The Silicon Valley Bank collapse highlighted the importance of a little-discussed but key feature of healthy banks – backup servicing. Put simply, many fintechs and institutions that failed didn’t have one.
Backup servicers assume portfolio servicing when a trigger event such as insolvency occurs. Vervent CFO and COO Dhruv Vakharia said investors often demand backup servicing before committing capital to a lender. Vervent performs various backup servicing tasks and provides direct-to-consumer credit card capabilities. They can also perform in-house servicing for fintechs and larger financial institutions from locations across the United States, Mexico, and the Philippines.
Vakharia said tasks include helping with business continuity, customer verification services, special purpose vehicle (SPV) management, remittance and calculation agencies, collateral management and independent record-keeping. Vervent manages the entire life cycle with credit card issuers, from marketing and customer acquisition to underwriting and service processing. Vervent isn’t a bank, but the company has relationships with many banks and capital services providers.
Dry times highlight the importance of backup servicing
During the low-interest years, fintechs grew, in many cases, thanks to SPV and venture funding. When the music stopped, many regional banks and fintechs were threatened, especially those with little, if any, balance sheet growth to compensate for drier times. Vervent began to hear concerns from some of their 700-plus clients.
In many cases, Vervent’s service pace increased as they analyzed loan data and reconciliations to spot any noticeable trends. Conversations with customers also picked up.
“It was a time when interest rates were high, ABS markets and warehouse facilities softened, and you’d have thought there’d be less deal flow,” Vakharia said. “Our share of revenue and capital market services went up because of the way we were giving lenders and investors comfort.
“At the end of the day, we’re here to help and can do that in various ways. There’s full service where we step in and take over the platform. Or we step in and convert certain things. One of our services is more of an agent role, managing and coordinating the servicing right before a trigger event.”
That’s welcome news to funders who may have injected nine-figure sums into what has become a firm on shaky ground. The need to help firms under duress led to an accelerated backup product that services the entire portfolio. It does everything save for calling customers.
Vervent also performs annual readiness tests and transition management coordination.
What to look for from a backup servicer
Vakharia said that experience is one feature fintechs and institutions should look for when selecting a backup service provider. Vervent has experience helping clients succeed in all economic climates. They leave capacity open so they can step up within 30 days with established lines and trained agents.
“They’ve talked to clients, giving them comfort and asking them for feedback,” Vakharia said. “What else do they need? What else are they seeing? Here’s what we’re seeing. Joining all the dots related to the information flow that results from those conversations is also incredibly important.”
Breadth of experience is another factor. Vervent serves multiple touchpoints, so stakeholders have the assurance that it can act appropriately if required. Lenders have demanded such services be in place before they sign the check.
“It’s important that we maintain those touch points because then it’s almost like it institutionalizes itself, and a lender, originator, or primary servicer will do this deal to provide the capital, but they have to name Vervent as a backup servicer,” Vakharia said. “It’s almost like a flywheel; one thing leads to another, and then it continues. Folks always think of Vervent at the top of their minds.”
Before you issue that credit card…
The many brands considering issuing their card should realize the business is more complex than it looks, Vakharia cautioned. Factors to consider include risk modeling, compliance issues, capital requirements and various consumer concerns.
“It’s complex if you want to keep this thing running and make it profitable,” he advised. “So, we don’t do it for just anyone. It has to be that right partner, someone taking this business seriously and willing to establish a partnership versus just treating us as a vendor because (otherwise) it’s a waste of time and money from both sides.”
