European equipment

The transition to a ‘new world’ of usage-based models

26 May 2023

In association with Leaseurope and Eurofinas

Summary

Sustainability representatives from the equipment finance industry came together at the Asset Finance Connect ESG Unconference to discuss the emerging opportunities and challenges facing the industry as we transition to net zero.

The Science Based Targets initiative (SBTi) drives ambitious climate action in the private sector by enabling organizations to set science-based emissions reduction targets.

The finance sector is key to unlocking the system-wide change needed to reach net-zero emissions. With the SBTi Finance Framework, financial institutions can set near-term science-based targets that align their investment and lending activities with the Paris Climate Agreement. With a 50% reduction in greenhouse gases required by 2030, financiers need to start focusing on new ‘greener’ financing models.

Many in the industry see that a product shift is required from ownership to servitization and usage as we move to a ‘new world’; with usage-based and ‘As-a-Service’ models seen as the ideal products to tackle environmental issues. However, the transition to these new financing models requires a “total industry mindset change” according to the unconference participants.

As-a-Service models and the circular economy

Usage and As-a-Service models are important and impactful tools to enable the circular economy, all contributing to extending the life and use of products and assets.

The exclusive authority on Product-as-a-Service solutions, Black Winch, supports organisations in turning a product-based business into an in-house and circular subscription model and moving from transferring ownership to providing usership. Black Winch helps companies to re-think business models around servitisation and circularity to help organisations stay tuned to market changes.

Black Winch’s Sophie Féret believes that the industry needs to take a “holistic view of the ESG journey” with ESG seen as “an enablement to progress to the circular economy.”

The circular economy aims to eliminate waste by reusing it in the production process of manufacturing new products and to extend the life of these products. However, its implementation will not be effortless. The As-a-Service rising model, which is defined by the sale of the use of the product rather than the product itself, can contribute to extending the life and use of many products when applied to an asset, and therefore links to the circular economy.

For the users, the usage-based model enables them to satisfy their needs without the burden of ownership and without the need to continuously make large investments. It means that the manufacturer who owns the product has the responsibility to maintain its product in as near to purchase-day condition as possible. At the end of the many life cycles, the manufacturer is responsible for the after-use step, whether it is remanufactured, recycled or reused.

For the manufacturer, there are many economical and financial advantages with a usage-based business model: recurring revenue streams, maintenance and service product bundles, increased customer loyalty, flexibility and scalability. However, the manufacturer is now passed the risk from the financiers, with a focus on performance risk.

The goal of the usage model is that the asset is to be used for the longest time possible, by a variety of clients, whilst providing the best user experience possible. Therefore, the durability of the product is crucial; a solid and dependable product will be used for a long time, whether it is by the same user or many others.

Because the manufacturer is able to reuse the raw materials and various components after the product’s main lifecycle, the natural resources consumption decreases. The environmental and social impacts that are inherent to the extraction of raw materials and the production of one asset are therefore spread across many users instead of one asset for one user. The value of the raw materials is optimised to the maximum.

The usage-based model promotes the principles of a circular economy and, since users are more and more sensitive to environmental concerns and tend to choose the most sustainable solution, the As-a-Service business model is an opportunity to seize.

With users and manufacturers increasingly being asked to provide key information on the environmental impact of activities, As-a-Service allows all the players and their asset financing banks to access and monitor key data about environmental concerns, specifically around production and usage of the assets.

Changing mindset

While the case for usage products is compelling, many participants believe that such models will take time to take hold in the industry and will require a mindset change for the whole industry – manufacturers, finance companies, customers – and, as a result, the industry will get the maximum life out of the asset.

Manufacturers will need to redesign products to be more circular and part of a pay-per-use model, while finance companies will need to better understand this new economy and restructure their finance concepts to allow pay-per-use to thrive.

Many unconference participants see the adoption of As-a-Service models as a commercial and economic challenge for the industry. The transitional change to usage-based products requires a different approach to risk, documentation, sales and marketing.

Sales forces will need to be re-educated in order to sell a totally different financial product, or new younger talent recruited who think, act and sell completely differently. A further obstacle is finding customers who are willing to take a leap of faith and change to new sustainable models.

It was highlighted during the session that whilst customers appear to want these changes to help the transition to net zero, they too need to be re-educated so that they don’t continue to opt for traditional methods that they know and are comfortable with.

To scale up these new finance models, a fresh perspective is needed, without a comparison between traditional models.

Some finance houses see pay-per-use as a massive step for financiers and a very difficult market in which to shift. However, a huge step forward will happen for usage products when larger businesses start to support the circular economy and promote the second-hand life of assets. New financing products are essential for the transition to net zero.

We are living in an era where subscriptions are infiltrating our common life e.g. streaming movie channels; it will therefore only be a matter of time before these products are commonplace in the asset finance industry.

Partnerships needed to bring together a solution

Many businesses won’t be able to reach net zero alone. Collaboration and partnerships will be a key factor of success on the road to net zero, especially when trying to adapt to new usage-based circular models.

The uncertainty surrounding emerging technology, new risks and residual value unpredictability has led many banks and financial institutions to be hesitant about these new financing models.

With traditional financing models, banks have experience with credit risk and expertise at the beginning and end of the asset’s life. However, the period in-between is the most important part of the asset’s life in the circular economy.

Finance houses therefore need to create partnerships within their ecosystems, including manufacturers, asset managers and third-party consultants, to assist with the uncertainties and new risks.

The industry needs to deepen manufacturer relationships and enter into risk sharing or buy-back agreements in order to allow proper risk-taking on new assets. Lenders need to get smart enough to assess which manufacturers have the right technology to make it past the first wave of consolidation that will inevitably occur in the coming two to three years.

Knowledge needs to expand beyond a simple financial analysis – lenders need to develop the acumen to go beyond the numbers and get comfortable with the long-term potential of start-up players in the transition.

Confidence needed in new models

Before entering the new world of usage-based products, many funders and manufacturers need to gain confidence with the transition, which can be fuelled by data from client usage and manufacturers.

Through a new emerging data set, software ratings company Twist can provide the infrastructure to help companies get comfortable with new business models. Data such as how products are shared, remanufactured, resold, is provided to investors by an API that reports live ratings on the environmental and economic impact of circular companies. This is data that, until now, has been foreign to the asset finance industry. The digital and live way of conveying the data reflects the dynamism of the new business models.

Documentation issues

A number of participants raised concern about the lack of a Hell or High-Water clause in usage-based contracts. To promote confidence in these new financing models, changes are needed in contractual documentation. However, this process could take time with slow baby steps.

Some suggested that the contracts need to be standardised to pass through law with industry collaboration essential to provide standardisation.

Concluding remarks

The transition to a ‘new world’ of usage-based models is cautiously welcomed by the asset finance industry, but time and a mindset change are needed to enable the transition to these new environmentally-friendly financing models and circular economy.

Find out about the emerging opportunities and challenges facing the industry as we transition to net zero. by reading the review of our Asset Finance Connect Unconference

European equipment

ESG webcast review: From good intentions to effective action

5 May 2023

In association with Leaseurope and Eurofinas

Summary

While businesses may care about the environment and have plenty of good intentions, enforcing strategies and roadmaps and putting them into action is more challenging. Some approach the transition with a quiet determination to push things through, while many simply don’t want to pay to protect the planet or see it as too difficult to action.

However, the prospect of exchanging “dirty assets” to green ones offers opportunities for the asset and equipment finance industry to potentially make profit whilst at the same time acting on caring values. Equipment finance is in the right place to support the energy transition as well as considering how to take on the added residual value and credit risk.

But how can we turn the ESG dream into a reality? Odile de Saivre, CEO of SGEF, and Sacha Balachandran, Head of Equipment Finance at HSBC are senior representatives and knowledgeable leaders from two global banking groups, where ESG is a critical part of the parent bank’s strategy. In our recent Asset Finance Connect ESG webcast, they talked to AFC’s equipment finance community leader John Rees about getting into the details to make their ESG strategies happen.

The growing impact of socially sustainable business

Social factors have gained greater attention since the Covid pandemic forced working and living practices to change, highlighting the social issues that were already there.

With social issues being brought to the forefront, Odile and Sacha highlighted the growing impact of socially sustainable business and its importance in staff management and motivation. The importance of building a socially sustainable workforce through talent acquisition and retention is critical to futureproof our businesses, according to SGEF’s de Saivre: “People are key in our business for today and for the future.”

Both Balachandran and de Saivre are passionate about the importance of recruiting, retaining and motivating staff, and making sure that company values are consistent with modern values.

As de Saivre notes, we cannot do business the way we were doing it before, with Covid shifting the boundaries between professional and personal life, along with the expectations of people of all ages. Business is changing, assets being financed are changing, and there is an acceleration in striving for a positive impact for the planet. In these changing times, de Saivre believes that businesses need expertise and mindset: “people who can think out of the box and are motivated to go to work; they can be the future leaders of the business.”

For Balachandran, ESG is vital in recruiting and retaining staff, along with the alignment of a company’s purpose and values: “Existing and new employees want to align their personal values with a company’s values and purpose, and see the impact they can have both personally and in their workspace.”

Great companies need to follow up on the claims they make to prospective employees on their alignment with sustainability and D&I objectives, with positive action to ensure that is what new employees actually experience when they start work. According to HSBC’s Balachandran: “Sustainability is about being relevant, reliable, resilient and responsible, and that touches not just the environmental piece, but diversity and inclusion as well. If you’re not addressing those points, then you should question how sustainable you actually are and what that means for an individual wanting to join your organisation.”

A company’s culture is of the utmost important, according to de Saivre, with SGEF’s Care and Dare strategy putting ESG at the centre of SGEF’s vision. The Care and Dare motto focuses on the future and the planet and goes beyond ESG. ‘Care’ highlights the need for “true alignment” with employees’ values and the impact these values can have.

To ‘dare’ is to push the boundaries, linking to entrepreneurial innovation that is needed in the industry. Whilst guidelines are needed, innovation and experimentation are essential to confront new ways of looking at things. The industry needs to dare and take risks, but this can be difficult to implement in a larger organisation due to understanding and accepting new risk factors. Individuals need to be allowed to experiment and take “new” risk in order to feed innovation and new transactions, according to de Saivre who commented that, “if you want to move forward, you have to dare.”

As part of HSBC’s leadership team, Sacha Balachandran promotes the encouragement of employees, giving them the space to be entrepreneurs (both internally and externally). As well as challenges, there are also benefits to working for a big banking organisation: you can attract diverse talent across the group (from different markets, jurisdictions, experiences) and can leverage the brand. This helps to build diversity of thought, experience and skills, which in turn has the ability to challenge the status quo.

Circular economy

In the Circular Economy Action Plan of March 11, 2020, the European Commission highlighted the move away from the prevailing “take-make-use-dispose” model of the linear economy into a circular economy to keep the resources used in the economy for as long as possible. Resources should be used efficiently, with every phase in a products’ lifecycle being designed to ensure the product, and its individual components, are used to their maximum potential.

Many asset and equipment finance companies have been promoting the transition to a circular economy for a number of years, focusing on refurbishing and recycling their assets and components to ensure that assets are used throughout their lifecycle and recycled accordingly.

The leasing industry is circular in its very nature since the primary goal of companies active in the sector is to ensure that the assets remain in good working condition for as long as possible. Leasing can actively promote a circular economy by encouraging customers towards use as opposed to asset purchase. This massively reduces the amount of wasted resources since customers no longer dispose of assets once they have finished using them. Instead, customers simply return the asset to the leasing or rental company, who are well placed to either re-lease the asset to another customer, re-sell the asset, refurbish it for a second/third life cycle, or (where appropriate) dispose of or recycle the asset safely.

Balachandran noted that HSBC Equipment Finance works with partners to support circularity in terms of reuse, refurbish, redistribution and resale of assets as they come to the end of their first life. While some assets can go beyond their normal maturity and are naturally easier to reuse, refurbish and remarket, for example, buses and construction equipment, there can be a challenge to fund the second and third life of some assets. You need to be very knowledgeable as an asset financier with the asset and its use, and how to extend the life of the asset.

SGEF and its vendor partners see that assets can be used after their first life and are willing to make sure that the secondary market is ready and under control in order to help to refurbish and remarket these assets. Developing a reselling strategy for reused assets presents a number of new opportunities. Many manufacturers are developing spare parts and refurbishing assets as it is becoming increasingly important to them and their ESG strategy. SGEF is becoming increasingly comfortable to finance the second or third life of assets.

Usage-based pricing models are being introduced across the industry as a more beneficial financing option for the environment. While HSBC supports businesses who have adopted the pay-per-use model, they have not actually used the model for funding themselves. However, Balachandran believes that there is a place for usage-based and subscription models from a portfolio approach.

SGEF are increasingly seeing ‘as-a-service’ models, particularly equipment and energy ‘as-a-service’, with SGEF financing some of these transactions. These are new offers and understanding the risk factors associated with such products are key to the product development.

Transition to greener assets

As we transition to new greener assets, we must find the right ‘balance,’ according to Balachandran. Balance cannot be understated and is very important as customers, clients and assets are all at different stages of their journey and therefore no one-size-fits-all approach will work. There must be alignment.

The move to greener assets presents a big dilemma for the equipment finance industry. On the one hand, green assets are good for the planet, but on the other hand these green assets are frequently more costly and potentially present a greater risk with differing or uncertain residual values.

To prevent customers doing a U-turn reverting to older assets and technology, many industry players feel that governments must step in to help the transition to greener assets. There needs to be wider collaboration with governments in terms of incentives, funding and risk sharing. De Saivre points to a “collective movement” of governments, manufacturers and financiers to help with this transition and enable the industry to move further forward.

Partnerships in the ecosystem

Both Odile de Saivre and Sacha Balachandran believe that collaborations are critical to ESG strategies and building ecosystems is extremely important.

“Partnerships are very important for ESG strategies,” according to HSBC’s Sacha Balachandran, “the reality is that you can’t do it alone.” While some partnerships are informal (education, upskilling), others are more formal (RV risk sharing).

During the webcast, SGEF’s Odile de Saivre noted that a new combination of expertise and techniques is needed to achieve a successful ESG strategy. Ecosystems will grow and develop, but businesses must be open to partnerships with new start-ups who are more agile and risk averse and can help to move businesses and their strategies forward.

Concluding remarks

Throughout the AFC ESG webcast, Odile de Saivre and Sacha Balachandran discussed how the equipment finance industry cares and how it plans to deliver on caring for the planet and its people.

We need to be brave to dare in this industry, but we also need to deploy some of that entrepreneurial innovation that is exhibited in the asset and equipment finance industry to succeed with ESG.

Interview with: Odile de Saivre, CEO of SGEF, and Sacha Balachandran, Head of Equipment Finance, HSBC

ESG and an alignment of purpose and values is vital in recruiting and retaining staff
Circular economy presents new opportunities for equipment finance to refurbish and reuse assets
A new combination of expertise and partnerships is needed to achieve a successful ESG strategy

Communities

European automotive

European equipment

UK asset finance

UK regulation

Poll: The key challenge for companies seeking to attract staff by claiming that they are aligned on purpose, will be to deliver on the promises they make

Delegates unanimously agree that aligning a company's values and purpose with their employees’ personal values is essential in the struggle to recruit and retain talent.

Find out how a new combination of expertise and partnerships is needed to achieve a successful ESG strategy by reading the review of our Asset Finance Connect Webcast

Analysis from John Rees head of Asset Finance Connect equipment finance community

It is very clear that ESG is a critical topic for these industry leading asset finance companies.

This starts with a need to ensure that the company’s goals and purpose are aligned to the private values of employees. The need to maintain, recruit and motivate staff was a key topic for both Odile and Sacha.

And then once the staff are in place the delivery on the ESG strategy is critical. It is important to have an ESG strategy but even more important to deliver on that strategy. Talk is cheap – action is critical. It was clear from talking with SGEF and HSBC that the asset finance industry is uniquely placed to support the energy transition and support the circular economy, but it is also very clear that both companies are on the start of a journey and on a learning curve.

It may take some more time but there was a clear determination from both Odile from SGEF and Sacha from HSBC that this was a critical journey. And a journey that banks may not be able to find all the solutions to but in partnership with third parties (be they manufacturers or fintechs) a journey that ultimately is critical to the future of the industry and the planet.

UK asset finance

Managing the broker-funder relationship

2 May 2023

Summary

In the 1990s, banks and leasing companies were generally somewhat reluctant to deal with brokers. Times have changed quite dramatically, with banks and non-bank lenders happily dealing with communities of brokers, with many funders set up specifically to deal with brokers as their primary source of new business.

The panel at the 2022 AFC Winter Conference included a mix of brokers and funders who came together to discuss some of the challenges facing the broker-funder relationship.

Continual changes in the financial services landscape are causing issues for both brokers and funders; these include changing customer needs, expectations and demographics; regulation and compliance; and emerging technologies.

Digitalization

The Covid pandemic tended to push digitalization to the top of the agenda for companies around the world, with the financial services industry accelerating its adoption and development of digital channels and technologies.

However, the more digital things become, the greater the possible threat to brokers. There is an underlying concern that brokers might not be needed in the future as AI could potentially takeover key operations on all platforms.

With the transition to the digital world, brokers can themselves use tech to enhance the customer journey and manage the customer better, with dealer portals giving some power back to the brokers.

“There is a strategic way of using technology to complement the traditional methods of acquiring customers and building relationships,” according to Lee Schofield, Director of PMD Business Finance.

For brokers, the technology focus must start at the point of new customer acquisition.

According to Schofield, customers are wanting answers faster, coupled with digital ease of use. So, technology needs to be harnessed in the broker-customer relationship and have a particular role to play through the use of APIs.

However, with lower value asset finance deals, customers can still use online portals and digital platforms to go direct to the lender, therefore bypassing the broker.

Tom Perkins, Director & Co-Founder at Charles & Dean, believes that “brokers are having to evolve to have multiple business models within their own businesses.” According to Perkins, brokers are having to leverage different technology and systems for different asset finance applications. There has even been a surge in brokerages creating their own bespoke IT systems in order to make their business more competitive and also more efficient.

Along with the pandemic, came a shift to hybrid working and changing customer behaviours, resulting in much more online interaction as opposed to face-to-face client relationships.

It is inevitable that things will become more digital, according to Lee Brenard, Managing Director at Asset Funder, as it improves efficiency. But Brenard also sees a need to keep the ‘old’ values of face-to-face business, particularly as one way of reducing fraud.

Mike Randall, CEO of Simply finds the asset finance industry to be at a crossroads. While digitalization is helping to standardize the system, regulation is not making things any easier for brokers and funders.

Many panelists believe that regulation is actually stalling technological progress in the asset finance sector as compared to the consumer world.

Regulation

With the introduction of the new Consumer Duty, regulators are continuing their drive for best practice and good customer experiences, together with a focus on price and value. However, the expected reform of the Consumer Credit Act and the prospect of yet more change has left many in the sector wondering how their already stretched teams will be able to respond.

Nova Everidge, Director of Asset Finance at Metro Bank sees regulation as the biggest issue affecting the industry, making things ever more complicated, especially the lender’s relationship with their broker community.

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

With brokers dealing with many lenders on their funding panel, all of whom interpret the regulations slightly differently and have different requirements, Everidge believes that funders, “need to find a better way of working with brokers in what has become a complex marketplace.”

In the funder-broker model, Nathan Mollett, Head of Asset Finance at United Trust Bank feels that any issues are about oversight and the methods that funders use to ensure brokers are in fact delivering fair outcomes to customers.

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 accordance with the number of funders they have on their panel.

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

According to Mollett, standardization and consistency in execution is needed with funders and brokers collectively agreeing the way forward.

Collaboration

Key to a really effective relationship between funders and brokers is the need for consistency, oversight and collaboration between the various parties.

Funders and brokers need to collectively agree on how such a collaboration will work, possibly in a forum where all voices are heard enabling both brokers and funders to have viable businesses going forward.

The Finance & Leasing Association (FLA) and the National Association of Commercial Finance Brokers (NACFB), trade associations representing funders and brokers respectively, both need to work harder to reach an efficient solution for funders and brokers, according to the FLA’s Simon Goldie and the NACFB’s Norman Chambers.

While the FLA brings the funders’ perspective and the NACFB brings a broker view, they both also need to understand the other side of the equation. Goldie commented that, “collaboration and an open dialogue with brokers is key, together with understanding the issues from all sides.”

An efficient digital solution for broker oversight is also a necessity in managing the broker-funder relationship. While the NACFB and the FLA both have their own systems, they must work together for consistency so that brokers can serve customers rather than deal solely with oversight for funders.

“Standardization is important” from a reporting perspective, according to UTB’s Mollett, and is an issue which should be relatively easy to fix.

Many of the panelists, including Paragon Bank’s John Phillipou, agree that collaboration and standardization is very important and will help the relationships between brokers and funders, but agrees that the competitive edge must not be lost in the process.

Randall commented that “the pie is big enough for all of us,” and would therefore not want to see absolutely everything standardized, as some elements could risk the competitive element of relationships.

In Randall’s view, there is currently still quite a gap between brokers’ and lenders’ drivers and expectations, and the industry needs to collaborate to reduce this gap before there are long-term consequences for both lenders and brokers.

Find out about the challenges facing brokers and funders by reading our summary of December's Asset Finance Connect Conference Session

Analysis from Stephen Bassett head of the Asset Finance Connect UK asset finance community

The panel discussion in this session gave a very useful insight into the natural frictions which exist between those who originate new business and those who have to underwrite and manage such transactions during their lifecycle, whilst also ensuring that best practices are applied throughout.

The AFC conference session also highlighted the difficulties which arise from ever-changing and developing technologies and regulatory requirements together with where and how such new methodologies could best be deployed in the overall value chain without everyone duplicating additional costs.

UK asset finance

How to raise funds for a finance portfolio

2 May 2023

Summary

At the AFC Winter Conference we took an initial look at funding options for new and established companies wanting to start or scale up their own portfolio of finance agreements.

Stephen Bassett was joined on the AFC panel by a selection of experts from the funding market, each occupying a somewhat different position in the value chain, so that they could help highlight some of the many different funding approaches and financing options available. Moderator Stephen Bassett opened the discussion by noting that there were more ways to do this than many realized.

Warren Mutch, Head of Speciality Finance at Shawbrook Bank confirmed, “there is a range of different institutions and different sources of funding available. Some will work for you, others may not work as well.”

Sandeep Kaundal, Debt Advisory Lead at T.Mistry & Associates Limited pointed out that “lending to the lenders” is itself a form of speciality finance.

“Providing funds to lenders is actually a multi-faceted market.”

A brief overview follows, of just some of the speciality finance options discussed at the Conference:

Wholesale and block discounting. Block discounting is seen by many as the first concrete step in the own book funding journey. Block discounting allows independent finance providers and lenders to release the capital they have tied up in existing agreements once they have been originated.

It is a relatively simple and secure revolving credit facility allowing lenders and providers to raise funds against their future rental income streams and then immediately reinvest in their company’s growth by providing additional finance agreements to new customers.

Warren Mutch heads up the wholesale and block discounting team at Shawbrook Bank, whose block discounting facilities enable companies to do exactly this, releasing capital from current live contracts without impacting on the agreements arranged with their own clients.

Invoice discounting. Amongst other facilities, invoice discounting is offered by Leumi ABL as a core part of their asset-based lending product range. Like block discounting, invoice discounting improves a company’s cashflow, with immediate cash availability linked to outstanding sales invoices, so the available funding grows as the business grows.

Medium-term note programme (MTN). Working on the capital markets side of the LGB business, panelist Fergus Rendall, Associate Director at LGB Capital Markets described how they arrange debt facilities styled medium-term note (MTN) programmes which can provide a more flexible type of funding, offering investors greater diversity and higher levels of security.

Fergus was joined by LGB’s founder and director, Andrew Boyle, and they gave a clear and concise explanation of these MTN programmes which enable lenders and providers to borrow from multiple investors quickly and efficiently, the funds from which might be utilized in order to fund growth, refinancing, acquisitions, wholesale requirements, or just working capital.

Boyle concluded that, “LGB’s medium-term notes are perfect for companies who want to borrow incremental amounts, and for investors who want to have a regular source of notes at par that provide them with income. LGB have often been able to successfully put these two parties together.”

British Business Bank – ENABLE programmes. To support lenders such as smaller banks and non-bank financial institutions and unlock more lending to smaller businesses, the British Business Bank (BBB) launched the ENABLE Guarantee and the ENABLE Funding programmes.

Designed to encourage additional lending to smaller businesses, the ENABLE Guarantee programme incentivises participating institutions by providing a government-backed portfolio guarantee, to cover a portion of a designated lending portfolio’s net credit losses in excess of an agreed ‘first loss’ threshold, which they receive in exchange for a fee.

In November 2014, the BBB launched a new programme, ENABLE Funding, aimed at improving the provision of asset and lease finance to smaller UK businesses.

Providers of finance to smaller businesses often lack the scale required to access capital markets – a key source of funding for lending institutions – in a cost-efficient manner.

ENABLE Funding warehouses newly-originated finance receivables from different originators – bringing them together into a new structure. Once the structure has sufficient scale, it will refinance a portion of its funding on the capital markets. This means the British Business Bank can help small finance providers to tap institutional investors’ funds.

According to Shire Leasing’s CEO Mark Picken, the ENABLE Funding programme is like the “big brother of the BBB’s match funding facility,” and allows businesses like Shire Leasing to become engaged in securitization transactions.

Case study: Shire Leasing’s funding journey

Since its inception in 1990, as a non-bank lender, Shire Leasing has needed to create cash flow to fund agreements and growth. At the time, block discounting was limited with a “glass ceiling” of around £10m. Picken notes that, “If you were a cynic, you might say that block discounting is designed to keep the small man small, because you can only borrow just enough to make your way reasonably easy.”

After the credit crunch, the government-owned British Business Bank (BBB) was formed to look at many markets including block discounting. “The BBB’s plan was to try to smooth the way for people to get access to block discounting type facilities without the £10m limit,” according to Picken.

The BBB set up a match funding facility which changed the £10m ceiling of block discounting. Shire Leasing entered the match funding facility and received investment from the BBB’s commercial arm – British Business Bank Investments Ltd – in late 2014, matching Shire Leasing’s private funders and investing an additional £40 million block line funding into Shire Leasing.

The BBB then launched another product called ENABLE, allowing businesses like Shire Leasing to get into the realms of being able to securitize. Shire Leasing joined the ENABLE funding programme enabling the business to access wholesale funds at a reasonable price as well as diversifying their funder base.

In 2017, the BBB agreed a £37.4m ENABLE Funding Facility with Shire Leasing to boost asset finance for smaller businesses. (See https://www.shireleasing.co.uk/british-business-bank-agrees-new-37.4m-enable-funding-facility/). In 2020, the BBB agreed a further £62.4m ENABLE Funding Facility.

In 2022, Shire Leasing further strengthened their funding position with a £15 million secured medium-term note (MTN) arrangement with LGB Capital Markets. The programme will provide funding and enable further investment in Shire’s business platforms, operations, own book, and other opportunities as they arise. (See https://www.shireleasing.co.uk/lgb-capital-markets-advises-shire-leasing-on-15-million-mtn-programme/)

Shire Leasing is always on the look-out for its next funding facility, according to Picken: “If you wish to grow, you always need to look for the next appropriate type of facility.”

Along their funding journey, Shire Leasing has been happy with all its chosen funding sources with good relationships created along the way. Mark Picken highlights that, “the only way you can borrow money on any scale from someone who wants to lend it is to be transparent to encourage trust.”

Case study: LGB Capital Markets

LGB Capital Markets is a capital markets and investment firm providing two services: (i) capital raising for corporates; and (ii) offering investment opportunities to investors.

LGB Capital Markets provides capital raising advice and structures medium-term debt financing programmes to support the growth of their corporate clients.

LGB looks at the whole ecosystem from early-stage to large institutions: “Early-stage businesses approach LGB looking for senior, more developed funders come to us looking for more flexible facilities, potentially mezzanine capital, and even large institutions come to us looking for more working capital type facilities or mezzanine type facilities, potentially for things like acquisitions.”

One of LGB’s products is the medium-term note (MTN) programme which is more flexible than block discounting. A £15 million secured MTN programme was arranged for Shire Leasing in 2022, with the programme providing funding to Shire’s senior wholesale funders to enable the company to further invest in its business platforms, operations, own book, and other opportunities as they arise.

Shire Leasing’s Mark Picken was particularly impressed with LGB as the capital could be used for different options (with LGB’s approval), for example writing agreements, cash flow and acquisitions, unlike most other funding products which are restricted to simply writing agreements.

Advice for somebody looking to scale up or start their finance portfolio

From their different perspectives around the funding path, the panelists ended the conference session by offering their advice to anybody looking to scale up or start their own finance portfolio. The main thrust of this, according to all the panelists, was that to establish a strong and effective relationship with a lender, there must be complete transparency in order to ensure that there is mutual trust between parties.

Shawbrook Bank’s Mutch added that, from a risk perspective, he would much rather be supporting a customer already known to the bank, who has been onboarded and is performing well under a recognized growth strategy.

Other points raised included:

Stick to the basics and be transparent.
Get to understand the different funding processes and products that are available.
All your internal policies, procedures and systems all need to be set up, published and ready to go before further investment can be expected.
Make sure you have the right set of skills within your organization in order to manage the funding journey you’re about to embark on.
Know exactly where you are and what you want to achieve, create a thorough business and financial plan for growth.
If you are unsure, go to a consultant or advisor for further advice and clarification.

T.Mistry & Associates’ Kaundal reinforced that, “the funders need to be more convinced in every way possible that they can trust you and they can grow with you.”

Whether advising the borrower or the lender, Kaundal believes that a consultant can make the process simple and unlock the best liquidity option for their client, helping them to answer three important questions: (i) how can I grow my business? (ii) how can I make sure I’m getting the best deal? and (iii) how can I protect my business and align it for future recovery?

Find out about funding options for new and established companies wanting to start or scale up their own portfolio of finance agreements by reading our summary of December's Asset Finance Connect Conference Session

Conclusion from Stephen Bassett head of the Asset Finance Connect UK asset finance community

Whilst many experienced players in the lending market already know what they need to do about all these matters, many others, especially those just starting out on the lending journey, do recognize that there is a great deal to learn and that accessing funds at workable rates is not necessarily all that easy. It seems that more detailed sessions along these lines may well be helpful.

UK regulation

Is consumer understanding the keys to the kingdom of Consumer Duty

17 April 2023

Summary

Giving customers the information that they need, at the right time, and presented to them in a way they can understand is, in the Financial Conduct Authority’s (FCA) words, “an integral part of… creating an environment in which customers can pursue their financial objectives”.

Consumer understanding is considered to be a key component of the consumer outcomes of the Consumer Duty and an area where the FCA is looking for changes.

As Clare Hughes, Partner at Addleshaw Goddard highlighted during the AFC 2022 Winter Conference, “consumer understanding could be the answer to Consumer Duty.” This sentiment is shared by many in the financial services industry, with customer understanding being seen as the keys to the kingdom of Consumer Duty.

At the heart of the consumer understanding outcome are a handful of principles: using clear and timely communications, tailoring them where appropriate, and testing them to see if they are supporting your clients’ understanding and decision making. The key point for firms to consider is whether a communication is likely to be understood by the likely recipients. These rules apply to all communications, not only promotional material, and so cover the entire product or service lifecycle.

“Consumer understanding could be the answer to Consumer Duty.”
Clare Hughes, Addleshaw Goddard

Consumer understanding represents the opportunity to take consumers on a journey – sell them a product that they understand, communicate that product in a way they understand, have a journey which supports that understanding and delivers on expectation, and take them all the way through the entire product usage that they expect and that makes sense. By performing good customer understanding in a binary way results in a reduced number of complaints.

Hughes feels that, “Consumer understanding represents an opportunity to engage with our consumers, find out who they are, and how we can best communicate with them, in an effective way, the messages and products we want to communicate to them.”

“Consumer understanding is the key element that carries the consumer with you through the process of Consumer Duty.”
Clare Hughes, Addleshaw Goddard

Fiona Hoyle, Director of Consumer & Mortgage Finance and Inclusion at the Finance & Leasing Association believes that Consumer Duty “is a fundamental seismic change in regulatory expectation with regards to how we interact and provide services to our customers.”

Hoyle finds that customer communication has always caused challenges for businesses, especially in the consumer credit arena. This resulted from a starting challenge with asset, motor and consumer finance products being seen as enablers. People don’t start out on this journey – they want to buy an end-product and the finance product always falls in second place.

“Consumer Duty is a fundamental seismic change in regulatory expectation with regards to how we interact and provide services to our customers.”
Fiona Hoyle, Finance & Leasing Association

A complex but ageing regulatory framework, including the archaic 1974 Consumer Credit Act, presents further challenges to businesses especially in today’s digital world. This brings with it complexity and requirements especially in the online customer journey, where innovations have progressed, but customer communications haven’t.

However, Hoyle sees hope and positive change on the horizon, moving faster than anticipated, with the reform of regulation and publication of consultation papers driven by consumer understanding. The FCA has been looking at clearer communication for some time, with the Smarter Consumer Communications Consultation Paper 2015 highlighting that customers do not engage with longer communications.

Nina Babou, Head of Underwriting at Novuna Business Finance highlights that there needs to be a notable shift in our mindset from products to customers, and we should be designing our thinking towards customers from the outset.

Companies should be looking at their own teams, particularly in the product research, development and marketing phases where a diverse team is needed to see all aspects of Consumer Duty through varying consumer lenses. Babou’s view is that D&I must be ingrained in the company and the product, and how we think about our customers; it must be systemic and at the core of the business.

“D&I must be ingrained in the product and how we think about our customers; it has to be systemic and must be at the core of the business.”
Nina Babou, Novuna Business Finance

NatWest Group’s Behavioural Science & Applied Psychology Lead, Meera Shah, questions what we need to do to ensure there is that customer understanding:

Be clear about who your customers are.
Representation internally is reflective of representation externally – this is a good way of seeing what customers need and want.
Understanding and researching what is happening in the country economically at the moment and how the situation is affecting customers.
Average reading age in the UK is 12 years old – therefore communications must cater for this reading age – we need to look at communications and step back and see how it reads.

To effect the cultural change that is needed with Consumer Duty, NatWest’s Helena Thernstrom believes that an iterative approach is essential with a need to constantly measure. Shah feels that we need to look at statutory communications and see what is missing and look at consumer behaviour data.

To enhance consumer understanding, Shah sees the need to build an element of trust amongst customers and colleagues. The fundamentals of trust come down to three core components that are essential to Consumer Duty:

Competence – ability to do what they say they can do.
Integrity – act in line with stated values.
Benevolence – acting in the best interests of your colleagues/customers irrespective of your bottom line – might be profit-making but this is not your ongoing intention.

These fundamentals of trust are basic elements which should already be part of every company’s values and philosophy, but the FCA have implemented Consumer Duty as they obviously feel that businesses are not going far enough.

Consumer Duty will change the current mindset of businesses and customers, according to Shah, and will help businesses to focus on understanding the customer.

“Consumer Duty unlocks a better way to understand our customer.”
Meera Shah, NatWest Group

According to Addleshaw Goddard’s Clare Hughes, Consumer Duty and particularly consumer understanding can be seen as a shifting opportunity for the industry: “If we genuinely embrace Consumer Duty and engage with consumer understanding in good faith, then it has the opportunity to build trust, and allows the asset finance sector to be seen as a reputable industry that takes care of its customers.”

Consumer Duty through the lens of consumer understanding offers the industry an opportunity to reflect on their products and the customers, providing an opportunity to unlock certain aspects of the customer journey.

By shifting perception and customer engagement, companies will be able to re-baseline what they do, presenting them with the ultimate opportunity and challenge, according to Hughes, where they can facilitate the customer’s journey through consumer understanding.

NatWest’s Meera Shah sees that, “Consumer Duty unlocks a better way to understand our customer,” and through our data we can provide a more personalised customer journey. However, Shah feels that companies do not use this data to its full potential and need to look more fully at the breadth of available data to see how it could be used to better understand the customer base and then cater for their needs.

As Helena Thernstrom summarises, “Consumer Duty and consumer understanding requires us to take account of a whole complex package; looking at the product itself and looking at the target market, who are you talking to, how is it all put together, so there should always be a little bit of caution in thinking that a one-size-fits-all approach applies.”

Find out if consumer understanding holds the keys to the kingdom of Consumer Duty by reading our summary of December's Asset Finance Connect Conference Session

Analysis from Clare Hughes Partner, Addleshaw Goddard LLP

The FCA’s flagship initiative, Consumer Duty, has a number of layered component parts. Clearly the new Principle 12, the duty “to deliver good outcomes for retail customers”, is the overarching requirement but below that, on the next layer, the various outcomes are key to achieving compliance.

Outcome 3 – customer understanding – is potentially the most important outcome for firms to get to grips with. The customer understanding outcome requires firms to think about the products they sell, how they are sold to customers: what is said, how they are explained, and the methods of communication used to facilitate a greater level of understanding on the part of those buying the products. But the story does not end there.

Firms will need to think about how the product is serviced and whether or not that is in line with the customer’s understanding and expectations, how they explain the things which are done post-sale and the transparency with which they share information.

These things make customer understanding so important. The idea seems to be that if a customer buys a product they understand, and it operates in a way they expect, there is less scope for poor customer outcomes. When seen in this light, customer understanding is so much more than just re-writing your terms and conditions in plain language and getting them accredited. Customer understanding becomes a vehicle by which you can build relationships with your customers – a way to rebuild the public’s trust and confidence in financial services.

European equipment

Managing utilization risk: how companies are managing the risk of usage in pay-per-use models

6 April 2023

Summary

There was a lot of positivity at the Asset Finance Connect December 2022 conference surrounding pay-per-use models in auto and equipment finance industries.

The pay-per-use model is a much-discussed business model that businesses and consumers are considering due to its flexibility and sustainable credentials. The flexible consumption business model ticks lots of boxes – affordable for the customer, a sustainable solution, and the next step forward in future financing options.

Under the pay-per-use model, the ownership and responsibility of the product or service lie with the provider, and the customer pays a fee for usage. Many customers are considering this model because they like the idea of paying only for the services they require and use. In many cases, they also end up receiving better service because the manufacturer has a greater interest in providing a product that lasts.

While pay-per-use is not a new solution (cost per copy has been available in the copier/printer sector for many years), the rise of IoT has made the usage monitoring of the products easier, more accessible and more accurate than ever. This new data flow has made pay-per-use a more viable option for industries that previously didn’t have the tech capabilities to gain value from it.

In order to successfully leverage the benefits of the pay-per-use business model, you need to have access to two critical pillars: technology and data. Moving to a pay-per-use business model may call for changes to business capabilities, operating models, and enabling technology platforms.

There are many advantages and environmental benefits of the pay-per-use financing model with the potential to address the challenge of underutilisation of expensive machinery during the energy crisis. With many machine operators considering a switch to pay-per-use, the potential for greater flexibility and benefits for both manufacturers and operators are significant.

Pay-per-use and ESG

Pay-per-use models are a driver for sustainable consumption and the circular economy, where the asset can be reused, ensuring that the asset is serviced and as new for further lifecycle usage. As part of the energy transition, many businesses want to replace old unsustainable machines with new or used equipment supplied via a cost-effective flexible finance model.

“Pay-per-use models are a driver for sustainable consumption and the circular economy.”

Pay-per-use business models are often linked to increased environmental performance, with consumers becoming more conscious about consumption patterns and companies taking responsibility for product lifecycle issues.

In the Asset Finance Europe 50 Report 2022, Black Winch’s Yann Toutant observes that, “In response to the environmental challenges that we are facing, there are strong solutions that make us thrive while simultaneously not endangering the future generations and existing business models. The As-a-Service model is an important and impactful tool to enable the circular economy. On top of providing economical and financial benefits to the manufacturer/integrator to consolidate its position in its market or even increase it, this model reduces the environmental and social impact of industrial extraction and production of assets when associated with the circular economy principles. And since users are more and more sensitive to environmental concerns and tend to choose the most sustainable solution, the As-a-Service business model is therefore an opportunity to seize. And one last thing, for both the users and the manufacture/integrators, since it is increasingly required to provide key information on the environmental impact of our activities, As-a-Service allows all the players and their asset financing banks to access and monitor key data about environmental concerns, specifically around production and usage of the assets.”

Case study: machine manufacturer

Heidelberg Druckmaschinen AG, the world’s largest manufacturer of sheet-fed printing presses, has offered pay-per-use transactions with its printing equipment since 2017.

Heidelberg initially pioneered the new business model when they discussed changing to an Equipment-as-a-Service model (EaaS), adding the service option to the equipment. Heidelberg customers increasingly wanted support on how they could increase the efficiency of their machines. By adding a package where the price per sheet to be charged includes all the equipment, all consumables required such as printing plates, inks, coatings, washup solutions, a comprehensive range of services geared to availability, and consulting services intended to boost performance, Heidelberg was effectively allowing the customer and the machine to become more productive and efficient.

Heidelberg’s Head of Financial Services, Ralf Steger, addressed the conference session about the benefits of pay-per-use for Heidelberg’s customers, with their new digital business model following the growing pay-per-use trend in mechanical engineering, aiming to move away from growth based solely on selling and installing printing capacity.

At Heidelberg, pay-per-use offers a flexible model where the customer is only charged for the number of sheets they actually print. The model must include a base fee (related to cost of production and consumption of consumables and number of prints) which the customer must pay, but this can be flexible.

The first Heidelberg pay-per-use deal was signed in December 2017 and that first customer has now signed their fourth contract. With their pay-per-use model, Heidelberg experienced an immense learning curve, and today they have signed around 35 subscription contracts. As Ralf Steger noted, “The wise man does” and Heidelberg did!

Heidelberg has been exploring pay-per-use models for several years, looking for partners to share the risk. As an established German manufacturing and leasing company, Heidelberg knows their customers from immense data from over 20 years; they can therefore easily assess the customer risk and equipment residual value risk.

However, out of these 35 signed pay-per-use contracts, only a few have been financed externally, with most held on their books waiting for external finance partners to fund. As Steger notes, Heidelberg will take part of the risk, but they have a cashflow issue to fund the build of the printing press machinery, each costing €3-5 million. They therefore needed a finance partner to manage this cashflow.

Since the conference session, the Heidelberg Group has been able to further develop their pay-per-use model by entering into a strategic partnership with Munich Re Group. With this cross-industry partnership, the two companies are pooling their strengths: Munich Re, as the new contract partner, takes over the financing of the machinery, while Heidelberg is delivering everything which is needed for running a printing business.

Case study: pay-per-use financing

linx4 is an Austrian-based European financing company offering true pay-per-use financing for industrial equipment.

The pay-per-use financing of linx4 is based on an industrial IoT and AI risk management solution, to enable usage-risk sharing. Operating in over 20 European countries, linx4 offers data-driven pay-per-use financing products and tools to revolutionise machine financing operations using data-driven financing products and algorithms.

With a big appetite for pay-per-use financing solutions, linx4 has seen strong demand with business growing fast across different industries and different regions.

linx4’s Managing Director, Peter Oser, also sees the pay-per-use financing model as providing a sustainable solution, with the current energy transition creating a lot of demand from customers who want to replace energy-inefficient machines. If the customers do not have the balance sheet or traditional financing options to buy new machines, they therefore want variable, flexible financing based on a cashflow base.

linx4 enter into vendor partnerships, with 100% of business conducted through machine manufacturers who want to move to an EaaS model. Oser believes that many manufacturers see pay-per-use as presenting a real opportunity to have a more intense customer relationship. Often it is very difficult to get data from a client according to Oser, but if the vendor provides pay-per-use financing through linx4 they can access the data, have long-term service contracts and use the data to build additional business models, all while enhancing and digitalising the customer relationship.

“Pay-per-use is an enabler for vendor partners to develop new business models.”

Utilization

With the pay-per-use model, it can sometimes be difficult to predict individual case utilization according to linx4’s Peter Oser, so transactions can be observed on a portfolio basis to spread the risk of utilisation.

Oser highlights two things that are essential for pay-per-use financing that traditional finance companies are struggling with:

Technology – The ability to connect the equipment to your lease administration systems once the transactions start, so that you can collect data through a secure data transfer from the machine to your system. Middle and back-office functionality are needed for invoicing and other administrative processes. As Oser points out, this is easier to set up as a new start-up company rather than a company with legacy systems. With the rise of IoT, tracking the usage of products has become easier, more accessible and more accurate than ever.
Data – To understand the future volatility of the usage of the equipment, you need to look at different sources of data – from vendors/machine manufacturers and individual customers. Based on the data, the risk can be assessed, and the risk margin determined for each individual deal and priced accordingly.

To look at utilization on a portfolio basis, a diversified portfolio with usage risk focusing on more than one industry and region is essential to build an understanding of different utilization.

Oser notes that it is not unusual to look at a new type of risk along with the data behind it and the evidence you have. You can also look at ratings agencies and then pricing can change as you grow more confident.

With this model, a possible partnership approach between pay-per-use financiers (who have the technology/connectivity to the machine and understanding of machine usage risk) and more conservative bank lenders (who have funding and expertise in underwriting credit risk) can create complimentary relationships.

In the current climate, Oser points out that there are many investors in the European private debt market which has grown massively after moving away from banks. As money has moved into these areas, spreads have tightened, and a lot of capital is available. The pay-per-use business model with its risk returns and margins are attractive to the private debt market because pay-per-use financing offers real value to the customers and so they are prepared to pay a premium relative to traditional financing.

Case study: Technology

Basikon offers a cloud native technological solution that manages the full lifecycle of assets financed under pay-per-use transactions. As Renaud Winand, Country Manager for Benelux and Nordics for Basikon points out, digitalisation is needed from the front to back-end of the pay-per-use transaction.

Winand highlights the significance of products that are used part-time and the use of ‘used’ not new assets. Refurbishing and reusing the assets links to a sustainable circular economy. This also provides access to assets for smaller companies who want limited use of equipment, whilst also extending the life of the assets.

Basikon’s Winand believes that there are three fundamental characteristics needed to conduct pay-per-use financing:

1. Help the client to identify what they need, and the relevant pricing.
2. Measure usage of the asset (adding IoT devices to machines) and invoice that use.
3. A flexible digital system that can reconfigure traditional solutions.

Challenges

For pay-per-use to be embraced by the business world, there needs to be a change in the industry’s mindset, according to the session panelists.

Asset Finance Connect’s John Rees believes that, historically, we are a client financing business and there is an asset. But with a pay-per-use full-service model we need to become an asset financing business with multiple clients for the one asset; if you fully understand the asset, you can change the clients.

Basikon’s Winand agrees, you no longer need to understand the risk of the client, but you need to understand the asset, with a shift from risk managers to asset risk managers.

The focus is no longer on interest rates and traditional bank loans either; it is now about the usage of the equipment and assessing the utilization risk. With the correct data and technology, this risk can be managed.

“For pay-per-use to be embraced by the business world, there needs to be a change in the industry’s mindset.”

With big demand for pay-per-use going forward, this rising business model must be seen as a future financing solution for both auto and equipment industries that can offer flexibility and environmental benefits.

Find out how companies are managing the risk of usage in pay-per-use models by reading our summary of December's Asset Finance Connect Conference Session

Analysis from John Rees head of Asset Finance Connect equipment finance community

The conversation about pay-per-use models continues to dominate discussions at industry conferences including the recent AFC conference in London in December 2022. Whilst there is a strong feeling that the real number of pay-per-use transactions that are currently delivered is relatively small (compared to more conventional finance products), there is an even stronger feeling from leading industry executives that, firstly, this discussion is critical and, secondly, that in the coming 5 to 10 years pay-per-use products will become more and more important.

It is easy to see why there is such a strong feeling that this is a significant product for the future for the asset finance industry. The pay-per-use product charges the user of the machine on outcomes rather than being a fixed periodic charge based on capital and interest repayment. It means that the machine is only paid for when it is being used. This brings significant efficiency for the user and contributes to a much more efficient lifecycle for the machine, allowing for a potential second life for the machine. All-in-all a product that greatly supports the financial efficacy of the user and contributes greatly to the circular economy.

The product is in its early stages of development, but its relevance will surely grow and grow. As usual the early adopters pave the way for the industry. The asset finance industry needs to learn how to sell the product as there are different risks associated with the model, but the industry learns and adapts quickly.

How soon before the industry refers to provider and user as opposed to lender and borrower? Not long, I suspect!

European equipment

AFC leaders’ interview with Carlo van Kemenade, CEO of DLL

31 March 2023

In association with Leaseurope and Eurofinas

Summary

Carlo van Kemenade, CEO of DLL, spoke to Asset Finance Connect’s equipment finance community leader John Rees in the latest AFC leadership interview, in association with Leaseurope and Eurofinas.

Carlo van Kemenade leads the world’s largest asset finance and vendor finance provider. Taking up his leadership responsibility in February 2022, Carlo has recently completed a tour of the DLL global network to bring his vision and refreshed strategy to DLL. So, what is it like to manage a global vendor finance company which is a 100% subsidiary of Rabobank, a Dutch cooperative bank?

Future vision for DLL

After being appointed as CEO and Chairman of the Executive Board of DLL in February 2022, Carlo van Kemenade is responsible for implementing the company’s strategic plans, which enable DLL to deliver integrated financial solutions to manufacturers and distribution partners in more than 25 countries around the world.

Van Kemenade joined DLL from Obvion, one of the largest mortgage providers in the Netherlands and a wholly-owned subsidiary of Rabobank, where he held the position of CEO and Chairman of the Board between 2018 and 2022. Prior to his time with Obvion, Van Kemenade had a career with DLL that spanned more than 25 years, where he progressed through the ranks and built leadership experience in finance, operations, risk, IT, sales and general management, including assignments in several European countries and the United States. In 2013, he was appointed Chief Operating Officer and Member of the Executive Board of DLL and was responsible for all country operations and IT activities across DLL’s entire global network.

During his first year back at DLL in 2022, Van Kemenade spent time travelling throughout DLL’s global network reconnecting with DLL’s 5,500 employees in over 25 countries. The reunions with colleagues but also with customers were a fantastic experience for Van Kemenade. The reconnection was a big success as a following engagement survey amongst the 5,500 showed an extremely high score that outpaced the market, showing that loyalty and engagement is ever present in DLL’s network and making Van Kemenade extremely proud.

DLL has a strong management organisation. Currently composing and expanding the Executive Board team, Van Kemenade sees his ‘Team EB’ as “collectively responsible for the total strategy, while speaking with one voice”.

Van Kemenade sees DLL as united with a strong foundation, hands-on, and good at executing and delivering strategies due to:

Consistent service across DLL’s global network
A people strategy, where all employees can get the best out of themselves every day. Execution power and teamwork is part of the cultural experience at DLL.
Discipline in planning processes – DLL’s refreshed strategy has roadmaps with timelines, initiatives, ownership. Roadmaps are clear and realistic, with progress monitored. Roadmaps have critical paths to see when things are delayed and might affect other roadmaps.

Rather than looking at geographical expansion at the current time, DLL are focusing on sustainability, digitalisation and DLL’s unique culture, whilst optimising and expanding their value propositions for their vendors, dealers and customers.

The core business model of DLL

“We strive for deep partnerships with deep mutual understanding not just for one another’s industries and business models, but we also want to be a cultural fit for our partners as well,” commented DLL’s Carlo van Kemenade.

Delivering a consistent experience for its vendor partners across all global markets in which it operates, DLL represents its partners’ business and understands the customer experience.

DLL’s commercial performance, and partner and customer satisfaction are constantly monitored and measured, with DLL’s Net Promoter Score exceeding the market and improving for a fourth consecutive year to +62 (2021: +53).

Digitalisation

DLL has a new and refreshed strategy which is accelerating their digital transformation. Van Kemenade sees digitalisation starting at the point of sale and connecting with customers, partners and dealers with DLL systems and databases to enable the most flexible customer journey possible.

DLL wants the customer journey to be 100% digitalised and customer friendly. With Covid accelerating the digitalisation journey, DLL have more than doubled their investment and resources in accelerating the strategic digital journey over the next three years.

Bank-owned benefits

Van Kemenade highlighted the benefits of having Rabobank as its parent company including the stability during a financial crisis to always provide 100% continuity in funding to its partners and customers. As well as sharing knowledge and expertise with each other, particularly relating the food and agricultural business, Rabobank and DLL also share people talent (like Carlo van Kemenade himself) as the bank can offer career advancement in different ways.

Significantly, DLL has recently become one of the three key strategic pillars of Rabobank, who see DLL as a co-facilitator for the ESG journey (climate and energy transition as well as food transition, many of which are applicable to DLL’s new strategy). As Van Kemenade notes, “the bank views DLL as the facilitator and the lead player in asset-based finance products”.

ESG and sustainability

The Energy Transition Team was set up at DLL to manage its sustainability goals across all sectors and divisions. DLL see the ‘Road to Paris’ as their highest priority, helping to facilitate the transition to net zero. From a sustainability perspective, DLL’s redefined purpose is to help improve the world, combining with their partners to create a better world. This also provides new commercial opportunities for DLL and their partners.

Most of DLL’s partners are also on the ‘Road to Paris’ and they expect DLL to be on the same journey. Some partners want to be guided by DLL and some will go at a faster pace than DLL, according to Van Kemenade. This is most evident in the construction, transportation and logistics/industry (30% of portfolio) business, and in the food and agricultural business (40% of portfolio), so effectively 70% of DLL’s portfolio and their partners are busy on the ‘Road to Paris’.

DLL aligns and strategizes with their partners whilst looking at commercial opportunities with them; for example, clean technology from a climate perspective but also looking at greener assets that help the transition – finding the right balance in the journey to Net Zero. DLL are also currently developing an e-mobility strategy.

Organisationally, DLL are addressing the energy transition by establishing an energy transition team in the commercial domain. The team will support NGOs to capture commercial opportunities by following developments and translating them into commercial plans to approach the players and networks where these opportunities can be found.

Pay-per-Use financing is a topic at the forefront of DLL’s thinking. As a frontrunner in the Pay-per-Use concept, DLL have been able to apply it successfully to the marketplace and, whilst current demand is low, Van Kemenade sees huge potential over the next decade.

Carlo van Kemenade believes that the industry must be patient with new sustainable financing models, with the ‘Road to Paris’ justifying any investments and creating payback.

Pay-per-Use is the future, according to Van Kemenade, as he believes that over the next few years almost everything we do will be focused on circularity, with Pay-per-Use being an important part of it.

Van Kemenade sees ESG as a critical part of the DLL recruitment process. Younger talent care for purpose and want to work for a purposeful company who positively contribute to ESG and DLL gives all members an opportunity to contribute.

Carlo van Kemenade spoke passionately and honestly about his own career journey at Rabobank and DLL and how that positive rewarding experience has helped him see the importance of talent recognition and development in the asset finance business: “Healthy growth combined with healthy opportunities combined with a very well thought through people strategy where there is sufficient money available to invest in talent.”

Purpose is important because people want to work for a company which doesn’t just prioritise profit but has a clear focus on planet and people. Van Kemenade believes that DLL have an obligation to look after the planet as well as the next generation of talent.

Van Kemenade believes that there is a need for both new and mature experienced talent: “In the war for talent you have to cherish several generations.” Members who stay at DLL need to be kept fit, happy and healthy for longer, which requires extra investment. Van Kemenade discussed bringing back retired members to DLL to share their experiences with younger talent.

AFC Webcast Review: Carlo van Kemenade
CEO, DLL

DLL’s unique culture and global strategies deliver a consistent experience for its vendor partners
As a facilitator of the ESG journey, DLL’s redefined purpose is ‘Partnering for a Better World’, meaning DLL collaborates with its partners and customers to help them grow sustainably and be their transition partner to make a meaningful contribution to the world: “The Road to Paris”
DLL’s people strategy embraces ESG, as young talent wants to work for a company with a strong “purpose”

Communities

European automotive

European equipment

UK asset finance

UK regulation

Poll: DLL has built competitive advantage over its competitors because it delivers a consistent experience for its vendor partners across all the global markets in which it operates:

DLL’s unique culture, global strategies and mutual understanding deliver a consistent experience to vendor partners across DLL’s global network, according to over 80% of delegates.

Find out from Carlo van Kemenade what it is like to manage a global vendor finance company by reading the review of our Asset Finance Connect Webcast

Analysis from John Rees head of Asset Finance Connect equipment finance community

It was a great pleasure to interview Carlo van Kemenade – CEO of DLL. What did we learn?

DLL remains the world’s leading vendor finance provider, delivering very high levels of satisfaction to its partners and their customers.

DLL appears to get the mix between centralised control and local variation right. Providing a consistent experience which makes sense both in a local market and to global manufacturers is a challenge for most global vendor finance providers and DLL manages this challenge well. They get the right balance between global and local.

The organisation sees the ‘Road to Paris’ as an enormous opportunity – as does Rabobank, its parent bank. DLL is well positioned to capitalise on the Net Zero transition.

Whilst DLL currently does not see a great demand for complex Pay-per-Use deals, Van Kemenade expects that in 8-10 years almost every solution will be related to circularity and innovation, with Pay-per-Use being a key part of it.

Van Kemenade sees the importance of the link between prioritising purpose and attracting the next generation of talent. DLL attracts very high-quality staff and van Kemenade clearly intends to prioritise further developing its workforce.

Perhaps the biggest challenge for the business comes not from within but from the banking regulators. As a bank-owned finance provider, DLL will have access to competitively priced capital, but it could also be more constrained by regulation.

As a lifer at DLL, Van Kemenade really understands the business he now runs. He is a safe pair of hands. His accession at DLL has been managed with great skill with a formidable and talented team assembled around him. He has gently massaged the business’ strategy to include more focus on ESG. There has been an increased focus on people – an asset which Van Kemenade clearly sees as vital for the business’ future prosperity. It is difficult not to conclude that the company remains in good health and in good hands.

European automotive

Vision for the future: how Arval plans to thrive in a changing market

21 March 2023

Summary

In Asset Finance Connect’s recent webcast, in association with Leaseurope and Eurofinas, Arval’s Deputy CEO and Chief Commercial Officer, Bart Beckers, shared his vision for Arval’s future in a changing and challenging market.

In BNP Paribas Group’s 2022 full-year results, it was reported that Arval had expanded its global leased fleet by 8.3%, including acquisitions, growing the fleet to over 1.6 million. Globally Arval leased around 300,000 electrified vehicles by the end of 2022, four times the amount compared to 2019. And two successful acquisitions in 2022 of Terberg Business Lease Group and BCR Group have helped to expand Arval’s fleet.

Expanding fleet businesses

With acquisitions aplenty in the fleet industry, vehicle fleet businesses are simply getting bigger, with the merger of ALD and Leaseplan scheduled for 2023 creating a combined fleet of 3.5 million units, Arval with 1.6 million units and partner company Element within the Element Arval Global Alliance with more than 4 million units, as a whole. In addition, from a BNP Paribas standpoint, millions of vehicles are financed (including Arval’s fleet).

With fleet numbers and operator sizes expanding, more cars are needed each year presenting greater challenges for large fleet operators to source the cars they need during times of supply issues. As Bart Beckers notes, “this is a challenge but not a new challenge.”

“Getting the required cars while facing supply issues is a challenge, but not a new challenge.”

Beckers believes that size does indeed matter in the fleet industry but not just on a global scale. On a local scale, fleet operators can work with local clients and partners, while on a global scale they are able to invest in solid IT and digital suites to further leverage this scale and invest or indeed acquire competitors and partners.

A significant strategic partnership can be found with BNP Paribas’ partnership with Jaguar Land Rover (JLR), where the power of a bank can make a real difference to the scale of a business. With Arval joining up with their BNP Paribas colleagues in personal finance and automotive retail, BNP Paribas Group can offer a full suite of possibilities in a seamless one-stop-shop environment with a digital suite that is built for those specific needs. Different BNP Paribas divisions can therefore be used by the partner, such as JLR, for different needs. Such an operation has been deployed in nine geographies at the beginning of 2023 with BNP Paribas Group optimistic about how it will make a difference to the market.

While many vehicle leasing companies are merging their retail and fleet divisions, Beckers does not see this as an additional problem but rather a growth opportunity. Out of Arval’s 1.6 million vehicles, more than 1 million are still in the corporate sector and the rest is other business including retail, where private leases are a growing segment in many countries and the domain where Arval are competing head-on with manufacturers.

Transition to BEVs

Bart Beckers believes that price matters in any industry and particularly in the auto industry with the transitions to electric vehicles. Price is always an important issue, whether it is a private individual or large company.

“Price is always an important issue in the auto industry, whether it is a private individual or large company.”

To see the benefits of electrification, fleet managers need to adopt the TCO (total cost of ownership) method for analysing fleet cost and the TCM (total cost of mobility) approach, if they start using other forms of mobility, rather than using a monthly rental approach.

Larger companies are now driven just as much by their CSR and ESG agendas as TCO. And they also need to keep their own employees satisfied with the company car being used as a loyalty instrument. Charging infrastructure is extremely important too and must be affordable, with energy networks and energy pricing following suit.

Arval is concerned that cars are becoming less and less affordable. Bart believes that it is important that everyone (and not just the well off) can afford a car.

New entrants within the OEMs are bringing more accessible vehicles and prices to the global market, and Beckers believes that this should be embraced.

ESG and CSR are now seen as big drivers in the fleet business with large multinational companies in mature local markets willing to pay a premium for the environmental option. As Beckers confirms, “ESG is extremely important and growing in importance with large multinationals” as it is one way to really make a difference.

Often this is combined with fiscal incentives, with large corporate accounts pushing forward with governments’ efforts. Bart believes that fleet companies and governments must help as “we owe this to the environment as an industry… and Arval wants to play a role.”

Arval is taking a leading role in the net zero transition with feedback from Arval Mobility Observatory Fleet and Mobility Barometer highlighting that in most countries (one in two of the 25 Arval countries) they have already started embracing EVs and, at the end of 2022, Arval’s new order intake over all Arval entities was 35% EVs.

As part of BNP Paribas’ Horizon 25 strategic plan, Arval’s objective is to have 700,000 electrified vehicles in fleet by 2025, of which 350,000 BEVs. At the end of 2022, there were 300,000 electrified vehicles as a result of Arval’s determination and taking calculated risks with residual values (RVs).

However, the results of AFC’s accompanying webcast poll highlight that the main force influencing the selection of fleet BEVs over ICE is price (financial – personal tax advantages), with sustainability coming in second. These results link to a recent Arval Mobility Observatory survey conducted by IPSOS across six different companies who are mature clients of Arval. The study found that price and fiscal benefits were the most important consideration for companies, while electrified vehicles came fifth and environmental considerations unfortunately were tenth in the survey: as Beckers sadly noted, “Price and fiscal benefits are needed to get people on board.”

“Price and fiscal benefits are needed to get people on board the electrification journey.”

Setting residual values

Setting RVs is a difficult job, especially with some fluctuant new model prices and new companies with no heritage, such as Chinese OEMS, entering the global market.

Beckers explains in the video below that, while not an easy job, setting RVs for electric vehicles is Arval’s core competence.

When setting RVs, Arval initially assesses the vehicle and can then influence the price and the possibility of vehicle multi-cycling, with cars being reused two to four times, all contributing to the risk.

New mobility

Arval have an interest in new mobility products with a focus on mid-term rental products, Arval Connect telematics solutions, and products where you pay by the time you have the car.

Arval’s Beckers sees BEVs as indirectly being the catalyst for a whole new suite of customer mobility products. This is linked to changing times following the Covid pandemic with different living and working patterns being adopted. Although we now drive less miles, Beckers points out that we still need cars going forward, especially if we are not based in cities.

With new mobility comes new processes, new platforms and systems, and new people, so is it best to form strategic partnerships in your ecosystems or go it alone which could possibly be the slower option? Arval Beyond – Arval’s strategic plan 2020-25 that was developed before Covid – highlights their way forward in the world of new mobility.

Arval Beyond has four pillars focusing on mobility, electrification, flexibility and connected, and the most important pillar, according to Bart Beckers, partnerships.

Arval Beyond – Arval’s strategic plan 2020-25

360° Mobility: 360° Mobility transforms Arval from a car-centric company into a mobility company. In 2025, 100% of Arval countries will offer alternative and sustainable mobility products or services.
Good for you, good for all: Arval aims to become a key leader in energy transition and sustainability by helping customers to protect the environment and create safer roads. With Good for you, good for all, Arval will have 700,000 electrified vehicles in its fleet by the end of 2025 (including 350,000 BEVs), across all its 30 countries, as well as registering a 35% reduction in its fleet’s average CO2 emissions, and a 10% decrease in its overall accident rate.
Connected & Flexible: Arval is building a simpler and highly connected leasing offer. Based on a combination of new technologies and services, it will enable drivers to enter a new era of mobility with a much simpler driving experience. By 2025, more than 80% of Arval’s fleet will be connected and will offer a wider set of services to make the driver’s life easier.
Arval Inside: Since the creation of Arval in 1989, partnerships have been part of its DNA, starting with banks and car manufacturers, and now extending to other stakeholders. In 2025, 100% of Arval countries will have signed successful partnerships with international or strong local players.

Partnerships are important to Arval; not just distribution partnerships with companies such as JLR but also partnering with fintechs to scale up faster.

One strategic partnership, which has helped Arval to scale up and is complimentary to Arval’s legacy, is RideCell, which deploys next-generation global shared mobility solutions.

Subscription

When asked which products will emerge as the most important mobility product for the fleet sector by 2025, delegates of the webcast poll unanimously felt that subscription (47%) followed closely by Pay-by-Use (44%) products will be the most prominent mobility solutions in the future.

However, if price is one of the biggest drivers for BEV at the moment, will we see a rise in the premium subscription product, where costs are higher than a regular lease or PCP and not affordable to middle-income customers? Beckers feels that higher subscription costs are the price we pay for more flexibility and an easy-to-understand model which is appreciated from a consumer perspective.

Arval’s Beckers sees us moving into a world of mobility with a combination of subscription and full-service lease/PCP, but not 100% subscription.

The hardest aspect of the subscription model to get right, according to Beckers, is managing utilisation. This challenge is similar to that faced by short-term rental businesses. Going forward, to make subscription a successful mobility solution, customers need to get used to driving different and older cars, while fleet companies need to find ways of gaining higher utilisation from existing fleets. Refurbishment costs also need to be controlled.

Find out more about how Arval plans to thrive in a changing market by reading our review of the Asset Finance Connect Webcast featuring Bart Beckers

Analysis from David Betteley AFC Auto content leader

It was a real privilege to interview Bart Beckers who has enjoyed a long and very successful career in the fleet industry, during which time he has built up an eclectic knowledge of what makes the industry tick. Rather than sitting back and comfortably using that knowledge to maintain business as usual, Bart identified himself as a restless and very forward-looking individual, wanting to use his knowhow and the power of Arval and the BNP Paribas Group to initiate real change in the fleet industry.

Bart acknowledged that there was a continual merging of the traditional fleet and retail automotive markets, but he doesn’t lament that change, rather he sees it as an opportunity to enlarge Arval’s scope of operations, under the global BNP Paribas umbrella of “One Bank Auto”.

A number of factors are helping him to take advantage of the opportunities on offer:

Leverage Arval’s inherent ability to deliver in-car driver services using the wide range of telematics-based car derived data.
BEVs: Bart acknowledges that they are expensive, but by developing flexible financing models such as pay-by-use and/or short to medium-term rental products, and creative RV setting for lesser known but more affordable brands, they are more easily accessible.
Partnership with JLR.
Growth of salary sacrifice schemes and the like in various European markets.
Increased consumer interest in pay-by-use, subscription and other “new mobility” schemes.
Developing partnerships with like-minded Fintechs to provide speed to market for new customer demanded services.

We also talked at length about the elephant in the room for the automotive industry…ESG. Bart discussed his concern that the results of a survey conducted by the Arval Mobility Observatory strongly indicated that customers today are more focused on dealing with their costs increase than other things. Bart and Arval are on a mission to increase electrification of the fleet, and to promote the efficient use of cars by developing new products which reward efficiency.

European automotive

Finance first: Customer journeys that drive loyalty and increase spend

16 March 2023

Summary

The most recent Asset Finance Connect webcast, sponsored by FIS, brought together a wealth of auto industry expertise to discuss the finance first concept that provides pre-financing at the start of the customer journey, and both enables sales and ensures long-term customer loyalty.

Carpass is a business concept that pulls together operations, technology and business processes to engage the customer online for finance at the beginning of the car-buying journey and then provide the necessary technology to support that customer in their buying decision regardless of brand.

When developing this finance first platform, Tony Lynch, owner of Carpass.ai, asked the question: ‘as a finance company, what comes first – the car or the finance?’

Lynch believes that all car-buying journeys start online and most of those journeys need finance: “As a finance company we have traditionally been an enabler to the motor company, but we should be the customer acquiror, maybe the finance is that important to the customer that they can be pre-approved online for finance and then we’ll help you buy a car.”

There is an enormous opportunity for captives, such as Toyota Financial Services, to play a much bigger role according to Lynch and Toyota Financial Services’ Martin Muessener. Together, they started to realise that if the captive could pre-finance the customer at the beginning of the car-buying journey, they could potentially influence their car-buying decision towards the captives’ brand.

Martin Muessener pointed out that, since 2017, Toyota Financial Services has been observing customer behaviour in Europe regarding finance first. Since 2017, there has been an increase of 15% of car buyers who would prefer to finance first, providing an increasing opportunity to ‘hook’ in the consumer in the finance first phenomenon.

For captives, finance first is a new way of thinking and involves opening a new channel with finance first and direct to consumer. This will enable them to widen their customer base and loyalise customers. The conquest potential to get the customer to change brands leads to future growth.

Nick Brownrigg, CEO at BMW Financial Services Nederland B.V., highlighted that pre-authorising people for credit is not a new concept, but it must be done in an easy manner for customers who strive for ease of use. Brownrigg believes that digitisation in the car-buying journey is extremely important, as is the marketing effort as you still need to drive people to buy and not just simply visit your website.

David Nield sees the different drivers for finance first or car first depending on the confidence of the consumer being able to access credit. Everyone starts in a different place according to Nield, with sub-prime customers starting from what they can finance. The monthly payment is critical at any stage in the journey for the lender and customer from an affordability point of view.

Nield believes that the customer journey should enable the different starting points for customers depending on their needs, but current models don’t operate smoothly and are not customer oriented. As Nield states, “Customers can fulfil so much more of their journey online, a journey that should be customer first.”

Nick Brownrigg agrees that the car-buying journey should be moved to a single digital channel which should be the channel of the customer’s choice, for example, a mobile app.

Adapting technology

Traditional tech systems are built for car first and then finance, according to FIS’s David Woodroffe. Finance first would turn these systems on their head!

The car-buying journey is no longer a linear journey as it was five to ten years ago, according to Woodroffe. There needs to be a workflow reorientation to bring the finance approval to the start of the process at the front of the system. With pre-approval upfront, Woodroffe believes that we need to lessen the burden on the customer at the front-end to avoid a drop-off of customers having to fill out multiple forms. Information capture needs to be streamlined, using open banking services for affordability checks, dynamic pricing and eIDV (Electronic Identity Verification), in order to minimise the friction upfront.

To address the technical challenges presented with finance first, Woodroffe does not see any major problems that can’t be solved by stitching the journey through APIs – opening platforms and distributing capabilities through APIs. While the tech is available, Woodroffe points out that investment is needed to open and share data in the industry and make it accessible to APIs.

Genpact’s Harvey Maddocks sees the finance first conversation lending itself to artificial intelligence (AI). Amar Rana agrees and sees the future use of machine learning to speed up pre-approval and underwriting. AI could be used to collect the missing data, not to make the decision.

As FIS’s David Woodroffe confirms, “the use of data and machine learning is definitely part of the picture moving forward.”

“AI is going to change every aspect of the car-buying journey”
Tony Lynch

Tony Lynch sees AI as a very powerful tool that will change every aspect of the future car-buying journey. When looking at predictability of buying intent, the most basic form of intent is engagement, and the more the customer is engaged the more likely they are to buy.

Lynch believes that AI chatbots are genius at this type of engagement, answering just as competently as a salesperson: “If the success of finance first is based upon the conclusion of the sale, then the AI chatbot is going to be essential for us being able to scale it, especially across multiple markets and regions.”

Changing landscape

In researching and developing the finance first business processes, Tony Lynch found that customers are online for approximately three months browsing for a car. During this time, Lynch feels that finance companies should embrace the finance first initiative by engaging with the customer to provide information early in the journey and build a beneficial customer profile and loyalty over time.

As Lynch states, “pre-approval creates a level of loyalty which persists throughout the car-buying journey,” with the finance company engaging with the customer on the platform and providing a level of support.

“Financing pre-approval creates a level of loyalty which persists throughout the car buying journey”
Tony Lynch

While finance first is beneficial for the customer, is it attractive for the independent and network dealer channels? Martin Muessener sees a potential issue with independent dealers receiving a pre-approved finance first customer, with the temptation for the dealer to turn the customer to their own financing options.

For network dealers, finance first does the ‘fishing’ on the dealer’s behalf, sending them customer leads that they wouldn’t normally get as they are outside of the dealer channel. Customer credentials and shopping behaviour can be shared with the dealer who can then make predictions on how likely the customer is to buy a car, which has the potential to turn into a brand conquest for the dealer and greater customer loyalty.

Challenges

Finance first does present some challenges, including financing pre-approval without knowing what car it is being used for. This causes problems with current soft search systems that have an auto proposal system which must include a car.

Looking at financing pre-approval, CrediCar’s Amar Rana is concerned as underwriters will need to account for the fact that no car has been chosen at the initial stage. This causes an added complication, especially in the UK when trying to conform to the new consumer duty guidelines as you cannot give the customer a false sense of pre-approval. Rana points out that initial eligibility checks won’t take the vehicle into account but obviously when final financing approval is given, the vehicle will be added to the equation.

Another issue relates to the uncertainty of what finance product the customer will decide on at the end of the journey, as the type of product taken will change the RV. The tech system needs to be dynamic enough to fulfil the customer experience even if they change fields in the finance package.

Prime or sub-prime?

While finance first appears to present a more attractive option to sub-prime rather than prime customers, sub-prime customers are not necessarily the customers that a captive wants. Captives want the prime customers, but finance first is less attractive to them as generally they already know what they can afford and don’t need to get the finance first.

Martin Muessener sees opportunities for finance first in prime customers, especially those who are undecided about the finance product or car, customers who like to be guided and like the approach of curated sales and a premium trusted online service.

BMW’s Nick Brownrigg sees benefits for both prime and sub-prime customers in finance-first. For prime, it gives more value-added, more options and makes the process easier. For sub-prime it can enable you to get a car, based on what you need and can afford. According to Brownrigg, “if you are enabling a customer to make a purchase they need to make, that is the subprime; if you are adding value to a customer who knows they can already afford it by giving them the options or just by making the process easier, that is a prime customer with a good credit rating.”

However, Brownrigg sees that much of the value that is delivered to customers to generate loyalty comes after the point of purchase, over the next two to three years after they have made the financing purchase.

“If you are enabling a customer to make a purchase they need to make, that is the subprime; if you are adding value to a customer who knows they can already afford it, that is a prime customer”
Nick Brownrigg

Concluding remarks

“Finance first puts the customer in the driving seat,” according to Toyota Financial Services’ Martin Muessener. This direct consumer approach provides increased customer convenience, flexibility and freedom. While there is less of a structured sales process in finance first, for practical reasons there is more of a default approach at the beginning of the journey.

While Tony Lynch also sees benefits in finance first for the consumer, where they can see what they can afford, the monthly payment and likelihood of financing approval before moving along the platform looking at a potential car purchase, he also highlights the opportunities for increased sales and customer loyalty for the finance companies.

“Finance first puts the customer in the driving seat”
Martin Muessener

Find out about the finance first concept that provides pre-financing at the start of the customer journey, enabling sales and ensures long-term customer loyalty by reading our Asset Finance Connect Webcast Summary sponsored by FIS

Analysis from David Betteley AFC Auto content leader

This was indeed an extremely lively debate between people nominally with an auto finance related job-title, but with very different backgrounds and journeys to where they presently sit. As could be expected from such a diverse panel, there was not unanimous agreement about finance first, but this simply added to the debate!

As with many of the topics we present at AFC, there is no right or wrong answer; our job is to continuously monitor market developments and provide thought leadership as to the potential drivers our members and listeners need to be aware of.

Similarly, the survey results were interesting in that there was a wide spread of opinions from the delegates. There is clearly some hesitancy to consider that the majority of cars will be sold on-line anytime soon, so this is good news for our dealer colleagues, who now tune in much more frequently to our webcasts!

There was somewhat more enthusiasm for the growth of finance first, but again the survey results could not be interpreted as a “slam dunk” for this innovation.

There was a good debate about whether this is a sub-prime or prime product, but this was summed up well by Nick Brownrigg who explained that for a sub-prime customer it was about basic access to wheels, whereas for a prime customer the dealer/OEM had the opportunity to provide added value services and ensure long-term client retention.

So, I think the key question here is whether finance first is a finance pre-approval, a lead generation tool, or a customer retention policy.

My thought is that finance first should be thought of not as “pre-approval” but “pre-validation” What’s the difference you may ask. I think that for pre-approval, this sits better with a specific car choice when not only can credit be confirmed but a rate for risk model can be applied also.

Pre-validation is a step back from this and it enables the customer to continue the car buying journey with a greater feeling of security that they have the money in their wallet, that in turn enables the seller of the car to significantly increase the likelihood of conversion, and secure a finance contract even when the customer changes his or her mind about what car to buy, and from where.

A lot of talk about journeys. An old boss of mine had a favourite saying, “every journey starts with a first step,” …and Tony Lynch has started the finance first journey and there is no doubt in my mind that he has the skills, enthusiasm and staying power to complete it. Watch this space!

European automotive

European equipment

How digital business ecosystems are changing the auto and equipment sectors

7 March 2023

The concept of ecosystems originated in the geographical world but has traversed to the business and technological environment. As John Murray, Head of Solution Architecture (EMEA) at Alfa confirmed at the recent AFC Winter Conference, “Ecosystems are an environment with a set of rules and a number of participants who collaborate and compete against each other, where ultimately the overall value of the ecosystem is greater than the sum of its parts.”

Over time and following the pandemic, customers have become increasingly competitive and more demanding over what they expect to see in the marketplace, e.g. self-service applications, 24-7 availability as key requirements. Ecosystems answer these customer demands, with strong software providers offering a variety of components that are put together on a single platform which can be flexible, innovative and can adapt to requirements.

Building a digital ecosystem for asset finance is explored in Alfa’s Digital Directions 3 report, which draws on industry experts’ input to understand a future in which technology’s power is channelled not by individual operators, but by many participants, who collaborate in an ecosystem on delivering new value that exceeds the sum of its parts.

“Ecosystems are an environment with a set of rules and a number of participants who collaborate and compete against each other.”

APIs

Application programming interfaces or APIs are crucial to today’s digital economy as they are the foundation of many digital platforms, enabling organisations to build and plug-in new products and solutions in their ecosystems.

Digital Directions 3 emphasises the importance of open APIs as “a cornerstone of modern technology” in the way they simplify the process of connecting applications and enable ordered interaction between them.

For example, Alfa can provide APIs, such as to their credit decisioning engine, and clients can connect to these APIs with their own front-end portal. APIs together create an ecosystem that is incredibly powerful.

John Murray noted how Alfa can create direct links via open APIs to specialist products and services which will enrich their customers’ experience, reduce the need for Alfa to develop every element required in-house, and provide access to innovative fintech solutions.

“The system orchestrator plays a key role in making ecosystems deliver what is intended.”

Role of the orchestrator

The orchestration layer of the digital platform brings together all APIs and components, and is one of the most important aspects of the ecosystem for the customer journey.

As highlighted in Alfa’s Digital Directions 3 report, “The system orchestrator plays a key role in making ecosystems deliver what is intended. They are trusted advisors to their customers, charged with handling the complex data sharing, technology selection and value metrics involved in building an ecosystem. They have an overall picture of all the participants in the network, and an understanding of what new functionality is required, who will supply that requirement, and how risk and reward will be shared.”

An orchestrator could take on an advisory and consultancy role focusing on the customer and what is best for them, looking at what could be added to the platform, and then orchestrate what is the correct and best tool for the job.

With industry expertise and customer experience, a company such as Alfa would be ideally placed as an orchestrator bringing its trusted leadership to the ecosystem, forging successful partnerships, and integrating components to make a successful ecosystem. With Alfa’s industry knowledge, John Murray highlights that they can look at what is already available and put the solutions and products together effectively in a business relationship.

John confirms that as an ecosystem orchestrator, “the key thing is to understand the business benefits alongside the technical options that are available.”

Boston Consulting Group notes that, “Orchestrators are the pivotal players and stand to gain significantly as platform-based ecosystems increase market share and eat into the profits of traditional companies.”

“The key thing is to understand the business benefits alongside the technical options that are available.”

Collaborative partners

Whilst not a new business concept, ecosystems are essentially about choosing the right solutions and products and plugging them into a single platform for a seamless customer journey.

Ecosystems therefore need strong collaborations with partners who have a single focus and can deliver the functionality in a solid way. As John Murray points out, Alfa could build each individual function but this could be time consuming, or they could partner with a trusted company with a good reputation who can provide that functionality quickly. Alfa would help choose the best solution with the most flexibility that could add the most value to the ecosystem, while not necessarily doing much – if any – development work itself.

The key benefits when creating partnerships and ecosystems are twofold: (i) speed and improving time to market, so that customers get the solutions quickly; and (ii) reducing risk.

Ecosystem partnership strategies can generate significant value both by growing the core business and by expanding the portfolio into new products and services.

One such integration partnership with Alfa is Tomorrow’s Journey, whose SaaS platform JRNY is purpose-built for subscription and usage-based mobility, and integrates perfectly with the Alfa Systems platform. Tomorrow’s Journey CEO Chris Kirby said, “the customer’s desire for an enhanced digitalisation to plug gaps in their journeys resulted in a necessity to partner with other specialist brands and provide a seamless customer journey.”

But with so many solutions in an ecosystem, which players – large or small – actually benefit from the partnership? Andrew Martin, Chief Data Officer at CrediCar would like to think that everyone can benefit, with large companies, like Alfa, having the flexibility to plug in new technologies and leverage advancements that they can’t or don’t have time to build in-house, while smaller companies can focus on new solutions and technologies and then interface with big players who can plug in their packaged-up solution to the ecosystem.

There are also advantages for business customers who get the benefit of all these varying solutions and products being brought to them on one platform in a seamless journey.

“Ecosystem partnership strategies can generate significant value both by growing the core business and by expanding the portfolio into new products and services.”

Partnership risk

Digital business ecosystems present a number of potential pitfalls as well as opportunities. Working with smaller fintechs, who often need to generate new funding, can be seen as a risk for bigger players in case they suddenly disappear and there is a gap in the platform.

John Murray highlights that companies such as Alfa will ensure that they only collaborate with trusted partners with a successful track record, to ensure that their customer won’t be affected, with any risk being looked at from a business sense (a need to mitigate risk through procurement and due diligence of new partners) and a technological one (cloud offerings have resiliency built in which provides strong backing).

There is also an element of risk for smaller companies who partner with large companies in the ecosystem, as a large player could decide to build the third-party functionality themselves or replace it with a better solution. The use of APIs in a software platform built of many components allows the easy replacement of an individual component when a better one becomes available, making it easier and faster for platforms to evolve and develop.

Alfa’s John Murray points out that major companies like Alfa prefer to focus on the customer and customer journey when providing them with the partner’s functionality. They like to interact with smaller specialised companies as the more ecosystems they can be part of, the stronger the overall solution will be. If they were to create each solution internally, the time to market would be too long so it makes sense to partner with specialists.

Large tech companies no longer have to be seen as a one-stop-shop, and they present the opportunity to plug-in specialised flexible solutions which help to adapt to new customer requirements. In turn, small companies can be integrated to many different ecosystems creating a stronger offering.

Another risk could be identified when smaller companies move between the ecosystems of more than one big player. However, John Murray confirmed that Alfa is happy for their partners to be part of many ecosystems as it makes them stronger. The downside to being exclusive to one ecosystem is that you can only move as fast as that one system, so working with a large number of players allows the smaller company to be functionally stronger and have a wider awareness with new visions from different markets.

“Large tech companies are no longer seen as a one-stop-shop; they present the opportunity to plug-in specialised flexible solutions which help to adapt to new customer requirements.”

For more information on building digital ecosystems in asset finance, download Alfa’s Digital Directions 3 report, which offers insight into the emerging role of technology providers as ecosystems orchestrators, identify various types of ecosystems, and discuss the current opportunities to deploy them in order to meet the needs of the auto and equipment finance industry.

Find out how digital business ecosystems are changing the auto and equipment sectors by watching our Asset Finance Connect Conference Session

Analysis from Andrew Flegg CTO, Alfa Systems

One of the key goals for many of today’s customers and providers is to embed all technology using APIs in a wider digital ecosystem.

Open APIs are a cornerstone of modern technology which simplify the process of connecting applications, and enable ordered interaction between them. Granular, well designed APIs empower organisations to build ever-greater value for their users in less time, and with less investment, than has been possible in the past.

A digital business ecosystem provides cutting-edge capabilities and can be developed by the provider, its clients, or specialist third parties that deliver anything, from state-of-the-art digital engagement channels to innovative, usage-based products.

Finance providers are recognising the opportunities to create new forms of value through partnerships, and collaborating via shared data such as telematics, causing ecosystems to become increasingly popular.

As more participants collaborate, they begin to create a community with a common purpose, which can work together to tackle challenges. Further to this, entire platforms and applications can be fully integrated to deliver new business solutions.

The vision for an open digital platform such as Alfa Systems is to empower customers to leverage the power of these connected ecosystems, which could be through receiving telematics or credit data, or introducing new products or origination channels.

Growing economic pressures, combined with the prospect of businesses facing increased strain on budgets and investments, represent an argument for collaborating with other providers and forming partnerships. These alliances can offer the customer a complete, seamless journey in one ecosystem of specialist modules.

Alfa is therefore exploring more integration partnerships, to satisfy the future needs of the industry, while opening up possibilities for our customers and showing them what is available in our growing ecosystem. Through such collaboration, Alfa can introduce customers to specialist ‘out-of-the-box’ applications in a central ecosystem, providing a managed solution that will save them from having to embark on that journey themselves.

Entitled Building a digital ecosystem for asset finance, Alfa’s Digital Directions 3 Report draws on industry experts’ input to understand a future in which technology’s power is channelled not by individual operators, but by many participants, who collaborate on delivering new value that exceeds the sum of its parts.

In the report, Alfa offers insight into the emerging role of technology providers as ecosystem orchestrators, identifies various types of ecosystems, and discusses the current opportunities to deploy them in order to meet the needs of the auto and equipment finance industry.

Download the Digital Directions 3 Report

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