The risks of using spreadsheets in financial lending

September 29, 2016 Risk Management
What are the risks of using spreadsheets?

Risk management is a huge component to financial lending, which is why it is rather paradoxical that so many companies choose to use spreadsheets as a financial modeling tool to manage risk-based pricing.

Due to the fact that spreadsheets are incredibly prone to human error, finance professionals place their companies at risk of loss every time they use one. It is ironic that extreme risk is involved in using the very tool meant to help mitigate it. Nevertheless, if lending professionals want to avoid mistakes that could cost them millions of dollars, they may want to think about ditching their spreadsheets for a far more reliable tool that will not only reduce the risk of errors, but also help them increase revenue.

Common spreadsheets errors

Spreadsheet mistakes can lead to incredible financial loss, in addition to a stained reputation for the employee and company who committed the blunder. Even more, these errors are far from uncommon. According to Forbes contributor Stuart Leung, approximately 88 percent of spreadsheets contain errors. Common flubs include copy/paste mistakes, entering the wrong digit and forgetting a minus sign. These errors may seem rather small, but they can have some very big consequences. 

Robert Kugel, the senior vice president and research director for Ventana Research, spoke with TechTarget about the pitfalls of spreadsheets and explained that one major issue they cause is a phenomenon known as dueling spreadsheets. Dueling spreadsheets arise because spreadsheets are not created on a singular platform. Thus, sometimes multiple versions of the same spreadsheet are created, only they do not contain the exact same data and changes are often made to one without being made to the other. These inconsistencies result in incredible confusion, though Kugel said it may not even be worth spending time trying to figure out which is right, as it is possible both are wrong. 

Spreadsheets may cause more confusion than they alleviate.Spreadsheets may cause more confusion than they alleviate.

Other problems caused by spreadsheets

Spreadsheets are not only a problem in finance because they are error prone; they are also incredibly inefficient. Spreadsheets can only be completed manually, which means a human being has to spend hours inputting the data, crafting the formulas and checking the spreadsheets for errors. When an error is discovered, even more time must be spent to fix it. Citing data from Ernst & Young, CFO contributor Chris Schmidt explained that one man-week is wasted every month for every $150 million in revenue for companies with complex reports.

Kugel also emphasized that spreadsheets make it difficult for companies to gain control over their data, as too many people are often free to modify a spreadsheet as they wish. The only way for a company to maintain more accurate, consistent records, Kugel said, is to adopt financial management software that can protect the data. 

"Despite the problems spreadsheets cause, many financial institutions continue to rely on them."

Famous flubs 

In one well-known incident in 2012, a top U.S. bank lost $6.2 billion, partially due to a spreadsheet error in which a number that should have been averaged was accidentally added. This mistake, Fortune explained, caused the company to significantly miscalculate the risk of credit derivatives. 

Another well-known spreadsheet mistake led Barclay's to unintentionally include 179 contracts into a purchase agreement during its acquisition of Lehman Brothers. An Excel file detailed what Barclay's was willing to buy from Lehman Brothers, and the 179 contracts that were never meant to be part of the deal had been hidden, rather than deleted. When a law associate converted the file into a PDF, the hidden contracts were included. Barclay's was left with 179 toxic assets that it never wanted. 

The solution

Despite the problems spreadsheets cause, many financial institutions continue to rely on them as key resources for managing risk. With the sophisticated financial technology solutions on the market today, there is no reason for these companies to continue putting themselves at risk of a big, expensive blunder.

Brilliance Financial Technology's DealPoint solution eliminates the issues created by spreadsheets. DealPoint's automated risk-based pricing tools reduce the chances of human error and allow lenders to capture far more data than spreadsheets ever could. Benefits include easy-to-use forecasting tools, increased visibility into the lending process and improved governance, as DealPoint can be configured so each employee can access only the data he or she needs to see for his or her own work. DealPoint is time efficient, helping lenders streamline their pricing models and better manage risk by allowing them to analyze the effects of past, present and future deals. Lenders who adopt a fintech solution like DealPoint will not only reduce the time spent on pricing loans as well as their risk of error, but through access to extensive analytics, they will also be able to create a more consistent pricing model that will help them price loans more effectively and increase their margins.