:
A back-up servicer is a service provider who agrees to take over the servicing of a portfolio of assets on the occurrence of certain trigger events, most common the failure of the existing servicer to perform or the servicer’s insolvency.
This sounds simple, like a straightforward task – but it isn’t. The promise of being able to effectively take over the servicing of a portfolio upon a trigger event is not the same as actually having the experience, security, capacity, and infrastructure to correctly onboard and manage that portfolio in an expeditious and compliant manner.
"Relationships with marketplace platforms are equally important as they create strong working relationships across the platform operating a personnel and the backup servicer"
So, while every Fintech is different, below are some common factors to look for when creating robust backup servicing:
Would you hire a plumber to fix your air conditioner? Of course not. When looking for a backup servicer, asset experience matters. Companies historically focused on business loans, credit cards, or other asset classes will have systems, compliance programs, and people relevant to those assets. For a Fintech, business experience matters. Card experience works for cards. If you work with unsecured consumer loans, you will need a company experienced in that asset class. You don’t want your portfolio to be your backup servicer’s market entry point.
A reliable backup servicing program requires a servicer with the ability to scale up quickly. Servicers with a SaaS focused, cloud-based platform can scale up much more rapidly than a servicer still operating with in-house, proprietary systems. Too frequently, we see today’s Fintech platforms anchored to the past by legacy vendors with antiquated systems and processes.
Other factors also drive scalability. For example, does the servicer have the office space to accommodate an influx of additional personnel physically? Can the servicer hire quickly? Multi-location servicers have a natural advantage over those with a single location, as do services with areas where the hiring process can be accelerated. Servicers located in small labor markets often struggle to meet growth demands, even in regular times.
In the classic backup servicing arrangement, a servicer will take on as much backup servicing as it deems prudent. These relationships are often 30-day conversions with monthly file transfers. In the classic model, the loans’ owner is dependent on the backup servicer’s ability to either absorb the additional volume brought in by the backup servicing event or to quickly increase staff to meet demand. This is particularly clear in the rating process with its strong focus on full-time employees (FTEs) and physical space.
The best option is a large-scale, backup servicing arrangement. Just as the reinsurance industry evolved to provide risk management at the wholesale level, a large-scale backup servicer provides a “reinsurance” layer to cover catastrophic risk in the backup servicing industry. Whether through contractual arrangements with outsourced call centers and collection agencies or multiple location setup, these services can access thousands of agent FTEs while providing continuity of relationships in case of a backup servicing event.
Each backup servicing arrangement will have a contractual “conversion time” – the number of days that the backup servicer has to service the portfolio. But can the backup servicer make the conversion happen on time? Servicers with in-house, proprietary systems will have a challenging time meeting deadlines less than sixty days. Credit card focused servicers will need to wait for their next “window” with their platform service provider. More traditional entities such as big banks or large, legacy servicers will continue to move at a pace in keeping with their business. However, experienced backup servicers have a demonstrated ability not just to meet these conversion deadlines, but to beat them by a wide margin. In a situation where a platform suddenly goes away, the ability to move fast is critical.
Strong relationships are essential to backup servicers. Healthy, ongoing relationships with investors, warehouse providers, and other capital market participants build confidence that the backup servicer is ready and able to step in. At the same time, the backup servicer benefits from advance notice of potential upcoming events before formal notification. These relationships, usually across multiple marketplace platforms, create a cycle of information flow, and enable day-to-day operations to run smoothly.
Relationships with marketplace platforms are equally important as they create strong working relationships across the platform operating a personnel and the backup servicer. For larger platforms, these working relationships and departments are particularly important as they maintain information flow when dealing with a growing, complex portfolio and changes in process and servicing cadence. As with investor relationships, strong platform relationships are generally built across multiple investor programs. Healthy relationships also require a commitment to client service and a focus on meeting client needs.
Compliance is a rapidly growing focus in the Fintech industry. Ensuring that backup servicing is, and will be, compliant requires more than just meeting today’s regulatory requirements regarding consumer PII for storing backup data. In converting a client’s loan portfolio, the backup servicer becomes the successor servicer and will need to be compliant with all of the client’s regulatory and legal requirements. The servicer’s experience with similar assets is essential for this reason.
Fintechs can secure their business with high quality, experienced backup servicer. When searching for a resource to provide safety and security for your business, make sure you consider a backup servicer with experience in your asset class, the ability to scale up and respond quickly, a partner who has established investor and warehouse lender relationships and who maintains strong compliance and risk, management models.