Jonathan Power asks: can lessors steal a march on the banks?

As seen from recent Leaseurope statistics, the European leasing market is dominated by the banks.   Something like 80% of more than €200 billion in new business goes through banks or bank owned lessors.

But for many banks, especially those with an integrated asset finance/leasing arm, challenges are presenting themselves which could mean that this ‘franchise’ may be at risk.

Let’s see what they might be.

Firstly look at the digital revolution.  Across the banking market as a whole, the emergence of ‘digital’ has opened markets to new entrants, driven down costs, improved customer choice and service whilst also disintermediating banks from some aspects of the market, especially those such as payments and foreign exchange transactions.

This has driven new regulatory changes such as the Payment Services Directive which has fundamentally changed the landscape.  It is inevitable that this type of change will have a greater impact on the asset finance and leasing market and, due to complex legacy environments some banks are not as prepared as one may assume to rise to this challenge.

Much of the digital ‘renovation’ within the banks has been limited to the retail business and customer facing/front office systems.

Another challenge is the breadth of products and services offered by banks to their commercial customers.  Asset finance and leasing can be at the bottom of the relationship manager’s kit bag of products and services to offer.   Cash management, working capital finance, overdrafts, bi-lateral lending, foreign exchange services, trade finance, invoice discounting and factoring are typically offered more frequently than the rather more specialised asset finance and leasing options.

The final challenge to mention concerns the increased regulation, capital and liquidity requirements being imposed on banks which can result in the critical examination of some of their customer relationships.

A recent report commission by the Financial Conduct Authority (FCA) shows that many of the larger banks, in the UK at least, are not pursuing but actively exiting parts of the SME market due to the increasing costs of regulation and compliance – concentrating on the larger corporates that generate more fee-based income. 

Banks will almost certainly find a larger manufacturer or captive finance house easier to lend to with less regulatory burden and a more conservative risk profile.

So, that begs the question that in the face of all this, who is best placed to take advantage?

I think that there are plenty that will.  From the new, private equity-backed money that looks to buy portfolios and the accompanying operations to act as a foundation for further investment and growth, to the captives who may be better placed in their markets to take advantage of the challenges being faced by the banks.

Looking at how the captives are positioned and the changes in the market, perhaps they can steal that march.  With direct access to, and a deep understanding of, their assets, captives should be better able and positioned to adapt to the opportunity that bundled services and the IoT (Internet of Things) provide.

Can they provide a better end to end asset lifecycle proposition than the banks?

Traditionally, banks have been primarily focused on the financing of the asset itself, but that can be the tip of the iceberg when we think of the veritable smorgasbord of services that can be incorporated into an overall offering, such as:

• installation services;

• performance guarantees;

• variable/usage billing;

• repair/maintenance contracts;

• damage insurance;

• upgrades and associated services;

• extended warranties; and

• end of life processing and re-cycling / disposal.

Regardless of the increased regulation and compliance within the banks, there is an understanding that the market has a good deal of liquidity at the moment; there is much money looking for safe yield.

As many have commented, this inevitably pushes down margins.

How does the lessor react at this point? 

Brand will provide a certain amount of competitive ‘air cover’ but as the market commoditises further the protection afforded by brand will be eroded.

This could affect the SME market further for the banks.  Long thought the engine of growth in a number of major European markets such as the UK & Germany, SMEs could start to migrate to lower cost providers that offer the right solution at the right price with an acceptable level of customer service and ease of doing business.

To counter this, how does one reduce costs to protect margins, improve customer service and ease of doing business whilst also managing risk?

The key to this is the people, process, and technology triangle within the lessor – with the right technology underpinning much of this. 

There are numerous technology avenues to explore here, but one can be regarded as key – digital.  Meeting the digital challenge is critical.

Now, this is a tricky subject as just embracing all aspects of the digital revolution is not the panacea for lessors.  Using the new digital age appropriately for one’s target market is.

We can look at the much used term ‘big data’. 

But I don’t think that is the challenge.  It is using the data in a smart way that counts; to understand one’s customers better, provide greater insight into their needs and to even anticipate demand.  In the realm of smart assets, knowing what to do with technical information on cycles and nature of use has the possibility to provide in-contract pricing changes, dynamic residual values and/or re-marketing costs.

Manufacturers would certainly find this sort of real-time usage data valuable in product development and research.  Technology provides the capability to use this data but that alone is not enough.  It has to be incorporated into the structure, pricing and risk profile of the leasing product with proper operational processes wrapped around it.  This then has to be supported by staff training and understanding to give the lessee what they are looking for.

Another ubiquitous term in the digital era is – mobile.  Does my market need a mobile enabled solution?  It is the value of a mobile solution that must be understood, not just the fact that something is mobile.  Having a mobile originations solution, with eSignature that can provide agreement in principle there and then, subject to full credit review not only improves the customer experience but provides a powerful tool for the sales channel to close the deal.  As ever, appropriate use of technology that delivers value is key.

The asset finance industry has always had experts on the assets themselves but this is beginning to change.  Now lessors need to understand the secondary value of assets in the context of the IoT, the associated services that can be wrapped around the asset to provide an overall solution and the partnerships with third parties that deliver many of these services.

This approach will create a much more value-based offering for customers whilst developing longer lasting, more meaningful business relations and differentiating form pure financing alternatives.

The leasing industry in Europe is in good shape, the market is growing and the opportunities to be successful are there.

Perhaps for some to even steal some of that €160 billion a year that goes to the banks …? Well, maybe, in this commentator’s, humble opinion.

Jonathan Power is managing director, EMEA, with International Decision Systems
This article represents the views and opinions of the author and do not necessarily represent those of International Decision Systems.