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Securitization

Banks and fintechs must work together to push ABS sector forward

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As the risk outlook worsens, it is important that both groups join forces to help securitization stay buoyant

The banking industry must cooperate with fintechs in the securitization space to properly manage risk infrastructure as we enter a period of heightened volatility, market participants at IMN's ABS East conference in Miami said.

The dynamics of disruptive technologies mean that start-ups and banks alike are trying to find ways to come together and find balance. Recently, established banks trying to jump into the technology sector have not been as successful as they had hoped, and while fintech are at the cutting edge of technology, they too have not been able to break into the industry as quickly as they had hoped.

Fintechs, in particular, are at risk. Generally operating as start-ups with venture capital funding, they are likely to be among the most exposed as the market enters a downturn.

One analyst at a large US bank told GlobalCapital: “Fintech is very promising and interesting, but because there is not much history going into it in times of volatility it may not be as attractive for investors. It is the industry most at risk.”

To avoid the worst, these emerging technologies should harness the expertise of established banks, suggested sources.

The question is whether it is fintechs that are driving the older banks along into the new spaces, or whether the older banks with the customer base can provide new relationships that work for both sides.

Discussing who is likely to lead the charge in the next couple of years as conditions worsen, panellists at the Fintech Advancements in Structured Finance panel at the Miami gathering this week agreed: both sides must work together.

“There are a lot of opportunities for partnership,“ said Brian Herr, managing director of Exos Financial. “What we tried to do is apply the technology in house first and utilise our own capital, own businesses, but then we are absolutely open to the idea of partnering with other people and helping them with our technology.”

Other panellists agreed.

“It’s got to be balanced,“ said Sonal Patel, structured finance and capital markets issuer at Citibank. “We can’t overlook the risk and compliance oversight aspect of both, and that's going to drive a lot of the market and regulation across each of the institutions, especially across capital markets.

“As a consequence, some asset classes are going to be very risky over time. Strategic division between the tech side and the bank side is going to mean a process where each institution is going to understand its own risk appetite over time, so it is going to be balanced.”

Chicken and egg

Until recently, technological innovation has been something of a chicken and egg question. On one hand, leadership is required to support the innovation and development that can provide the internal ability to support dynamic product necessary to meet investors demand.

One use case of technology in securitisation is implementing blockchain into the securities process. One company looking to do that is Redwood Trust, a REIT that has spent much of the last year working the technology into based residential loan issuance.

“Ensuring that we're in a position to meet investor need as it as it emerges is important,” said Cara Newman, head of structured finance at the REIT. “We think that, as investors integrate blockchain into their business holistically, there will be a need to buy and trade securities in a tokenized form on the blockchain.

“It is one thing to develop the technology, but it does require a dialogue in partnership with investor side participants to make sure that we're building the right product that serves the needs that they are actually looking to fill.”

Fintechs' reliance on VC capital does mean that the next couple of years are likely to be quite uncertain, and it is unlikely that many have planned for a downturn. Banks, on the other hand, can rely on deep infrastructure and will be much less exposed. To ensure the future of technological progression in the ABS sector, the two must cooperate.

“There are some great products, some great technology, but they have to comply with the legal and infrastructure side, and then get funding where there's very complex business,” said Patrick Collins, managing director at Goldman Sachs. “The answer is probably a little bit of both. The user experience is what's going to drive people.”