Why is event sourcing such a game changer for Lending
We have previously spoken about the power of event sourcing to give you access to all of the data associated with each processing event that an account will go through (Payment in, Payment Out, Interest Capitalisation, Interest Rate change etc), regardless of whether the event is for a deposit or a lending product. The events may be different, but the underlying architecture of our transaction processing is the same, regardless of ledger type. Ultimately, they are events with their own specific data structure that we write to the ledger, publish to the data projections and the webhooks. It is the data projections that bring these ledgers to life.
But for loans, there are more benefits, particularly in the area of hyper-personalisation. Traditional core banking systems manage the creation of schedules from settings. Things like frequency, face value, term, interest rate/fees and repayment type (principal and interest) are all used to create a repayment schedule to amortise the loan. This is great for regurgitating the same loan repayment schedule, over and over again but not great for creating personalised loans.
The feedback that we have received from prospects, particularly in SME and Corporate lending where hyper-personalisation is a key differentiator, is that they will typically copy the amortisation schedule that a core banking system will display (as they don’t create them but rather derive them on demand for an enquiry or a billing cycle) into an Excel spreadsheet and then manipulate it in there to get a repayment schedule that a client is willing to sign up for, Excel allows you to vary principal and interest during the term, switch between principal and interest and just interest or no payments at all. It also allows you to model tranche-based or milestone-based loans, or even loans with random fees. However, once you are done with simulating the outcome of the loan and deriving an acceptable outcome, you now have the unenviable challenge of amending the settings for the account to replicate, assuming that the system actually has settings to support your changes. Invariably, the loan ends up as a close approximation but not quite the same.
Simulation made real
Imagine if your core banking platform allowed you to maintain the whole schedule in a similar way to Excel. This is exactly how we are using an event sourcing architecture to support hyper-personalisation of loans and the power of simulation mode.
In simulation mode, we can use the default setting to generate a set of future events, based upon the settings and then allow you to add, amend or delete the entries to create the schedule you want. You can create various versions of this during origination, and when you have the one you want to use to create the account, the system will then, once it has been approved, copy this schedule to the live loan. The system will continue to process payments, accrue interest and assess fees based upon the schedule you have created and the product settings. The same accrual routines are used in both simulation and live processing, so the loan will behave as you have simulated.
Simulation mode is not just restricted to originations. Let’s say that you receive an unscheduled capital repayment to the loan. The default behaviour will be to reduce the term as you have reduced the principal balance, but you may want to discuss this with the customer. Prior to the conversation, you can put the account into Simulation mode (whereby it takes a copy of all of the future events and then you can model out a schedule with the same term and reduced monthly payments, a version where the repayment pays off future payments or a hybrid combination of each model. This will then allow you to communicate the total cost of the loan in each scenario and agree which version the client wants. Once happy, the simulation version that they want is then put live and it is that schedule that the system will now follow.
Simulation mode will allow you to edit the schedule and recalculate the rest to show you the impact of different scenarios, so you will be able to see exactly how the loan will behave when it goes live (and allow you to generate updated paperwork.)
Storing the Schedule as future events also allows you to create the schedule in an external system and upload it. This uploaded schedule will go into the simulated version, and once you are happy with the import, you can put it live.
If you would like to know more about how we deliver hyper-personalisation of lending products that actually matches the simulation, contact us.
