AFS Level III Retirement: How Well Are You Positioned?€¦ · might include role re-design, centers of excellence, right-shoring, process enhancement through Lean Six Sigma, and

AFS Level III Retirement:HOW WELL ARE YOU POSITIONED?

Nearly a year has passed since Automated Financial Systems, Inc. (AFS) announced the 2021 retirement of its venerable AFS Level III commercial loan accounting and servicing product platform. We view this event as a momentous opportunity for lenders to transform links in their value chain subjected to historical underinvestment. However, this event also poses risks to lending operations and technologies that have been relatively static and stable for decades. And, the clock is ticking. Lenders must act quickly yet comprehensively to achieve success in this journey. To help you navigate this opportunity and maximize outcomes, we present the state of industry readiness for this transition. We also offer six actionable insights that you should consider as you address the early stages of this change event.

How will you respond?

Six key observations to help commercial lenders navigate AFS Level III retirement

2 AFS LEVEL III RETIREMENT: HOW WELL ARE YOU POSITIONED?

Figure 1. Number of impacted lenders at varying stages of market response Where they are in transitioning from AFS Level III to a new platform

Nearly two dozen lenders in the U.S. are impacted by AFS’ decision, most of which have used Level III reliably since the 1980s. Despite the surprise timing of this announcement, most lenders are treating the enforced change as a monumental opportunity—particularly in light of historically low investment in loan operations—and are acting aggressively to address it.

At the end of 2019, one-third of impacted banks had selected their target platform(s) and had started their implementation. An additional 25 percent are positioned to select their platform in the next few months. In general, global banks are leading the pack, super-regionals tend to be fast followers, and regional lenders are trailing (Figure 1 overleaf).

OBSERVATION 1

Lender response has been more aggressive than anticipated.


Source: Accenture Research

Building Momentum

Platform Selected

Platform Under Selection

Intentionally Delayed

Delivery Underway

Lagging Lagging LeadingOn Par On Par


CASE IN POINT:

50%of AFS Level III customers have in-flight loan origination system (LOS) replacements

What is causing the delay among the lagging banks? The primary factor was the lack of budget allocation in 2019, exacerbated by competing investments within the origination and portfolio monitoring steps of banks’ value chain.

Why is haste important? Lenders that move quickly will win the war for talent. Due to the lack of historical investment in this space, skilled resources are scarce; captive IT organizations, platform vendors, and system integrators have limited capacity to satisfy the upcoming surge in resource demand. Regionals and super-regionals have a diminishing opportunity to get ahead of the curve and, so, must act quickly.

OBSERVATION 2 Slow-moving banks are in jeopardy of missing the 2021 deadline.Servicing platform vendors are promoting 12 - 18 month replacement timeframes. That feels aggressive but achievable, particularlyfor smaller, “vanilla” lenders. Our case studies suggest that 18 - 24 months is more realistic, particularly when accounting for vendor selection, contracting, and mobilization activities that precede the start of platform delivery.

AFS Level III retirement is not the only major change ahead for the industry. Complicating matters is the reality that other priorities, such as the London Inter-bank Offered Rate transition, preparation for negative interest rates, and in-flight investments in LOS platforms will compete for the same financial and human capital.

The implication? Waiting beyond the first quarter of 2020 to begin your platform journey puts you at risk of not completing the transition by the 2021 AFS deadline. This could result in increased Level III maintenance costs, unless you reach an alternative support arrangement with AFS. Furthermore, lenders whose AFS replacement isn’t already underway should expect to incur duplicative effort and costs for the Secured Overnight Financing Rate (SOFR), retrofitting legacy platform(s) in parallel with the target platform(s).


OBSERVATION 3

Lenders should seize the opportunity to drive value around the platform.

Rip and Replace Migration from Level III to a new platform and re-integration with your legacy ecosystem. This approach curtails cost but also minimizes value.

Operations Optimization Application replacement, operating model enhancements design, and strategic roadmap planning. This scope might include role re-design, centers of excellence, right-shoring, process enhancement through Lean Six Sigma, and robotic process automation of simple tasks.

Credit Transformation Implementation of the target operating model and introduction of straight-through processing along with more modern, API-enabled integration strategies. The focus is on reducing costs while pursuing portfolio growth at an accelerated pace. Examples of activities within this scope include a digital self-service experience for relationship managers and clients, portfolio/market expansion, data modernization (such as real-time enablement and blockchain), IT footprint consolidation, and intelligent automation using machine learning and natural language processing.


As lenders mobilize their response to AFS, their first major decision will be the scope of their transformation.

As we work with clients to evaluate their options, we see three viable tiers of transformation scope (Figure 2):

Figure 2. Three tiers of IT transformation scope

The takeaway? There is no one-size-fits-all approach to transformation. Lenders will be wise to look before they leap. Don’t just jump into a Rip and Replace and immediately start to select a platform. Instead, invest a few weeks upfront to identify your business and technology objectives—both short term and long term—and choose the transformation path that meets them.


Credit TransformationThis tier is expensive and highly complex. Maximum ROI depends on changes to the enterprise ecosystem, including digital channels, general ledger, and enterprise data infrastructure.

Operations OptimizationOn its own, this tier can drive significant marginal benefit with minimal marginal cost. Benefits are magnified when coupled with Rip and Replace, enabling lenders to simplify platform design/build around one common operating model.

Rip and ReplaceBy itself, this tier delivers a negative ROI. This explains the historical lack of servicing platform replacement in the industry.

Value Realization Potential

Parti

al

Tota

l

Scop

e of

Tran

sfor

mat

ion

More

Less

OBSERVATION 4 There is no clear-cut platform winner…yet.Which platforms are gaining and losing market share? It’s too early to declare platform winners and losers yet, although that will become apparent over the next three-to-four months based on the pace of bank activity as discussed above.

However, we are seeing preliminary trends emerging:


AFS, Finastra, and FIS are best positioned to win big. While many of our clients are evaluating offerings from other core banking providers AFS, Finastra, and FIS are consistently favored by the top lenders with complex, diverse portfolios. Each of these has garnered at least one win since the Level III announcement.

Core banking solutions may fit smaller lenders. Some lenders have contemplated migrating their AFS portfolio into their existing core banking platform suite as opposed to the fit-for-purpose, market-leading platforms mentioned above. This option is most feasible for AFS Level III clients with small, simple C&I portfolios of less than $10 billion. But, the lack of U.S. commercial lending credentials at scale will cause larger lenders to shy away from core banking solutions.

Platform value propositions vary. While Finastra, FIS, and AFS offer the greatest value, each platform’s proposition differs—as does its path forward.

The initial perceptions of clientsare that:

• AFS’s AFSVision seamlessly integrates origination and servicing and offers a significantly higher value proposition relative to Level III. It’s also the path of least resistance for Level III clients in terms of technology and data architecture.

• FIS’s Commercial Loan Suite, anchored by ACBS, offers the broadest commercial lending suite in terms of value chain coverage and is proven at scale for high- and low-end segments.

• Finastra’s LoanIQ provides best-in-class coverage for high-end capital markets portfolios and allows the greatest client extensibility with its software development kit.


What does this mean for you? If you’re a premier commercial lender with a diverse book—and particularly a higher end book—you will favor established, best-in-class platforms from AFS, Finastra, or FIS. But there is no one-size-fits-all solution yet. So invest time upfront to thoroughly evaluate the ability of each platform to meet the current and future objectives of your operations and technology stakeholders.

OBSERVATION 5 Your first hurdle will be resource scarcity.


Human capital is the single most important ingredient for transformation success. This transformation demands significant investment from your best resources to implement process, technology, and people changes. For example, product owners need to be dedicated full-time to the transformation. But we know resources are highly constrained, at levels that can greatly hamper your ability to respond aggressively to this opportunity.

On the demand side, there is significant internal competition for talent. Continued investment in LOS drains operations and IT capacity. So too does the escalating pace of SOFR activities, particularly data extraction and contract remediation. And in the case of at least three AFS clients, parallel core banking transformations are a significant distraction for IT and operations talent.

On the supply side, loan operations are usually run very lean, and supply may be further constrained by business process outsourcing to low-cost offshore providers. Within IT, servicing groups also tend to run lean, typically with sufficient resources only to “keep the lights on”. Tech resources with experience in servicing platform transformation are scarce both inside and outside bank walls.

CASE IN POINT:

of AFS Level III clients have slowed or stalled their replacement efforts due to lack of resources

25%

How do you overcome the shortage of human capital?

Act now to build capacity within operations and technology. Identify change agents to champion the transformation—people who possess the right blend of leadership skills, institutional credibility, and domain expertise. Then develop your backfill plan and draw on third-party services. Servicing transformations are unique and do not resemble the LOS transformations of the last several years. The right partners will bring deep expertise in loan operations, in your target platform, and in downstream information architecture.



OBSERVATION 6 Your biggest hurdle will be data. Our experience of loan servicing platforms shows that the critical path is not application development or platform conversion; it’s almost always data. Particularly downstream data architecture.

For example, most commercial loan accounting and servicing IT executives are familiar with the obligor and obligation/limit structures as the core backbone of downstream financial and regulatory reporting. These concepts are maintained in some capacity across all three major platform providers. However, terminology and the understanding of the new data models become a challenge when you attempt to adopt the new data structures that will be introduced by more modern platforms. An example is rationalization of the differences between a legacy VSAM database structure and the relational database models that top vendors now provide.

Furthermore, legacy downstream processes were built on years of point-in-time business need with limited documentation. This poses a major challenge, as most organizations don’t have the full picture of where data lands downstream and how it is consumed. While each data team knows its

requirements, the complete picture is often not available. It will be vital for organizations to fully understand their downstream data requirements and comprehensively map the processes/handoffs, irrespective of the platforms involved.

How do you start?

Your first strategic decision is to determine the downstream data integration path that provides the best long-term efficiencies. There are two options: adopt the new platform’s data architecture or transform the data to mirror legacy AFS Level III (Figure 3).

Adopt New Platform Data Architecture

Transform to Legacy Patterns and Insulate Downstreams

Figure 3. Two paths for downstream data integration


• Aligns with platform vendor architecture, e.g., API-centricity, real-time

• Better positions lenders for long-term functionality, maintenance

• Effort to architect, develop, and test will be costlier in near term

• Requires tight coordination across Commercial and Enterprise organizations

PROS

CONS

• Minimizes change effort, risk to consumers of downstream data

• Shorter initial delivery timeline

• Foregoes benefit of richer data

• Tends to be short-sighted, leading to tech debt, re-engineering down-the-road

CONS

PROS

Best fit for most banks Will appeal to some banks

Secure data subject-matter experts. Success is highly dependent on the availability of data experts. The upfront and ongoing dedication of both business and IT data experts will save time and money during implementation.

Clearly map the information architectures. Compile an inventory of the consumers of servicing data to understand the magnitude of the impact of your servicing platform replacement. We consistently see that lenders underestimate the upstream impact—for example, to their LOS platforms. Data changes, both to transactional data and reference data, can drive thousands of hours of retrofit to automation and integration within your LOS.


How do you position yourself for success with data? Take the following key steps to lay the data foundation early—even before you select your target platform:

Conduct an early and honest assessment of current data quality and availability. We encourage two-stage assessments: quickly identify and prioritize data “hot spots” by means of stakeholder and end-user interviews, followed by more comprehensive data profiling. Regardless of your approach, start early and expect to incorporate a data remediation workstream into your transformation program.

The clock is ticking.

15

Banks that are affected by AFS’s Level III retirement must act quickly yet comprehensively to prepare for their transformation. As tempting as it is to rush to select a new platform, your initial step should be to define your stakeholder vision and the resulting breadth of your transformation. Doing so will align key sponsors and provide the north star for your multi-year journey.

Also, think beyond the technology. The move by AFS has afforded lenders a unique opportunity. To maximize your ROI you need a coordinated, complementary operating model transformation in parallel with technology transformation. At the same time, accelerate work on critical enablers, such as data architecture and data quality, to avoid surprises down the road.

As the leading provider of wholesale credit advisory services in North America, Accenture is poised to drive success with pace and certainty. With the insight accumulated in the course of more than 25 commercial loan servicing transformations, we understand how to navigate each step of your servicing journey across people, process, and technology. We also know how to coordinate across your broader wholesale lending value chain, spanning CRM, origination, and portfolio management.

We welcome the opportunity to discuss how you can optimize your transformation.

AFS LEVEL III RETIREMENT: HOW WELL ARE YOU POSITIONED?

ABOUT ACCENTUREAccenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions – underpinned by the world’s largest delivery network – Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 505,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.STAY CONNECTED

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Accenture Banking

CONTACT US JARED RORRERManaging Director Commercial Banking Lead, Global

[email protected]

RYAN SHENOHAManaging Director Commercial Credit, North America

[email protected]

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AFS Level III Retirement: How Well Are You Positioned?€¦ · might include role re-design, centers of excellence, right-shoring, process enhancement through Lean Six Sigma, and