Hardly Novel and Perpetually Important: Mitigating Risk in Wholesale Finance

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Published on

3/19/24

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In a world that is becoming increasingly digital, we all need to think about the best ways to mitigate risk in wholesale finance while taking advantage of rapid technical developments. It’s challenging to take a step back from day to day operations, or to shake things up when things ‘work as is,’ so we’ve put together some ways in which we think businesses can improve their bottom line while mitigating some key risks.

Cybersecurity Risk in Wholesale Finance

Proactive management of cybersecurity risk has become essential. Bad actors are constantly evolving at a pace that’s impossible to fully keep up with, and it’s necessary to take defensive measures in order to protect your customer’s data and assets. There are many things that you can do for your business and clients, and the investment is constant. Some examples include:

  1. Develop a strong network of firewalls, anti-virus software, detection systems, and internal controls
  2. Update your systems and software regularly - avoid End of Life designation and known vulnerabilities with software packages, etc
  3. Conduct regular security audits to identify areas of improvement
  4. Create an incident response plan - detection, mitigation, reporting, complete resulting action items
  5. Educate your team!!!! Phishing remains extremely popular, and controls around access can limit potential impact here

The other option would be to partner with a technology company who can help with the heavy lifting and provide an evergreen platform for you and your clients to remain protected.

Charge Offs

We all know about this one. Credit risk of counterparties is something our industry has had to navigate since the inception of credit itself - but how we manage it doesn’t have to be as reactive as it used to be.

The underwriting process is only as good as the data that is fed into it - objective and subjective. With a robust data collection process, and the ability to utilize AI & ML to further predict behaviors of people & businesses, the risk of default will be reduced. This is another thing that will likely be a buy instead of build decision, simply because lenders may not have the expertise to build out these models.

Advancements like open banking can now empower you to proactively identify end clients who may be struggling to meet their financial obligations. Instead of retroactively reacting to a NSF or missed payment, the right partners will be able to identify ‘riskier’ clients sooner - empowering you to get ahead of the issue and work with your client to come to an amicable resolution.

Operational Risk in Wholesale Finance

Relying on any sort of manual process is a great way to ensure your business struggles to scale, and foster the menacing growth of operational risk. Without the right investment in technology, wholesale financing is an extremely cumbersome business operationally. Title management, underwriting, audits, reconciliations, reporting, payments, and many other aspects of the business can quickly become overwhelming without automation.

Investing in a platform that will exponentially boost the productivity of your team, while mitigating risk, is an incredible way to bolster your business from multiple angles through a single investment.

Retention Risk

Customer experience goes a very long way in not only retaining customers and bolstering utilization of a line of credit, but also in building a strong reputation in the market while giving some wiggle room if terms need to change at any point. Transparency and efficiency are of paramount importance, and as this industry becomes more generally intelligent with tech and data - they will want the ability to access that data for the purpose of their own monitoring and reporting. Not to mention, it simply pays to have a great looking application, that’s also built with intuitive user flows, for customers to drive their business with. The right partner building the ‘apple iphone’ of wholesale financing will help you retain your clients.

Conclusion

There is never a shortage of things to consider when navigating the (sometimes) tumultuous waters of running a business. With these best practices in mind you’ll be better suited to take on the inevitable curveballs, and with the right partners you’ll be able to keep hitting home runs.

If you have a portfolio and are looking to upgrade how you operate, consider contacting our team of experts today to learn more about the best technology solutions for your inventory financing needs. We are proud to work with Sopra Banking Software to offer a comprehensive, trustworthy, and user-friendly loan management system.

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