Fintech is reshaping banking, although much investment to date has focused on making services more accessible to consumers. Real estate lending units within major banks are far from the cutting edge of innovation, industry players admit.
Within many real estate banking businesses, technology has not been prioritised. IT systems are often antiquated, with many relying on Microsoft Excel rather than bespoke software.
“Banks in general in Europe have not invested early enough in technology. Some couldn’t, coming out of the financial crisis, as they didn’t have the resources to invest in IT,” says one German real estate lender.
European Union banking rules treat software as a cost, rather than an investment. Every euro an EU bank invests in software needs to be backed with one euro of the most expensive category of funding – a significant disincentive for banks. However, regulators are considering changes. The European Commission will set up an expert group to assess, by Q2 2019, the suitability of the current framework for financial innovation.
The European Central Bank has also undertaken an audit of most of the large banks’ IT provisions, from data integration to sustainable IT systems, with banks responding through investment.
US investment banks and some commercial banks are starting to prioritise IT spending for their property lending units. The market’s more traditional lenders, including German banks, are catching up. Investment includes using technology to improve internal functions and working with – or buying – fintech firms active across a variety of functions, ranging from payments to lending.
Last October, Berlin Hyp became the lead investor in online real estate investment firm BrickVest, which is planning to launch a new debt platform through which banks can originate and syndicate loans with more transparency. The technology makes lending more efficient by enabling users to sign documents and manage contracts online. It also enables lenders to syndicate deals by matching bidders through a private stock exchange.
“It’s now more obvious fintech is encroaching,” says Thomas Schneider, founder and chief investment officer of BrickVest. “When we started, three years ago, fintech in real estate was perceived as being far from reality; banks now see that disruption to their business enables them to be much more efficient. The German real estate market is also extremely bullish so banks are originating a lot of deals and have more pressure on their loan books to relieve.”
The Netherlands’ ING Wholesale Banking announced in December 2017 that Annerie Vreugdenhil, its former global head of real estate finance, was to become head of innovation. “The drive to alter structuring and originating is not so pressing,” she says. “However, the back end of the process is starting to be done on platforms rather than relying on phone or fax. When book building capital markets deals as well as syndications, gauging investor demand to enable price discovery, it is useful for people to be able to subscribe to parts of loans and to share documentation.
“More and more credit processes are becoming automated, helping clients faster while reducing the possibility of errors.”
One initiative banks are working on is the development of online portals where real estate clients can monitor exposures and metrics such as covenants, to more effectively manage their debt portfolios. ING, for instance, owns a platform called Cobase, which offers a single point of access to all bank accounts. The platform is set to launch in June.
ING’s fintech strategy includes looking to buy fintech firms and form partnerships, as well as create its own ventures. “There is a lot of difference between banks but since last year we’ve spoken to many others that are looking into it, largely partnering with fintechs,” says Vreugdenhil.
Partnering or becoming part of banks can benefit start-ups. “Fintechs normally have great technology and a way of working faster, but they lack exposure to clients. The moment they get closer to disrupting banking services they need access to knowledge that banks typically have, with so much regulation to deal with in wholesale banking,” Vreugdenhil adds.
ING now has 140 partnerships with fintechs. In Spain, it partners with online lending platform Kabbage, combining the platform’s technology with its own knowledge and client base to finance local SME businesses in a proposition that has recently been rolled out to France and Italy.
“A customer gets a ‘yes’ or ‘no’ for a loan of up to €100,000 within minutes in a fully digital process in which clients give us access to their account data at all of their banks which we use for analysis,” explains Vreugdenhil. “Often, SMEs don’t have that much history and can find business plans difficult to write, but by looking at their payment history we can assess their liquidity and build a business model around it.”
Innovators from the fintech sector are creating platforms they hope will be adopted by banks as part of their real estate lending business. Online platform Cloudscraper is aiming to become a forum for the trading of assets, through which finance deals will also be conducted. One former high-profile real estate banker – Matthew Webster, formerly of HSBC – is the firm’s chief financial officer.
Typically, banks would rather partner with entrepreneurs, rather than build technology from scratch themselves. “As long as they can find a good partner, they are willing,” says Richard Belgrave, head of Europe at proptech firm, Leverton. This can be challenging, however, since few fintechs are yet fully regulated.
NEED FOR CHANGE
Banks’ organisational structure can mean they are slow to address change. With the sector fragmenting, challenger banks are prompting traditional lenders to future-proof themselves. Deals such as UK challenger bank Tandem’s recent purchase of money management app Pariti, for instance, puts pressure on commercial banks to ramp up their exposure to fintech so as not to be left behind.
“If banks fail to invest substantially in technology, the fintech world – which is much quicker – will steal a piece of their business,” warns the German lender.
As the make-up of the banking sector and the demographic of those leading it changes over time, innovation is likely to follow.
“You’ve got to look at the age of people that make up the board of decision makers within a bank; some don’t feel the pressure of succession,” says Belgrave.
It is early days for fintech within commercial real estate lending, with a handful of banks leading the innovation. The banking sector, as a whole, is under pressure to embrace technology and harnessing the progress being made by fintech start-ups is seen by many as the most effective solution.