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Will Chinese electric car manufacturers transform the UK BEV market?

7 September 2023

Summary

There have been many challenges for the battery electric vehicle (BEV) market in the UK auto industry, including supply and demand, residual values, price parity, lack of long-term government incentives, charging infrastructure, and battery manufacturing factories.

The Chinese auto industry, the biggest in the world, with its dominance in car manufacturing and battery technology, is beginning to move its Chinese electric vehicle (EV) brands to Europe and the UK, offering cheaper, high-quality, technologically enhanced models which are seen as a threat to European automakers.

Toby Marshall, Managing Director of GWM ORA UK discussed the entrance of disruptors from the Chinese market to the UK, including GWM ORA’s Funky Cat, with David Betteley at the Asset Finance Connect Summer 2023 conference, and the implications for European car manufacturers.

Headwinds of battery electric cars

Changes in the EV market, including Tesla, NIO and others discounting prices has created added complexity to the EV market, as used EV values falter and stock becomes ever more extended.

As Toby Marshall noted, 2022 saw huge demand for EVs but low supply, while 2023 has seen a dramatic shift with supply picking up with established brands as well as new EV brands coming into the marketplace. Residual values of EVs are also normalizing in 2023 (at a significantly lower level than a year ago) as the EV market becomes more established and stable, with price parity between EVs and their ICE counterparts getting closer all the time.

At the beginning of 2023 there was a lot of negative media coverage surrounding electric vehicles, from range anxiety to charging infrastructure and the cost of public charging, but hopefully this negative blip is starting to subside.

In a recent Lloyds Insight article, Nick Williams, Managing Director for Transport at Lloyds Banking Group commented that, “2022 was a record year for electric vehicle (EV) registrations, with a 40% year-on-year increase despite ongoing supply chain issues – and 2023 is set to see this acceleration get a major boost.

We’ll see more new vehicles, with more choice for drivers than ever before. As well as traditional brands set to increase their electric vehicle ranges and offers, this year we can also expect to see more new manufacturers, including some disruptive new names. Many of these disruptors are coming from the Chinese market.”

Chinese auto market

The UK and European car markets are very different to the Chinese market which is by far the biggest car market in the world, with indications that it will grow to 30 million cars a year compared with 2 million in the UK. China is also the biggest electric car market in the world with a huge offering of electric car manufacturers.

In addition to Chinese car manufacturers, Chinese battery makers dominate the European motor industry, with more factories than any other nation.

Moving Chinese brands to Europe and the UK

Chinese car makers have been working to establish a foothold in the European and UK markets for many years, with an influx of new Chinese brands starting to access the market, including BYD, NIO, Ng, Polestar and GWM ORA.

There are many opportunities for Chinese BEVs in Europe and the UK markets, where they are outperforming western brands with their high-quality infotainment systems, better cameras and sensors, and are likely to lead the way in semi-autonomy and in-car services in the future.

The arrival of Chinese electric brands brings a range of opportunities and challenges for UK and European dealers and finance houses in addition to challenges for western OEMs. A recent survey by Startline Motor Finance highlighted that 51% of dealers expect the arrival of Chinese OEMs will result in some European manufacturers folding and 29% believe it is the European manufacturers that will fare worse in the transition to green.

With many European brands moving away from manufacturing smaller cars to focus on SUVs, for example, Ford has ceased production of the Focus and Fiesta, the European auto industry seems to be opening the door for Chinese brands to enter the European market with their smaller cheaper EV models.

The newest Chinese EV on the block is the ORA Funky Cat manufactured by GWM ORA, owned by the Great Wall Motors group. With the help of UK distributor International Motors, GWM ORA has recently brought the Funky Cat to the UK market.

EU investigation

During her annual address to the bloc’s parliament, European Commission President Ursula von der Leyen said the global market has been ‘flooded’ with cheap Chinese cars, with China’s share of EVs sold in Europe rising to 8% and possibly reaching 15% in 2025, noting prices are typically 20% below EU-made models.

On September 12th, the European Commission launched an investigation into whether to impose punitive tariffs to protect EU auto manufacturers against cheaper Chinese EV imports it says are benefiting from state subsidies.

The Commission will have up to 13 months to assess whether to impose tariffs above the standard 10% EU rate for cars, possibly rising to the stiff 27.5% level already imposed by the US on Chinese EVs.

Toby Marshall sees such tariffs as simply limiting the consumer who deserves the choice of EVs and should be able to buy whatever car fits their wallet and lifestyle the best.

EV purchasing incentives

A major boost for the sale of BEVs is the various incentives that can be offered to prospective customers including home chargers and cash grants for EVs and chargers. However, such incentives have disappeared in the UK, while other countries including China, Sweden and Norway have generous EV incentives which support the sale of electric cars.

In the UK, regulation is pushing consumers along the path to EVs. But Toby Marshall believes that “incentives are needed to pull demand along the route”.

The government’s drive to net zero through EVs and ultra-low emission zones (ULEZ) is creating a socio-economic impact on the country, causing a divide between those who can afford an electric vehicle and those who cannot.

During the recent House of Lords inquiry into EVs, Auto Trader’s Marc Palmer expressed concerns to the committee that a large number of motorists are being ‘held back’ as a result of price concerns and changes to their lifestyle.

Auto Trader’s Palmer told peers: “There are three core groups being left behind by the transition to EVs: those over 55, women, and people on lower incomes.

“And the core reasons they’re being left behind are around cost, which is a big barrier, perceptions around public charging infrastructure and around the changes required to lifestyle.”

Quality of Chinese brands

Chinese electric vehicles are renowned for their high quality compared to previous Chinese car models and are thus breaking down the brand snobbery that exists in the car industry. Consumers are moving to newer car brands for the enhanced quality and technology they offer, with Tesla breaking the mould.

Toby Marshall noted that, “Electric cars have enabled a shift away from legacy brands in all segments of the market which has and will dramatically change things.”

“People see an electric car as a gadget,” according to Toby Marshall, and the Chinese expertise in EV technology is far advanced of European car brands.

Equipment as standard and the level of outstanding in-car tech plus long warranties (including battery warranty) provides a growing confidence in Chinese EVs and gives them a genuine opportunity to grow in the UK and EU markets.

Sales model for Chinese brands

Most Chinese brands entering the European and UK markets are not looking at the direct agency route and are, instead, focusing on going down a traditional route to market with a dealer model or a hybrid route, incorporating online and dealer presence.

GWM ORA has chosen this omni-channel approach of dealer, online or both for the Funky Cat, which most customers are adopting. Toby Marshall highlights that a significant proportion of EV customers do those stressful car-buying elements online, such as configuring finance, but then go to the retailers to view and drive the car, especially with EVs which are new to most consumers.

The franchise models are essential for EVs, according to Toby Marshall, as they add value and confidence as they are experts in EVs and can amplify the marketing message of the car brand.

The service infrastructure for Chinese EV brands in the UK is still developing, but Marshall notes that International Motors owns a large parts warehouse in the UK for a number of EV brands, and around 30 aftersales points (which is constantly increasing) around the country where Chinese EVs can be repaired, although EVs are known to require less maintenance and repair.

Conclusion

An influx of Chinese EV brands is set to enter the European and UK auto markets in 2023, seducing European car buyers with their low-cost, high-quality EVs and superior in-car technology.

With recent changes in the EV market creating headwinds for electric cars in an increasingly stable market, there is a need for more affordable European models to rival these emerging Chinese EV brands, which are seen as a threat to European automakers.

Find out whether Chinese electric car manufacturers will transform the UK BEV market by reading our review of the Asset Finance Connect Summer Conference 2023 Session

Analysis from David Betteley Asset Finance Connect's head of content

There are always a lot of moving parts at play in the auto industry. We have seen many changes over the past few years, generally speaking driven by a combination of consumer preference and changing legislation. Take for instance the rush into diesel started by Gordon Brown but now totally discredited due to concerns over air quality.

BEVs are seen as the saviour in this respect as they are zero tailpipe emitters, and whilst there are no national incentives in the UK for the purchase or financing of BEVs at the moment, there are a growing number of examples of penalising ICE and, in particular, diesel vehicles. These include ULEZ in many towns and cities and also a new trend of councils charging more to park a diesel (or in some cases an SUV) when compared to a BEV.

All these developments are promoted as “green” by their respective local authorities, but there is growing evidence to suggest that whilst almost everyone supports green initiatives, this support dries up as soon as the initiative begins to hurt the pocket.

Therefore, it is safe to say that the transition from ICE to BEV is a dilemma for the national government. Low to middle income households are receiving no (national) support to make the transition to more expensive BEVs and, to add insult to injury, these households are having to pay more to use their (in most cased pre 2016) existing diesel vehicles.

There is some evidence that this message is beginning to land. A topical example is the London Mayor submitting to pressure from his local and national party and hastily introducing a means tested scrappage scheme, in an attempt to make the London ULEZ expansion more palatable for voters.

Additionally, Kemi Badenoch (Secretary of State for Business and Trade) is lobbying hard against the 22% rule (22% of production to be emission free) that is due to take effect from January 2024 on the basis that it will destroy investment in the industry and that the targets should either be reduced or extended.

Following the announcement to defer the ban on ICE vehicles to 2035, there will be a further announcement on the ZEV mandate on the 22nd September. It wouldn’t come as a great surprise to see some further watering down of this (also cast in stone) initiative!

However, the issue raised by the deferment of the ban on ICE vehicles is what will happen now to demand for new and used BEVs? With the phasing out date for ICE pushed back, there will be less customer urgency to make the change which may well result in weaker demand from the private sector with the fleet sector hopefully taking up the slack, driven by continuing attractive BiK taxation treatment. The other knock-on effect will likely be a further weakening of RVs on used BEVs which in turn will make them more affordable as a second-hand purchase….so perhaps a silver lining here for customers at the expense of the industry.

So, lots of challenges ahead for the sale of BEVs. One thing is for certain however; at the end of the day, it will be the customers voting with their feet and/or their financial firepower that will decide the winners and losers. The Chinese brands with their combination of wide choice, high quality, class leading tech and competitive pricing would seem to currently hold most of the aces in the pack.

It will be up to Toby Marshall and his colleagues to make sure that they play the strong hand they have been dealt skillfully. And I have no doubt that he will do just that!

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European automotive
European equipment

It’s all in the foundations: microservices architecture

4 September 2023

In today’s rapidly evolving business landscape, organizations face a multitude of challenges when it comes to addressing threats and opportunities with agility, scaling their operations, adopting new technologies, and delivering value to customers efficiently. Many software architectures pose obstacles to business growth and agility.

In this article, I’ll explain some of the pitfalls that you should watch for when evaluating your technology partners’ software architecture.

The original architecture is the monolith. Characterized by tightly coupled components that are compiled and deployed together, the monolithic architecture is considered a closed architecture that is expensive to scale and modify.

Monolithic architecture has been used for decades, dating back to some of the earliest commercial software. While products with this architecture are relatively simple to install and operate, their architecture often hinders scalability and agile delivery of new functionality. In an era when most commercial software was hosted by customers in their own data centers (on premise installations), monoliths were common because they required less administration from the IT team. However, they have limited options for scaling and use their hardware inefficiently, requiring more IT infrastructure to run at scale.

As they grow in complexity, they require exponentially higher amounts of development and testing to make changes, which impedes agility. Monoliths typically have limited integration options. While they may offer APIs or file-based integration points, their tightly-coupled nature often leads to difficulty in providing clean interfaces for external integration. These issues often yield high hosting costs, delayed product releases, limited integration into customers’ ecosystems and missed opportunities to capitalize on emerging market demands.

Other popular architectures that have been used for commercial software include layered (or tiered) architectures and service-oriented architectures (SOA). These architectures became popular in the 1990s and 2000s. Compared to monoliths, layered architectures improve scaling and code maintenance. They usually separate into 2-3 tiers, and each tier is usually hosted on separate servers, which allows IT teams to optimize each server specifically for its job. Some layered architectures support horizontal scaling, allowing the IT team to add servers to share the load for any of the application’s tiers.

Service-oriented architectures take this a step further and allow specific functions or services to run independent of each other. When designed well, each of these services can be maintained and scaled independent of the others, which improves the system’s overall agility and scalability. The cost of getting these benefits comes with the added complexity for the IT team, who now has more components and servers to maintain. While these architectures reduce the impediments for customers to scale and adapt, the improvements are small compared to more modern architectures.

Two architectures that have become popular in more recent years are low-code and microservice architectures. Low-code architectures are meant to provide extremely agile change by taking the vendor out of the process. While this can sometimes work, they sometimes lack the ability to scale and to remain agile as they become more complex over time.

Low-code applications provide means for customers to essentially develop their own custom application on the vendor’s platform without using traditional software code. Instead, they use drag-and-drop visual tools, rules and simple domain-specific languages to customize the platform for the customer’s needs. This usually allows the customer to quickly adapt the product to meet changing needs. However, it is common for these changes to have a negative impact on scalability and performance because low-code tools don’t offer the same level of support for managing these more technical features of a product. Also, complex configurations on these platforms tend to become difficult to maintain.

At a basic level, ‘low-code’ is still code and these platforms tend to lack the sophisticated capabilities needed to maintain many layers of dependencies and changes that occur during the life of the product. For some, difficulties in maintenance can even show up during the system’s initial implementation.

Many of the challenges noted above with monolithic, layered, SOA and low-code architectures can be overcome with a well-designed microservice architecture. A well-planned microservices architecture means that the technology provider develops and tailors independently deployable microservices to serve specific business capabilities, promoting modularity and decoupling between components. This modular approach facilitates the development and integration of new technologies and functionality, as each microservice can be developed, tested, and deployed independently.

Microservice architectures are inherently open because each service communicates with the others through APIs, and these APIs can provide integration points with the customer’s ecosystem.

Microservice architectures go hand-in-hand with software-as-a-service (SaaS) in the cloud. They make it possible to take advantage of the extreme scalability of the cloud. Usually, each service is set up to ‘autoscale’ (automatically scale horizontally with the load placed on it).

When managed in the cloud by a SaaS provider, the deployment, monitoring, scaling and upgrading of microservices can be automated. This allows the partner to seamlessly deploy updates without taking the system down. This approach is used by many of the technology platforms that we all use on a regular basis, including search engines like Google, media platforms like Spotify and Netflix and social media platforms like LinkedIn and Facebook. These platforms are continuously upgraded and improved, and we almost never experience downtime or other negative consequences.

Through a reliable and innovation-minded technology partner, secured finance providers will be able to capitalize on the latest architectures, tools, frameworks, and technologies for specific services without being constrained by the limitations of the monolith and other dated architectures. This technical flexibility enables secured finance lenders to capitalize on emerging technologies and stay ahead of the competition, whilst offering their customers tailored solutions which fully meet their requirements and needs.

At Solifi, we have taken the microservice approach. We have found that this architecture allows us to provide the agility, scalability, quality and efficiency that our customers require. We have the added benefit of improving our internal development scalability and quality, which we pass on through improved responsiveness and quality to our customers. With the loosely-coupled, independent nature of our services, we can make changes and deploy them safely in minutes and hours instead of weeks and months. The quick response time to market demands positions Solifi as an adaptive and customer-centric organization.

When you evaluate partners for your next technology upgrade, remember to look beyond the functionality provided by the products you evaluate and also consider the ability of the software and partner to enable your company’s growth and agility.

About the author

Eldon Richards joined Solifi’s Executive Team as Chief Technology Officer at the start of 2020, bringing more than 20 years of enterprise software product development and global technology leadership. In this role, Eldon leads the development of the company’s product portfolio, including Solifi’s Open Finance Platform.

Eldon joined Solifi from Recondo Technology, an enterprise SaaS platform providing revenue cycle management for healthcare organizations. As Recondo’s CTO, Eldon was responsible for all aspects of their SaaS technology platform including integration of advanced technologies like machine learning (ML) and natural language processing (NLP). Eldon was a key contributor to the company’s success which led to the acquisition by Waystar. Prior to Recondo, Eldon held executive technology leadership positions at PatientPoint, Optum, and United Health Group.

Eldon holds an undergraduate degree in computer science from the University of Utah, MBA from the University of Minnesota Carlson School of Management, as well as graduate level certificates from Stanford University, Washington University in St. Louis and is a Six Sigma Green Belt.

Find out about the importance of choosing a secured finance technology provider by reading this article from Solifi
European automotive
European equipment

AI innovation in financial services

31 August 2023

Summary

The next big thing in tech – generative artificial intelligence – is promising to change everything from the world economy to our personal lives. The hot topic was discussed in depth in several sessions at the Asset Finance Connect Summer 2023 Conference.

Sulabh Soral, AI Officer at Deloitte said: “At its most basic, AI is software that mimics and generates human behaviour – planning, generating ideas, understanding speech and visuals. Its ability to scale human intellect will have a profound impact.”

Forms of AI in use today include digital assistants, chatbots and machine learning amongst others. As humans and machines collaborate more closely, and AI innovations come out of the research lab and into the mainstream, the transformational possibilities are staggering.

As a source of both huge excitement and apprehension, AI and its limitless potential operates at a superhuman level. While the applications of generative AI are in the early stages, the capacity of these AI models is doubling every three months.

There is huge investment potential in this complex and highly intelligent technology. PwC’s Global Artificial Intelligence Study: Exploiting the AI Revolution describes AI as: “the key source of transformation, disruption and competitive advantage in today’s fast changing economy.”

According to PwC, AI can transform the productivity and GDP potential of the global economy with global GDP rising to 14% higher in 2030 because of the accelerating development and take-up of AI. However, strategic investment in different types of AI technology is needed to make that happen. 

ChatGPT is a generative AI model developed by OpenAI and is at the forefront of this revolution. It is nearly on par with the human brain and it is only getting smarter.

Shaping up to be the most revolutionary technology since the internet, the full implications of generative AI are still untold. This latest innovation in AI will drive an explosive growth and value creation in the technology sector over the next couple of years and vast potential implications for the financial services sector.

Generative AI

The launch of ChatGPT, an example of a Large Language Model (LLM), has sparked an explosion of interest in AI technologies. The development of LLMs allows the access of natural languages, unlocking vast amounts of information, for example, scientific, historical accounts, literature.

Generative AI is not just about linking data and databases but trying to behave like humans to create responses that make sense with, for example, conversation and human-like dialogue; instantaneous responses; and being able to act in a nuanced way with cultural references and adapt to the tone of the conversation.

ChatGPT can be trained to operate within a particular industry knowledge foundation. For example, in retail, AI language models have a number of benefits including accessing a lot of information, interacting in a natural way, assisting with complex data tasks, and solving a number of problems and issues.

New findings from Deloitte’s 2023 Digital Consumer Trends research found that a third of those who have used Generative AI in the UK have done so for work, equating to approximately four million people.

Paul Lee, partner and head of technology, media and telecommunications research at Deloitte commented: “Generative AI has captured the imagination of UK citizens and fuelled discussion among businesses and policymakers. Within just a few months of the launch of the most popular Generative AI tools, one in four people in the UK have already tried out the technology. It is incredibly rare for any emerging technology to achieve these levels of adoption and frequency of usage so rapidly.

“Generative AI technology is, however, still relatively nascent, with user interfaces, regulatory environment, legal status and accuracy still a work in progress. Over the coming months, we are likely to see more investment and development that will address many of these challenges, which could drive further adoption of Generative AI tools.”

Implications for UK businesses

As generative AI further develops, more and more services can become automated. AI can understand mass amounts of data so can reduce the workload of humans, make speedier decisions, and be more personalised.

In the business world, AI can be used in:

  • Customer service – enhance customer service and increase customer loyalty
  • Fraud detection – AI can be used to detect intent
  • Tax service – improve customer service and help file taxes
  • Process optimisation – credit and loan decisioning, process automation, internal document tagging. AI can help accelerate slow application processes, improve loan collectability and user experience, personalised loan collection communication, segment credit users.
  • Improve decision making – in areas such as portfolio management, asset allocation and investment strategy. Roboadvisors are widely touted as one of the highest potential technologies involved in AI in fintech.
  • Regulatory compliance – ensuring transparency and security, anti-money laundering, KYC systems, compliance mentoring.

AI provides the potential to enhance quality, personalisation and consistency, and save time.

In a recent analysis of the potential long-term impact of automation – Will robots really steal our jobs? – PWC determined that almost 30% of UK financial services jobs could be replaced by automation by 2030, offering big gains in productivity and customer experience. However, the report also predicted that the nature of some occupations would change rather than disappear. It added that automation could create more wealth and additional jobs elsewhere in the economy.

PwC’s Global Artificial Intelligence Study: Sizing the Prize highlighted just how big a game changer AI is likely to be, and how much value potential is up for grabs. AI could contribute up to US$15.7 trillion to the global economy in 2030. Of this, US$6.6 trillion is likely to come from increased productivity and US$9.1 trillion is likely to come from consumption-side effects.

According to the study, the adoption of ‘no-human-in-the-loop’ technologies will mean that some posts will inevitably become redundant, but others will be created by the shifts in productivity and consumer demand emanating from AI, and through the value chain of AI itself. In addition to new types of workers who will focus on thinking creatively about how AI can be developed and applied, a new set of personnel will be required to build, maintain, operate, and regulate these emerging technologies.

In the near-term, the biggest potential economic uplift from AI is likely to come from improved productivity. This includes automation of routine tasks, augmenting employees’ capabilities and freeing them up to focus on more stimulating and higher value-adding work.

More and more businesses are turning to automation, investing in AI to replace staff and cut costs. The 2023 McKinsey Global Survey – The state of AI in 2023: Generative AI’s breakout year found that one-third of survey respondents said their organisations are using gen AI regularly in at least one business function and 40% of respondents said their organisations will increase their investment in AI overall because of advances in generative AI.

Recently, telecoms giant BT announced it will be shedding about 10,000 jobs by the end of the decade as it digitises and relies more on AI automation.

However, the ultimate commercial potential of AI is doing things that have never been done before, rather than simply automating or accelerating existing capabilities.

The potential for advances in artificial intelligence will be one of the areas researched at the recently launched Gillmore Centre for Financial Technology at Warwick Business School. The aim of the Centre is to spearhead cutting-edge research and innovation for the UK’s financial and technology sectors, with leading research on AI development and machine learning.

Ram Gopal, Director of the Gillmore Centre for Financial Technology, said: “The Gillmore Centre for Financial Technology will act as a beacon for industry leading research across fields such as AI, blockchain and machine learning, helping to elevate government policy, inform regulators, and guide businesses through the safe development of these areas.”

AI: Not a new concept in the business world

We are seeing a proliferation of AI tools and applications in the business world, including digital assistants, chatbots and machine learning amongst others.

Despite recent advances in generative AI and the explosion of public interest in AI with the launch of ChatGPT, the AI data modelling concept including machine learning and statistical models has been around in UK businesses for many years, developing further since the emergence and development of Cloud technology, a key component for AI allowing it to evolve due to the need to store and process large volumes of data.

AI is already being used by retailers for metrics for pricing, writing advertising copy, and service booking systems, for example.

Fintech Innovator presentations

The Fintech Innovator session at the recent Asset Finance Connect Summer 2023 Conference provided four use cases for artificial intelligence in the auto and equipment finance sectors.

AI in onboarding: In auto finance, AI can use browser behaviour data to predict car brand and buying intent. AI will enable the ability to segment customers by data and enable better customer journeys in a real-time solution.

Currently, there is a revolution in the way cars are being sold which could be enhanced by incorporating AI in all ecommerce platforms.

AI in manual underwriting: AI can be used to predict the outcome of manual underwriting. There are many opportunities and challenges of using AI to progressively automate credit decisions to reduce cost to service and decision times. AI has the power to automate the majority of the manual underwriting process, reducing time, saving costs and enabling growth.

AI in origination: Generative AI solutions based on ChatGPT allows customers to ask detailed questions about their finance contracts. AI can be used as a copilot to take away drudgery and unlock a new wave of productivity, without losing the human element. AI can be used to solve a communication problem across the industry.

AI in retention: AI can be leveraged for enhanced customer retention and OEM success in the auto finance sector, and can be used to optimise the timing and offer for auto finance customers at the end of finance contracts and ability to retain the customer mid-term.

By incorporating AI into various aspects of the customer journey, retailers and financiers can improve customer satisfaction, anticipate and address customer needs, and ultimately enhance customer service and retention.

Limitations

With the unprecedented growth in AI technologies, it is essential to consider the potential risks and challenges associated with their widespread adoption, for example, security, privacy, bias, hallucinations, and repetition.

A 2023 Forbes article, highlighted the 15 biggest risks of artificial intelligence:

  • Lack of transparency
  • Bias and discrimination
  • Privacy concerns
  • Ethical dilemmas
  • Security risks
  • Concentration of power
  • Dependence on AI
  • Job displacement
  • Economic inequality
  • Legal and regulatory challenges
  • AI arms race
  • Loss of human connection
  • Misinformation and manipulation
  • Unintended consequences
  • Existential risks

The article notes that, “To mitigate these risks, the AI research community needs to actively engage in safety research, collaborate on ethical guidelines, and promote transparency in artificial general intelligence (AGI) development. Ensuring that AGI serves the best interests of humanity and does not pose a threat to our existence is paramount.”

The AI industry is working to solve these problems in a number of ways including focusing on more specialised models, such as BloombergGPTTM. This new large-scale generative AI model is a large language model that has been specifically trained on a wide range of financial data to support a diverse set of natural language processing (NLP) tasks within the financial industry.

Case study: Evolution AI

Evolution AI is using artificial intelligence in the financial services sector to assist with expedient, accurate lending decisions.

Set up in 2015, Evolution AI specialises in intelligent data extraction from business documents. Evolution AI rejected the traditional OCR (optical character recognition) technology as it failed to extract data from a lot of business documentation and is now using modern AI based methods.

Humans are no longer needed to read bank statements and balance sheets or go through business documents for underwriting purposes. Such boring repetitive manual work can now be fulfilled using AI algorithms.

Evolution AI’s CEO Dr Martin Goodson highlighted that you can’t 100% automate a process as you will always need people and human relationships, but you can automate elements of the process to reduce risk and drive efficiency.

Finance provider Novuna Business Finance and specialist commercial lending bank DF Capital both use Evolution AI software to simplify such business processes.

Novuna faced challenges with supplier invoices and extracting information using standard OCR technology. They decided to use Evolution AI software to extract data from business documents but had to address the orchestration of Evolution AI into Novuna’s system.

The successful implementation of Evolution AI’s software has allowed Novuna to extract from even more documents (for example, for sustainability reporting) and to use functionality during other stages of the process, such as with proposals earlier in the process.

Adam Crockford, Senior Change Manager at Novuna Business Finance said, “AI is not a threat but a tool to be used.”

DF Capital use Evolution AI software for the commercial lending side of their business with dealers and manufacturers. Previously DF Capital had to manually extract data from invoices and upload into their core banking platform. However, DF Capital wanted to scale up their business and use more automation going forward.

DF Capital are now taking the Evolution AI solution to the next level and are building API integration between Evolution AI and DF Capital’s core banking platform, linking to pre-existing automation from dealer and manufacturer portals. This allows for processing times to be reduced by 90%, increased even further by straight-through processing, an automatic solution for seamless electronic transactions and interactions without manual intervention.

For DF Capital, taking people on the AI journey with them is as important as bringing in the new automation technology.

Next steps

Artificial intelligence is constantly evolving. The financial services sector is planning to increase their AI investments across infrastructure, model development and deployment over the coming months and years. The industry therefore needs to look at AI use cases using a design thinking approach to enable financial service organisations to respond to this rapidly changing tech environment and to create maximum impact.

Are jobs at risk? This is always asked when a big technological change happens. While artificial intelligence will replace some human jobs as the technology advances, this evolving tech will in turn create new roles and new opportunities. AI can take away a lot of the repetitive drudgery, but it cannot take away all human roles.

With AI technology rapidly advancing, Evolution AI is further developing their use of AI for the future. Evolution AI’s Goodson commented that, in his 20 years in technology, there has never been a time when things have moved so quickly with weekly breakthroughs.

“AI combines excitement with anxiety in a shifting landscape of hands-on exposure to modern AI capabilities. Big changes are afoot,” concluded Goodson.

References:

More than four million people in the UK have used Generative AI for work – Deloitte | Deloitte UK

Will robots really steal our jobs? (pwc.co.uk)

Report – PwC AI Analysis – Sizing the Prize

The state of AI in 2023: Generative AI’s breakout year | McKinsey

The 15 Biggest Risks Of Artificial Intelligence (forbes.com)

Find out whether AI can change everything from the world economy to our personal lives by reading our review of the Asset Finance Connect Summer Conference 2023 Session

Analysis from Dr Martin Goodson CEO of Evolution AI

Perhaps the biggest impact of the rise of generative AI is on the credibility of the big four consultancies’ ability to predict the impact of AI on jobs! Only a few years ago, PwC predicted that education and healthcare were among the industries least likely to be affected by automation. Yet, today, we witness AI models like GPT-4 outperforming humans in medical examinations and chatbots usurping the roles of human tutors. The inconvenient truth is that the redrawing of the future landscape of employment by AI defies neat forecasts.

What is certain is that AI will become an integral part of operations in the commercial lending industry. Its potential for optimising tedious and error-prone business processes is too massive to be ignored. We should embrace this, as it means greater employee and customer satisfaction – and increased productivity.

The adoption process will take time. It’s a long way from a chatbot interface to a complete, well-designed product for the automation of a complex business process such as underwriting. Along the way, it will be important for AI vendors to recognise the importance of developing their AI technology’s capabilities in collaboration with businesses and end users.

Another consideration is the reliability of generative AI in the context of a highly regulated environment like the financial services industry. Generative AI suffers from hallucinations and is subject to bias, meaning that its various outputs – credit scoring models, predictive models, compliance reports and so forth – are less than 100% dependable. Human oversight, therefore, remains an indispensable component.

For businesses eager to leap into automation, the most immediate windfalls lie in the mechanisation of rote tasks: think data extraction from financial documents or reconciliation of invoices. As AI’s role morphs from the theoretical to the practical, the watchwords for industry should be collaboration, caution, and a healthy dose of scepticism about what lies ahead.

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European equipment

Power of partnerships to enable a sustainable transition

20 July 2023

Summary

Creating partnerships and ecosystems between lenders and specialist partners to provide strong client-facing asset finance solutions is increasingly becoming the norm within the asset finance industry in order to support the move to net zero.

At the recent Asset Finance Connect Summer Conference, a panel of industry experts from DLL, Lombard, Dell Technologies and Lloyds Banking Group looked at the potential of the asset finance industry to help businesses go through a sustainable energy transition and to help parent companies and partners on their path to a decarbonised economy.

“The whole energy transition is about the orchestration of partnerships.”

Leo van den Dungen, DLL

Partnership between parent company and subsidiary

Stuart Clark, Head of Climate Transition at Lombard sees the relationship between the parent company and subsidiary as fundamentally important to both sides of the business. Lombard is fully aligned with the values and purpose of their parent company NatWest, highlighting their “natural synergies” in working together on their strategy to support their customer base.

As Stuart Clark confirms, “Lombard can enable a faster transition for NatWest customers, for decarbonising transport or stronger and quicker investment in green technology, highlighting the unique role Lombard play in the NatWest Group.”

As part of their green asset finance proposition which was launched last year to support the transition to a low carbon economy, Lombard are playing a key and fundamental role within the NatWest Group with their corporate partnerships.

The partnership with large corporate client McCain, who are increasingly conscious of their ESG commitments, helps to reduce supply chain emissions and also allows Lombard and NatWest to help SMEs and sole trader farmers with access to capital and critical knowledge about the sustainability transition and green assets.

In another example parent company Rabobank joined together with DLL (their asset finance subsidiary), whose partnerships are core to the company. As Leo van den Dungen, Head of

Transformational Growth at DLL confirmed, “without partnerships, DLL would not exist.” Through their partnership, DLL can offer the food and agricultural specialist bank the impact needed for their energy transition through existing partnerships.

Leo van den Dungen noted that DLL and Rabobank wholeheartedly believe that “the whole energy transition is about the orchestration of partnerships.”

Richard O’Donohue, Senior Director, Partner Solutions at Dell Technologies pointed out that, through the partnership with their parent, they are able to leverage a big organisation and access insights into customers’ channel partners, and insights into various parts of the tech business.

Tim Biddle, Head of Asset & Invoice Finance Sales at Lloyds Bank Commercial Banking highlighted the “genuine” partnership between the asset finance product specialist department and the wider Lloyds banking group. Creating an interesting dynamic between parent and subsidiary, Biddle explained how asset finance customers can be introduced to a broad range of products and services from the wider banking group as well as expertise and consultation services, making the sustainable journey for SMEs clearer and more accessible.

Customer benefits

When starting on their sustainability journey, many SMEs are time constrained and don’t have the relevant knowledge and capital. Faced with risk and funding issues, SMEs require guidance and expertise from their trusted banking partner.

The trust relationship that parent companies have with their customer base can be leveraged by the specialist subsidiary companies and their partners, leading to additional business and consultation services for the customer.

For example, Lombard has partnered with specialist green companies to bring services to their clients that can help them to understand their energy usage, reduce costs and take action to save money and cut carbon. For example, through their partnership with Absolar, specialists in renewable energy services such as solar panels, Lombard can offer their clients guidance, funding and energy solutions – a ‘one-stop-shop’ providing a unique, bundled, aggregated green solution for the customer.

Importance of partnerships

Partnerships go beyond a transactional relationship and can plug-in to long-term business strategies within the ecosystem, according to Lloyds’ Biddle. Collaborations are becoming increasingly important in the energy transition in areas where specialist companies can excel and are more knowledgeable with more experience than the partner business.

During sustainability consultations, many banks and finance houses saw the benefits of third-party partnerships leading them to restructure their sustainable propositions. Plugging in partnerships during discovery phases can bring up some surprises and can change the original vision of the company.

Richard O’Donohue sees “a real opportunity for more and more partnerships” going forward as the world becomes more complex and more expertise will be needed.

However, he notes that it is important to know your strengths and what you can bring to the ecosystem before entering into external partnerships. For example, Dell dissolved some partnerships in areas where they themselves had better skills and expertise or where partners were not comfortable in new spaces. To be impactful in the energy transition, you need to know the strengths within your organisation and appreciate that there is room for failure, before engaging in new partnerships.

Leo van den Dungen discussed a soon-to-be-announced partnership between DLL and a major parcel delivery company who want to make a difference in sustainability by migrating their subcontractors to electric vehicles, highlighting the need for partnerships to share data and broaden the credit bandwidth to support the energy transition.

Emerging risk

While banks are used to analysing credit risk, new products and services to enable the sustainability transition come with emerging risk, for example, project related risk, supply chain risk, uncertainty around asset values, behavioural risk and usage risk that are unknown and challenging for banks.

Tim Biddle noted how the asset finance industry is becoming better at acknowledging their inherent capabilities and strengths as well as their weaknesses where support and partnerships are needed to plug in the gaps.

Lombard’s Stuart Clark sees the “biggest transition as a cultural transition,” with banks and finance houses needing greater cultural awareness to see opportunities in partnerships whilst not having a fear of failure.

When discussing the risk transfer mechanism, banks and finance houses need to look at things from a forward view, innovate and turn a problem on its head, according to Stuart Clark: “We need to think about future propositions and innovate, it is not just about the rear-view risk”.

When educating themselves in new models, processes and risks, banks and finance companies must allocate the emerging risks to companies who are best positioned to deal with them. With new risks arising on the road to net zero, it is unlikely that just one party will provide the overall end-to-end solution. Partnerships are needed where you can allocate risks and specialist roles.

Shift to consumption-based models

As we transition to a decarbonised economy, the asset finance industry is evolving, not just by decarbonising assets but with new funding models that need to rapidly develop to help the sustainability transition.

However, many banks and finance companies are cautious of the high risk-reward profile of new consumption-based products and services, such as subscription and pay-per-use, as they need more historic data to understand the usage and the accompanying risk.

As the industry starts to adopt consumption-based models, data will become imperative. DLL’s Leo van den Dungen believes that asset financiers must partner with AI data companies to provide the necessary data and analysis for new usage-based models.

With the launch of a tech-as-a-service partnership proposition on the horizon, Lombard’s consumption-based model links to circularity and the repurposing of an asset for a second life and the reuse of parts and material. New funding models and links to shared asset ownership will be a transition to a transition, according to Stuart Clark, and will be hugely dependent on successful partnerships.

The pace of development of new products and services is increasing quite rapidly, according to Biddle, particularly with changing industry attitudes towards risk, and consideration of behavioural understanding of asset use and client behaviour.

Concluding remarks

Partnerships are an essential requirement for the asset finance sector in the energy transition as businesses move to greener assets and new consumption-based financing models where uncertainties, challenges, data and emerging risks can be shared amongst members of the ecosystem, all with their own unique area of specialism.

Find out how the asset finance industry is helping businesses on their path to a decarbonised economy by reading the review of our Asset Finance Connect Summer Conference

Analysis from John Rees Equipment Finance Community Leader, Asset Finance Connect

It is clear from our panel with representatives from major global asset finance providers that partnerships will be crucial to the transition to net zero.

Single entities, even if large, will not have the expertise or credit appetite to provide all of the solutions that the move to net zero requires.

It is positive to hear representatives of global companies acknowledge that the need for partnerships is crucial in their development to support the transition to net zero.

Register now for future related webcasts
European automotive

Will the UK be ready for the 2030 ban on the manufacture of ICE vehicles?

14 July 2023

Summary

The UK Government’s decision to ban the manufacturer of ICE (internal combustion engine) vehicles by 2030 and hybrid vehicles by 2035 appears to be set in stone.

With 2030 just seven years away, representatives from the EV (electric vehicle) and charging industries gathered at the Asset Finance Connect Summer 2023 Conference to discuss what the industry must do to be ready for the ban on ICE vehicle manufacturing.

Education to dispel negative EV myths

There is a critical need for education due to the misunderstanding and bad press surrounding EVs. The UK media are doing a terrible job to support the EV sector and transition, highlighting so-called problems such as range anxiety and charging anxiety.

For example, a recent BBC Panorama programme left Andrew Leech, founder and managing director of Fleet Evolution “fuming and frustrated” over the “total distortions about electric vehicles”.

Leech noted, “It was typical sensationalist TV journalism with no preparation, no planning and no thought on how to manage a road route of that length. It seemed its only intention was to paint EVs, and particularly charging them, in a poor light.

“Anyone who regularly drives an EV will tell you that they are much more convenient than ICE models for everyday use, so why do journalists persist in using them for only a few days on trips most would only attempt once a year, with no preparation,” said Leech.

Car manufacturers and their dealers must assume responsibility for informing their customers about the conversion to EVs, including:

Plan your journey – look at your route range and charging facilities along your route. Vehicle range is irrelevant now as it is constantly being extended with improving battery technology.

Home charging – there is an ongoing debate about how many UK households have a driveway with estimates ranging from 20% to 70%, but those with driveways will allow 70%-80% of charging to happen at home. Home charging is a lot cheaper than public charging with many energy providers now offering “smart chargers” that charge your car overnight on the very cheapest tariff available Drivers able to charge at home pay just 5% VAT to power up their EV, compared with 20% for those without access to a driveway or designated private parking space who are reliant on the public network.

Cost – there are a growing number of EVs that are much more price accessible in addition to price reductions and discounts for electric cars. The initial purchase price of an EV might be more expensive than an ICE vehicle, but consumers need to focus on the overall lifetime cost of ownership, e.g. general maintenance is lower and more efficient to run if you can charge from home.

In a recent article – EVs set for major boost in 2023 – Nick Williams, managing director for transport business at Lloyds Banking Group, said: “Directly comparing an EV with its closest ICE equivalent can lead to some misleading conclusions, beginning with the price tag. Although the upfront cost of an EV might in some cases be more expensive, the total cost of ownership is likely to be less, and sometimes significantly so. As well as the obvious savings to be made on fuel, EVs have fewer moving parts and therefore need less maintenance.

“Even in the face of rising electricity prices, the cost argument for switching to an EV, when considered in the round, can be compelling.”

The Green Finance Institute actively engages with lenders about different product offerings for consumers on the EV journey and raising awareness of TCO. There is a perception that making the switch to electric is difficult, so through their financing models, lenders need to make the transition more appealing with product bundles combining EV and home charger.

Have EVs reached price parity with their ICE counterparts?

The initial cost price has always been a major factor in the EV purchase decision, with many consumers believing that an EV is beyond their budget. However, price parity between EVs and ICE vehicles doesn’t require the initial purchase price to be exactly the same.

For EVs, the total cost of ownership (TCO) — the full cost to own and operate the vehicle, accounting for purchase cost, fuel prices, maintenance — needs to become the most important deciding factor for consumers.

Some industry experts believe that TCO for EVs is already lower than its ICE counterpart with price already reaching parity if you consider subsidies in various markets and TCO, according to Deloitte in their Electric Vehicles – setting a course for 2030 report.

Other pluses for EVs also include the fact that EVs’ driving range is already comparable to that of ICE vehicles, and the number of models available is increasing.

Other industry analysts expect TCO parity between EVs and ICE vehicles as soon as 2024 to 2026 for shorter range EVs and 2027 to 2030 for longer range EVs.

Whilst there is a large depreciation gap between the cost of used BEVs and their original purchase price, the price gap of used BEVs is closing with their ICE equivalents if factors such as clean air zone charges are considered.

However, there is still uncertainty around the depreciation of EV residual values. Lauren Pamma, Programme Director at the Green Finance Institute believes that residual values are the big uncertainty surrounding EVs at present, but this is improving with data becoming increasingly available.

Charging infrastructure

In the UK, there is still work to be done on improving public charging networks so that EV drivers have access to infrastructure where it is convenient and at a fair price. Funding and investment models are needed to enable infrastructure at scale to cope with the increasing EV demand.

While charging infrastructure is currently not ready for the ban on the manufacture of ICE vehicles, by 2030 we will be ready as we still have seven years to prepare, according to Charlie Cook, CEO of RightCharge who sees solutions to the challenges.

We are constantly seeing new and improved solutions in technology, software and charging infrastructure, and as we approach the ban deadline there will be more and more investment.

In 2023 ChargeUK, a new trade body for the EV charging industry, was launched bringing together 18 of the country’s largest charge point installers, which collectively will invest more than £6 billion installing and operating new EV charging infrastructure by 2030.

Tens of thousands of new chargers are due to be installed this year, with the aim of doubling the size of the network through 2023.

ChargeUK will work collaboratively with the government and other stakeholders to help drive charge point investment and delivery, including shaping policies and regulation.

In July 2023, the UK Government published new regulations for public charge points, outlined in the Public Charge Point Regulations 2023, including a 99% reliability standard for rapid charge points.

The Public Charge Point Regulations aim to improve the charging experience for electric vehicle (EV) drivers in four key areas: payments, pricing, data and reliability:

  • Government is mandating contactless payments and payment roaming to reduce the number of apps.
  • Charge point operators will be required to be transparent about their pricing.
  • All public chargers will have to provide charge point information and data including live availability data.
  • New regulations include a 99% reliability standard for rapid charge points to build public confidence.

Charging issues also focus on the supply of power from the National Grid, with media reports raising concerns over whether there is enough power to fuel the increasing EV demand.

While National Grid are not worried about the demand from EVs, drivers need to be educated in off-peak smart charging overnight when it is most economical and uses cleaner energy.

Ben Boutcher-West, Chief Digital Officer at Connected Kerb noted that with the flexibility of electricity you can shift around charging behaviour with the use of software models: “the power supply is not a problem if technology can shift and provide those services to offer a blend of different charging options at different times.”

Battery manufacturing

The main cost of an electric vehicle is the battery, making up 55%-60% of the total cost. EV batteries are evolving with changing components and updated software and technology, all helping to reduce the cost.

However, negative media coverage about the quality and life of EV batteries has resulted in many retailers postponing their decision to purchase an EV, instead choosing to wait until there is more data about EV batteries. However, as Lauren Pamma, passionately declared, “we don’t have time, we need to make the change now!”

To meet the demand for EVs by 2030, the UK currently lags behind and needs to urgently invest in battery manufacturing and the supply chain, with only one small-scale battery plant currently up and running.

The global shift to electrification and EVs, in particular, to decarbonise the transport sector is creating a huge investment opportunity to meet the rapid increase in demand for batteries in the UK, according to the Green Finance Institute’s Guide to Investing in the EV Battery Supply Chain.

The new report discloses how the EV transition has the potential to grow the automotive battery market to GBP 12 billion in the UK as early as 2025, with growing battery supply chain capacity – upstream, midstream, downstream and end of life – presenting a significant opportunity for a wide range of investors across the financial spectrum, both those familiar with, and those new to the sector.

The UK has a window of opportunity to play a key role in the transition and grow its current battery manufacturing pipeline. Increasing investor understanding of the sector quickly is critical to seize this opportunity.

Concluding remarks

With only seven years until the 2030 ban on the manufacture of ICE vehicles, a lot still needs to be done to ensure that the UK is ready for the next step in the transition to electrification.

Investment is needed in charging infrastructure as well as UK battery manufacturing plants and supply chains as we move closer to the deadline.

Education of all parties is a necessity in the electrification transition of vehicles. Retailers need to be educated in the benefits of EVs and dispel some of the myths arising from negative media attention, for example, range and charging anxiety. Lenders too need to learn about different product offerings for EVs, while investment companies must see the potential for investing in battery and EV manufacturing in the UK.

Find out whether the UK will be ready for the 2030 ban on the manufacture of ICE vehicles by reading our review of the Asset Finance Connect Summer Conference 2023 Session

Analysis from David Betteley Asset Finance Connect's head of content

The transition to BEVs comes at a time when there are, in addition, a lot of moving parts at play in the automotive industry, such as agency, changes in regulation (new consumer duty), new mobility products such as subscription, the re-birth of old products such as rental, and the advent of the connected car. Connected cars offer the opportunity to completely change the pricing model once and for all from ownership to usership.

Whilst a connected car can be petrol, diesel or BEV, the question I think is whether the electric car revolution is the catalyst for the acceleration of the connected car and the use of the data produced by the vehicle to drive new finance products and usage-based pricing models.

There was much talk at the session about price parity between ICE and BEV and whether it will become a reality sooner rather than later. Parity has come quickly to some markets, but this has been due to the high level of subsidies for BEVs and this (as in the UK’s case) cannot continue forever. I must admit to being sceptical about some of the more bullish predictions about price parity, however, there can be no doubt that as the price per Kwh of electricity goes down, the appeal of BEVs will go up.

The winners in the ICE to BEV race will be those people that can charge from home, and whilst there is an ongoing debate about how many UK households have a driveway, the fact is that if you are a low to middle earner then you are more likely to live in accommodation that doesn’t have a driveway and will be forced to rely more (relatively speaking) on public charging which in many cases can be double the cost of home charging. In addition, if you are a low to middle income earner, you are more likely to be driving an older car that will incur high tolls to drive to work in a ULEZ.

Therefore, there is an element (as usual) of unintended consequence in that the drive to ban ICE vehicles will favour the better off! This could be offset by some kind of means tested incentive, but we will have to wait and see if the government (of whatever persuasion) wakes up to the social divide they are creating.

Continuing on the theme of charging, there is no doubt that the previous discussions about range anxiety have now been replaced by charging anxiety. The strong feeling of the panel was that charging anxiety has been over-blown by the media and that with education and a bit of route pre-planning there will be enough juice in the national grid and enough chargers (both public and private) to deliver it by the time 2030 comes around.

In conclusion, may I turn to the elephant in the room…..there always is one! This particular elephant is the loss of fuel duty and VAT on petrol and diesel and how HMRC will recover that loss. The favoured solution is road pricing, but this is unpopular with Brits who resent paying tolls. Road pricing today is a relatively simple solution to implement, supported by the “connected car” and the ability to re-price enabled by the data feed from the vehicle. This could of course impact the TCO of an electric car, but by 2030 the customer will have no alternative!

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European equipment

Nivo: AI co-pilot, combined with secure messaging, can unlock a new wave of productivity

3 July 2023

AFC Summer 2023 Conference: Fintech Innovator Award

Winner: Nivo

Sponsored by Lendscape and voted for by the Fintech Innovator judges and AFC conference delegates, the Fintech Innovator Award Winner for Summer 2023 is Nivo.

Matthew Elliott, Chief Commercial Officer and Co-founder of Nivo took to the stage at the Asset Finance Connect Summer Conference to showcase how generative AI based on ChatGPT style services can open up a range of possibilities for lenders, intermediaries and consumers, by plugging it in to Nivo’s secure messaging based communications platform.

Nivo is a fintech company focused helping brands shift away from email, portals and post, to a faster and safer way to communicate. The solution combines biometric identity verification and secure messaging in one simple app that customers love, and allows intermediaries and lenders to gather and share all the evidence, documents, and approvals required for a loan.

Looking at generative AI through a human-centric lens, Nivo are focused on solving a communication problem facing the industry today with an AI GPT-style service which slashes the amount of time spent by people finding the latest documents, chasing for updates, understanding what’s done and what’s outstanding, clarifying lender policies, and getting management information on how their teams are performing.

Analysts see generative AI having a high impact on sectors which are time and knowledge intensive, involving learned expertise, a range of data sets, repetitive tasks, and high levels of administration or documentation — characteristics that are prevalent across the asset finance industry where skilled, experienced, relationship-focused specialists are matching niche products and services from a wide array of lenders to specific customer needs, driven by relationships and human interaction.

At the same time, these specialists are typically spending 70% of their time on repetitive administrative tasks. Nivo believes that far too much time is wasted gathering, sharing and checking the information required to get a deal done.

Nivo currently solves this issue with their Verified Identity Messaging app by combining people, data and natural language – but can AI help this process even further?

Matthew Elliot sees AI’s potential to take this even further by removing this drudgery and unlocking a new wave of productivity, not by replacing humans but as a co-pilot.

Nivo already has the scale, volume and type of data flowing through its bank-standard secure Verified Identity Messaging service, but with a Large Language Model (LLM) deployed over that network, Nivo’s Nevis AI co-pilot can sit in their existing interfaces and use their existing data to find answers to questions raised by Nivo’s clients.

Simple questions can be answered by focusing on customer and lender data, but by combining and connecting different data sets, Nevis can answer more in-depth questions and interrogate different policy documents to find the best deal for the client.

Nivo are keen to create the best possible customer experience when dealing with regulated service industries by taking out the timeless waste and deploying a generative AI solution in their secure mobile journey. With the industry’s increasing appetite for AI, as well as the limitless potential of generative artificial intelligence, who knows where it will take Nivo!

Find out more about Nivo at www.nivohub.com or contact Matthew Elliott at matthew.elliott@nivohub.com

For more insights from this June's conference, see the Asset Finance International website
UK asset finance

Technology to enhance the broker-lender channel

7 June 2023

Summary

Technology is an enabler for the broker-lender channel, delivering business efficiency and simplified compliance, leading to better customer outcomes.

The recent Asset Finance Connect asset finance unconference brought together lenders, brokers and technology providers to discuss how technology can enhance the broker-lender channel.

Today’s UK asset finance brokers and lenders interact using a variety of competing solutions.

The technology sessions in the conference considered whether one technology platform used by all participants would create greater efficiency and a better experience for customers than multiple competitive platforms.

The scaling ecosystem business model

Participants in a scaling ecosystem are competitors who collaborate in ways that deliver benefit for all. This collaboration enables all parties to efficiently scale. Members of a scaling ecosystem may establish a collectively funded and owned entity to orchestrate the activities of all participants.

In the Netherlands, three competitor banks established HDN, a commonly owned organisation which enables interactions between brokers and lenders in the residential mortgage market. The collaboration lies in agreeing a format for the transition of data which moves through digital pipes owned by the organisation.

In the UK, if asset finance lenders and brokers were to establish a similar organisation and to agree a format for information exchange then this would create efficiencies for both brokers and lenders. For example, a lender seeking to create a single technology system to manage incoming proposals from multiple lenders could depend on receiving information in a single agreed format rather than having to cater for different formats. Similarly, a broker seeking to send proposals to multiple lenders could depend on sending information in a single agreed format rather than having to alter the proposal to meet individual lenders’ different requirements.

Against these efficiencies, some ecosystem participants might fear that they will lose the competitive advantage that lies in differences between them and other participants.

Case study: HDN

HDN ensures smart and secure information exchange in residential mortgages. A Dutch company owned by three of the largest banks, HDN creates the technology pipes and messaging standards connecting lenders and brokers. All mortgage transactions in the Netherlands go through HDN.

The HDN co-operative association includes 60 members representing almost all major providers of mortgage and mortgage-related products – financial advisors as well as franchise chains, service organisations and IT suppliers. HDN provides secure and smart information exchange in financial services with standardised, fast and efficient processes via a state-of-the-art secure and compliant platform.

Reinier van der Heijden, Director at HDN said, “There are great opportunities to use standardisation to serve customers even better. It helps customers to create a reliable and predictable process.”

HDN facilitates the application, underwriting and management process of mortgage and mortgage-related products. They do this, among other things, by developing and managing the standard for secure digital communication in the financial chain. This HDN language is created through interaction and co-creation with members and users. As a result, the HDN stakeholders save considerably on their operating costs, their processes are efficient, and their customers quickly know where they stand. To guarantee the quality and unambiguity of the standard, the members and users are certified annually.

The members of HDN make an annual financial contribution and participate in HDN’s working groups to ensure that all members have a say in what happens at HDN.

For more information, visit HDN’s website: https://hdn.nl/

The challenge of collaborating between participants in the lender-broker market

The UK asset finance industry is a larger more fragmented market than the Dutch mortgage industry. With more participants it is likely to be difficult to reach an agreement between lenders and brokers to establish a commonly agreed format without a trigger which makes it difficult to continue without an agreement to collaborate.

The industry sets a relatively high bar for collaboration.

The industry is currently negotiating an agreement to establish a commonly agreed basic audit for brokers (called a review) which lenders can rely on wholly or in part to replace their own checks. This would leave the broker more time to focus on generating business for lenders.

One trigger for establishing a common review process is arguably the increased focus generally on long complex distribution chains which has occurred because of the introduction of the Consumer Duty for regulated transactions. A common review has already been agreed for motor dealers, for example, which ensures that dealers are compliant with Consumer Duty requirements. A common review process for brokers dealing with non-regulated transactions is an obvious next step.

Attempts to agree a common review process for asset finance brokers have been largely successful, however the trade bodies FLA and NACFB have not agreed a single organisation to orchestrate the process – and it is possible that the industry will have two potentially conflicting sets of reviews, one run by the FLA and another by the NACFB. It is unclear whether the benefit of having two competing processes will outweigh the inefficiencies of having two organisations carrying out largely the same activities on behalf of brokers and lenders.

Another opportunity for collaboration has been more successful. Acquis Data Solutions have established an exposure register, a single shared resource which records leasing transactions by lessee. The collaboration required by industry participants was to share a sufficiently high percentage of all industry transactions that it would successfully identify individual lessees with whom the industry has a high exposure.

This project was triggered by a large fraud in which a single lessee financed an asset with multiple lenders. It was suggested that the size and frequency of frauds might be increasing. In this instance Acquis managed to establish a consensus among lenders to support the collaboration, even gaining participation from a large lender organisation who said they would not necessarily use the service.

It is possible that efficiencies alone might not be compelling enough to encourage collaboration. A large technology player, with the potential to act as a competitor to all lenders (Amazon, for example), might provide a trigger if they established a platform for brokers to submit proposals to them. An established infrastructure owned by the industry would create a barrier to entry for such a competitor.

The unconference considered FXE Technologies SmartFinance Hub to identify potential benefits of a common platform.

Case study: FXE Technologies (FXET)

FXET is a specialist provider of intelligent digital solutions for the business funding market that makes it easier for the ecosystem to compliantly transact.

For the Broker-Funder channel, FXET’s SmartFinance Hub enables efficient, compliant processes and freeing up time spent on admin to invest in building client relationships:

· Single point of access for brokers to screen proposals in minutes: Single point of access to panel of funders to match proposals to appetite without a hard credit search
· Digital packaging of proposals to drive high quality, consistent submissions with minimal admin effort: Use of background data and a single proposal path reduces admin time and increases look-to-book ratios
· Evidence of compliant processes and adherence of industry’s code of conduct: Audit trail to evidence compliant processes from capture of customer needs to confirming relevant consents makes adherence to compliance part of the management of each individual proposal – and easily evidenced

At the centre of the platform is FXET’s a digital proposal management process that ensures compliant processes are followed by a triage engine instantly assesses proposal against appetite across a funder panel. Funders can use more than 300 characteristics to pre-qualify proposals – providing brokers with an instant indication of the appetite across their panel.

Brokers are fully in control of progressing with any of the funders on their panel – creating a high-quality proposal and using the initial appetite assessment to have the right dialog with funders.

For the funder, the solution transforms their front-end and underwriting processes by doubling their underwriting capacity as proposals that are not in appetite are quickly screened out, preparing an initial set of assessments for the underwriter, driving higher conversion rates, and helping the funder internally to bridge the gap between an enquiry, decisioning and underwriting. This translates into faster decision making – and less wasted time.

Unlike decisioning platforms, SmartFinance Hub puts both brokers and underwriters at the centre of the decision-making for deals: recognising the nuanced decisions that are often required in the Asset Finance space, the platform creates instant visibility on ‘fit’ to brokers and funders but leaves decisions in the hands of experienced professionals.

For technology platforms to be effective and successful in facilitating interactions between funders and brokers, FXET believes that trust as well as demonstrated value-add is central. By working collaboratively with all industry players to solve key pain points, FXET recognises that transformation can be slow moving – as change without advocacy from all involved stakeholders is likely to fail.

Operating in the complex commercial funding ecosystem for more eight years, FXET has always put the human interaction at the centre and seen digital technology as a supporting system that can reduce the administrative workload and address compliance challenges, freeing up humans to deal with personal interaction.

Benefits of technology platforms

Many large funders are adopting digital systems to facilitate faster, more effective engagement with clients. In some cases, these solutions have cost millions of pounds. Funders view their proprietary digital platforms as a differentiator. The platforms embed the funder’s take on compliance and governance processes, as well as value-adds they want to provide to brokers.

A drawback of multiple lender-specific platforms is that brokers have to engage separately with each and to deal with the funder’s unique take on how proposals should be submitted.

The benefits for brokers of a solution that gives them a single point of access to all the lenders on their funding panel are clear. It reduces the need to enter a proposal into each lenders’ platform, giving them time to focus on the human interactive side of the business – engaging with customers and funders to structure the right deals. It also makes it easier for a broker to add new lenders onto their lending panels.

The benefit to large lenders who already have their own lending platform is less clear. One difference lies in potential value-adds extracted from data derived from other lenders as well as their own data which may provide valuable insight into an individual broker or an individual customer.

For example, a broker who submits the same proposal to many lenders (known as multi-propping) could be more quickly identified and treated differently. A lessee making multiple applications for an individual asset would also be more likely to be identified.

Perhaps the largest advantage to lenders of shared infrastructure is shared investment, and less duplication of work. The more lenders pool resources to invest in infrastructure, the more infrastructure they are likely to be able to afford.

This advantage is particularly compelling for smaller lenders who may not be able to afford their own solutions; and who would be more likely to conform to a common agreed proposal format than larger players.

But as expectations about what problems technology should be able to solve increase, the case for shared investment even among larger lenders may become stronger. One area where technology is expected to play a far greater role is around compliance.

Compliance

Compliance remains a major concern for the asset finance broker-lender channel, specifically as the FCA makes it clear that obligations like Consumer Duty will in due course also apply to the unregulated market.

There is already a blurring of the boundaries between regulated and unregulated business, with most funders having the same processes in place for regulated and unregulated deals.

The review of the Consumer Credit Act 1974 is expected to bring clarity and greater harmonisation of rules followed by unregulated and regulated business.

As the industry develops an understanding over what are the right controls, it can reduce the cost of these controls by making them part of commonly agreed background processes that ensure that compliant processes are adhered to.

Technology can allow a business to build-in processes that can ensure that compliance issues, like GDPR, and Consumer Duty, are addressed and demonstrated. Simon Goldie, director of advocacy at the FLA has suggested that technology could be used to embed many of the core elements of broker reviews into real time transaction checks.

The core DNA of a technology build is the ability to demonstrate good outcomes for customers and to track and show that good customer outcomes have been achieved. Automating and systemising data and evidence would assist brokers by bringing to the forefront those assessments that brokers must evidence, for example, eligibility and affordability.

While a technology platform can contribute to addressing key challenges in the asset finance broker-lender channel and delivery efficiencies, it should not be seen as a ‘quick fix’ to every industry-wide challenge between brokers and funders, for example, technology need not be the solution to commission disclosure.

Concluding remarks

The adoption of a co-operative technology platform similar to the HDN mortgage platform in the Netherlands provides a potential opportunity to establish an efficient ecosystem which embeds a range of value-adds which can significantly improve the broker-lender channel and discourage activities like multi-propping.

The business case for using a single platform is currently strongest among the smaller lenders who are less likely to be able to afford their own systems, and who will benefit most from shared infrastructure and sharing data. For now, the benefits of efficiency currently seem unlikely to offer a compelling enough case for larger lenders to drop their proprietary platforms which provide them with a competitive advantage.

Technology is increasingly being seen as a tool to manage compliance across the distribution chain. In future the broker-lender channel seems likely to embed real-time compliance into digital processes to ensure the sector delivers the right outcomes for all stakeholders.

Managing compliance may change the status quo, driving development of industry rather than lender-specific infrastructure. Industry platforms enable an industry to orchestrate ecosystem participants more effectively particularly where adherence to a common process is more about achieving compliance than efficiency.

The role of trade associations in establishing industry-wide solutions will be key.

Find out how technology can enhance the broker-lender channel by reading the review of our Asset Finance Connect Unconference
UK regulation

Challenges arising from regulatory overload

7 June 2023

Summary

Compliance and the sheer overload of recent regulation remain a major concern for the asset finance broker-lender channel.

With the recent introduction of new regulatory rules including the Consumer Duty rules and outcomes, regulators are continuing their drive for best practice and good customer experiences, together with a focus on price and value. This is all to the good, however, confusion surrounding the application of Consumer Duty rules to regulated and unregulated business, along with the review of the Consumer Credit Act and the Appointed Representative (AR) Regime by the Financial Conduct Authority (FCA) and the prospect of yet more change, has left many brokers in the asset finance sector wondering how their already stretched teams will be able to respond to the increased burden.

It is to be hoped that the review of the Consumer Credit Act (CCA) 1974 will bring clarity and a greater harmonisation of regulatory rules, while a possible collaboration of brokers, lenders and industry trade associations should result in a standardised process for information packs and broker oversight reviews, in order to ensure that compliance issues are co-ordinated in a common unified manner.

Standardized broker-lender review process

While regulation is having a notable impact on end-user customer outcomes and is helping to reduce risk and fraud in the financial services sector, the broker community is at a crossroads and can see a potential reduction in business due to the increasing oversight review processes and the introduction of more regulation.

All lenders perform their broker oversight slightly differently, depending on their interpretation of the regulation, leaving brokers having to go through a detailed oversight audit process numerous times in line with the number of funders they have on their panel.

Smaller brokers can therefore end up spending more time dealing with funders, broker oversight reviews and audits than they do actually serving their SME customers.

Standardization and consistency in the execution of oversight audit reviews is needed with funders and brokers collectively agreeing the way forward.

As the industry develops an understanding over what the right controls are, it can hopefully reduce the cost of these controls by making them part of commonly agreed background processes that ensure that all the relevant regulations are adhered to.

Technology can also allow a business to build-in processes that can capture adherence to issues like GDPR and Consumer Duty, demonstrating that they have been addressed.

The core DNA of a technology build is the ability to track matters and show that good customer outcomes have been achieved. Automating certain processes and systemizing data and evidence would assist brokers by bringing to the forefront those activities which brokers must evidence, for example, eligibility and affordability.

Appointed Representative Regime

There is a lot of ongoing activity in this space at the current time, with the FCA undertaking a review of the Appointed Representatives Regime (AR).

Initially AR structures were a convenient device to allow groups to share resources without having to have multiple permissions across multiple entities and effectively doubling-up resources.

However, applying the AR regime to the consumer credit market with all its nuances and complexities, different product types and different customers, has caused some problems.

As the use of ARs in financial services has continued to evolve, the FCA in its recent work has seen a wide range of consumer harm across all the sectors where firms have ARs. In particular, the FCA has identified significant shortcomings in principal firms’ (principals) understanding of their regulatory responsibilities for their ARs.

The FCA consulted on changes to protect consumers and address harm across all the sectors where principals and ARs operate. Effective from December 2022, the FCA introduced new rules requiring principals to provide more information on ARs, clarifying and strengthening the responsibilities and expectations of principals.

The new requirements cover three key areas: design and implementation of a robust AR oversight framework; annual gathering and reporting of AR data; and evidencing compliance with the rules in an annual self-assessment report approved by senior management.

The new rules mark a more proactive and, in many ways, more intense supervisory strategy by the FCA when it comes to ARs. The rules will affect not only principals in that they will have more responsibility in terms of overseeing and reporting information about their ARs, but they will also affect ARs themselves who will have to provide their principals with more detailed information on a more regular basis. Increased resources and costs will transfer to ARs for these services, with brokers once again burdened with more regulatory oversight and reviews.

The FCA added that it would undertake targeted supervision of principals and would increase scrutiny of those firms applying for authorization to appoint new ARs.

The FCA’s updated rules for principals making use of ARs introduce new responsibilities and requirements and signal a clear step-change in the intensity of the FCA’s supervision of principals.

Along with these new rules for principals, there was also a mandatory information gathering from the FCA under Section 165 of FISMA looking for drivers of harm and alerting principals that the FCA are looking closely at the size of AR structures: how compliance of a large network 100 ARs is managed; renumeration; and commission, for example.

Outputs of the review are still pending but the AR regime in relation to consumer credit is up for grabs at the moment. The fact that the FCA have initiated such a huge Section 165 across the whole market suggests that they are minded to explore particular areas of harm and may well seek further interventions.

Consumer Duty

With the new Principle 12 (Consumer Duty), the FCA has introduced additional layers of compliance and raised the benchmark for regulated business.

However, many in the asset finance sector feel that Consumer Duty has a few quirks surrounding the application to certain businesses and no uniform definition provided for the ‘retail customer’ term. These issues need to be resolved and clarified, including an urgent clear description of business use as all subsequent queries lead back to it.

The FCA had an ambition of trying to give everybody clarity about their roles in a regulatory structure but applying it to the asset finance marketplace is extremely complex, which is causing problems for both funders and brokers.

As a sector we need to get the focus right and get the data right and present the case to trade associations that we want asset finance businesses to be outside the scope of regulation.

The introduction of information packs from lenders for brokers, as a result of consumer duty rules, is also causing unnecessary work and upheaval for brokers due to a lack of consistency in the various packs that come from different angles. Different lenders have different views of the market, different risk appetites, and different processes.

Within a matter of weeks, brokers have got to assimilate all this differing and inconsistent information from different pockets of the market, in time for the end of July when Consumer Duty will be in place. Also, it is likely that packs will need to be refreshed and updated as and when things become clearer.

Just like the broker oversight review process, there needs to be more co-ordination in the market regarding information packs that must all contain consistent information and instructions. Consistency is also required across the various codes – FCA, FLA code, NACFB code, Lending Standards Board – with baseline information that lenders should be providing to brokers to try to harmonize the process.

Concluding remarks

According to one unconference participant, “compliance has become an industry in itself” with the focus no longer solely on protecting the customer.

Recent regulation overload has resulted in an increased burden for asset finance brokers, with more time being spent on onerous oversight reviews and form-filling rather than on their actual business and serving the customer.

Many brokers, who have always looked after their customers, are thinking about exiting from FCA permissions, as they simply do not have the time or resources to complete all the necessary checks and provide documented evidence of this, whilst also risking fines or censure if not properly completed.

Many in the industry are optimistic that the Edinburgh Reforms, including the review of the 1974 CCA and transfer to FCA powers, will bring an industry-wide definition of ‘individual’ that will exclude business use. The exclusion of business lending from consumer credit will increase liquidity for SMEs and sole traders and will, in turn, reduce the cost of regulation as the FCA do not see as much harm as in the consumer marketplace.

The asset finance sector, which sees relatively few complaints, should of course still follow best practice for unregulated business in the business-to-business marketplace.

The worst outcome from the Edinburgh Reforms would be if it is decided that all small businesses fall within the scope of regulation. In such a disruptive scenario, asset finance trade bodies would need to unite, co-operate and have a combined voice when dealing with the FCA.

Hopefully the review of the Consumer Credit Act will bring some clarity and peace of mind for the asset finance broker-lender channel; but for now, we will have to wait and see.

Find out whether the review of the Consumer Credit Act 1974 will bring clarity and a greater harmonisation of regulatory rules by reading the summary of our Asset Finance Connect Unconference
UK asset finance

Building a resilient and efficient broker-lender channel

7 June 2023

Summary

The asset finance industry is currently negotiating an agreement to establish a commonly agreed basic audit (review) for brokers which lenders can rely on wholly or in part to replace their own checks. This would leave the broker more time to focus on generating business for lenders.

One trigger for establishing a common review process is arguably the increased focus on long complex distribution chains which has occurred because of the introduction of the Consumer Duty for regulated transactions. A common review has already been agreed for motor dealers, for example, which ensures that dealers are compliant with Consumer Duty requirements. A common review process for brokers dealing with non-regulated transactions is an obvious next step.

Attempts to agree a common review process for asset finance brokers have been largely successful, however the trade bodies – Finance & Leasing Association (FLA) and National Association of Commercial Finance Brokers (NACFB) – have not agreed a single organisation to orchestrate the process.

It is possible that the industry will have two potentially conflicting sets of reviews, one run by the FLA and another by the NACFB. It is unclear whether the benefit of having two competing processes will outweigh the inefficiencies of having two organisations carrying out largely the same activities on behalf of brokers and lenders.

The recent Asset Finance Connect asset finance unconference brought together all relevant parties – brokers, lenders and trade associations – to discuss this ‘common focus’ in an open and transparent session.

Align a common purpose

There is a commonality of interest across the industry and a will to find a practical solution across all funders, brokers and trade associations for consistency, efficiency, and managing regulation and oversight.

Monitoring and oversight of these third-party relationships is a key requirement for any lender to ensure it proactively identifies and minimises risks, and demonstrates effective controls are in place. Effective oversight also has commercial benefits from the appropriate management of risk and the engendering of trust with partners and customers.

Lenders understand that standardisation and consistency in execution of the review process is needed with funders and brokers collectively agreeing the way forward.

For brokers, the time and administrative workload is increasing as the large range of funders each require slightly different levels of information and form filling. A lot of it is common information across different funders and therefore streamlining and standardising the information across the industry is a sensible move.

“It is important that we get it right,” according to the FLA and NACFB, who both recognise the significance of providing assurance for lenders and collaborating with one another for the benefit of asset finance brokers and lenders.

Both the NACFB and the FLA have developed broker oversight review processes that are aligned with Consumer Duty. There is close alignment between the NACFB and FLA review documents providing consistency and standardisation.

The FLA has also produced a ‘best practice’ for members which acknowledges the NACFB standards and shows a level of recognition and co-operation.

Along with the collaboration of the industry, the adoption of a single digital platform provides a potential opportunity to manage compliance across the distribution chain as well as standardising the lender-broker audit review. Technology would enable the review process to be a year-round activity and not just an annual review process.

Who will undertake the process?

While there is a close alignment between the NACFB’s and FLA’s review process – with 95% consistency – the more challenging issue is deciding which single organisation will undertake the review’s orchestration process – FLA, NACFB or an independent third party.

The NACFB has helped with the growth of brokers and, accordingly, brokers join the association on the back of regulation for assistance, support and advice. As an inclusive association, the NACFB have been working for 10 years on the review process and they recognise the challenges and see that consistency is needed through a kite-marked broker process. The association feels that their kite-marked assurance status provides sufficient auditing evidence for brokers.

However, the FLA and its members favour outsourcing the orchestration and auditing process to an independent third-party entity to either conduct the audit review process or, alternatively, audit the NACFB-assured kitemark process.

Lenders would also want transparency of data behind the kitemark, which would provide a starting point for lenders who need to complete due diligence. Many lenders’ compliance departments will still check the audit results to ensure that they comply with FCA regulations.

Lenders want an independent review process with collective transparency. They want the same single view of the broker – “a single version of the truth” – not an adapted review depending on which lender it is for, with full accountability and backing from the whole market. All lenders will need to be onboard with what works best for them, otherwise they will not use the review process.

From the unconference session and accompanying poll, it was generally felt that lenders favour the FLA or an independent body to complete the audit review process while brokers have no preference – they just want a common standardised review process to help ease their increasing oversight workload.

Issues to resolve

When assessing the work completed to date, it was felt that more questions need to be asked and more needs to be done before a common review is reached, including: what information is needed, how much detail do you need, how do you collect the data, how do you record it and report it, and who is going to pay for it?

With regards to remuneration costs for the process, the unconference poll found that lenders believe brokers should foot the bill, while brokers do not want to fund the process.

Many participants also feel that it would be good to standardise trading agreements and get rid of onerous clauses. However, at the current time the FLA has not seen an appetite from members to standardise other documentation.

The FLA highlighted possible issues with total industry collaboration citing asset finance brokers who are not members of any trade association or businesses who are happy to use their own systems and do not need or want an overseeing body.

Concluding remarks

There is a combined spirit and will within the asset finance industry to find a way forward to align broker oversight documents and processes, creating an efficient and standardised audit review.

The asset finance industry must keep communications open and continue to work together to streamline the audit review process and find a single entity to orchestrate the whole process rather than having two competing reviews running side by side.

One unconference participant concluded: “If we don’t look at regulation and standardisation ourselves in a coherent manner, then we will have unwanted regulation enforced on us.”

Find out how the asset finance industry is trying to find a way to create an efficient and standardised audit review by reading the review of our Asset Finance Connect Unconference
UK regulation

Scope 3 reporting brings a new set of industry challenges

26 May 2023

In association with Leaseurope and Eurofinas

Summary

ESG considerations in asset finance

Asset finance providers are working with clients on decarbonisation levers across transport, IT hardware and software and, for larger purchases, structured asset finance. These developments are being driven by new legislation, including EU and UK sustainability reporting regulations, and evolving market expectations.

In particular, net zero targets in the automotive sector – a 2035 target to phase out the sale of new internal combustion engine (ICE) vehicles – is driving capital providers and auto fleet owners to reassess forward-looking asset valuations. The scale of the automotive industry and technology advances in battery technology for long haul freight and bus fleets is having positive knock-on effects in the rail industry.

The UK rail industry is poised for major structural changes enroute towards the government goal of removing all diesel-only trains (both passenger and freight) from the network by 2040. Beyond emissions, social impact and biodiversity issues are beginning to come onto the agenda.

Data challenges remains

Gathering emissions data in a consistent way remains a challenge, both for fleet owners and operators and lenders. Scope 1 and Scope 2 emissions, which cover operations, provide a starting point for the process of creating emissions baselines for reporting purposes, and target setting. At present, starting the data collection process is the biggest challenge, as standards and processes exist once this is underway.

Beyond direct emissions accounting, value chain emissions represent a more complex data gathering exercise, requiring supplier engagement and updating of expectations for clients and other stakeholders. In particular, understanding and tracking fleet metrics, such as a miles per gallon, and grid-level emissions intensity metrics for electric vehicles, represents a new challenge for the industry.

For asset finance providers, assessing their financed emissions – Scope 3, Category 15 in emissions accounting speak – is a challenge that firms are having to come to grips with to meet reporting expectations in the UK and beyond.

Many finance companies are struggling with Scope 3 emissions data collection and reporting because their reporting covers a full range of activities requiring a diverse data set. A vast array of target guides and directives along with international standards cause confusion for companies who are unsure which framework is best to use.

Public procurement reinforces regulatory drivers on net zero

Beyond aspirational government goals, public procurement budgets are encouraging fleet operators and manufacturers to shift to electric vehicles. In the UK, all companies bidding for government contracts worth more than £5million a year are expected to commit to achieving net zero emissions by 2050, for example.

Alongside government procurement levers, corporate interest in low emissions fleets is supporting new financing innovations. If both corporate and government users of leased transport and IT products accelerate their net zero transition plans, this is likely to move the market faster than is currently expected. This could lead to reappraisals of asset life for emissions intensive assets and asset write-downs.

Beyond demand drivers, a host of new regulatory and voluntary standards raises questions for capital providers. From the EU Green Taxonomy to the Green Claims Directive, capital providers and operating companies are under increasing pressure to substantiate sustainability claims across all industries.

Beyond advertising standards and classification systems for business operations, financial reporting standards are also becoming more consistent, with ISO 14001 (environmental standards), ISO 32210 (sustainable finance), and the International Sustainability Standards Board (ISSB)’s raft of new guidance highlighted as setting new expectations for more standardised reporting by financial services players.

Unknown unknowns in the sustainability transition

Residual values and secondary markets for ICE vehicles remain a large question mark. For the rolling stock industry, the potential write-down of asset values implied by the government’s 2040 phaseout of diesel-powered trains has yet to be integrated into financial planning or client dialogues. Given policy uncertainty in a number of key asset finance industry segments, many are waiting to see if governments are in fact able to follow through on ambitious goals before seeking to transform business models.

Circular economy developments remain uneven, with asset owners and finance providers unsure of how technology and government regulation will influence decommissioning and recycling requirements across asset types in the UK.

Technology pathways are also uneven with hydrogen trains flagged as a promising technology that is still in a testing phase.

Despite a number of technology, policy and market-led uncertainties, all participants were confident that the industry was ready to adapt, with a focus on the ability of software tools to streamline data collection and reporting processes and enable industry-scale transitions.

As one participant summarised, “asset finance providers need to adapt and drive the change to survive in the current and future markets.”

Find out how scope 3 reporting is bringing a new set of industry challenges by reading the review of our Asset Finance Connect Unconference