Though banks, independents and captives all participate in the equipment financing industry, all have different needs and focuses. Charles Wendel of FIC Advisors games out 2019 for each one and recommends that no matter the organization, embracing rapid technological advances will be a benefit to everyone.
Charles Wendel, President, FIC Advisors
FOR ALL: BEGIN WITH PROACTIVE RISK MANAGEMENT
Most of this article focuses on growth, but risk management requires clear and constant prioritization. While predictions differ on whether 2019 will see a recession, there is no doubt that, at some point, the economy will slow down. At the same time, in the last year I have spoken with a half dozen equipment finance leaders who commented about competitors, often newer independents whom they view as going too far out on the risk spectrum in order to build volume quickly.
The best players across the industry have likely already established early warning systems to identify deteriorating credits and set procedures to resolve problem credits. But this is an area that demands renewed focus, as well as consideration of the capabilities and tools that a myriad of vendors, some new and some established, now offer related to risk analysis.
The good news is that many equipment finance groups operate with a collegiality and respect between the line and credit personnel, which is not always the case within some core bank units. That spirit of cooperation and trust will be particularly valuable as leasing companies review their credits, conduct stress tests and face an inevitable downturn together.
BANK-OWNED COMPANIES: TEACH THE BANK
In recent years, a handful of banks have begun to adopt a number of the practices that have made their internal equipment finance groups successful to the rest of the organization. A few have even taken the senior management of their equipment finance groups and given them greater responsibilities across the bank. Banks should and will continue to “borrow” the approaches their equipment finance units have used for years, and more will “poach” equipment finance leadership to take on broader authority within the bank.
Banks acquiring independent equipment finance companies or experienced teams have also largely allowed these groups to continue to operate as they have in the past, subject to the greater compliance and regulatory requirements of operating within a bank, of course. In turn, many of these units have generated strong growth, taking advantage of bank relationships as well as highly competitive low-cost funding.
In addition to growth and high returns, these units will offer more to the senior bank managers who are willing to look at non-traditional lending activities as a model for overall bank growth, such as:
• Sales discipline. Most equipment finance groups need to fill their pipeline annually. They constantly approach internal groups for leads, but do not depend upon them to make their numbers, instead maintaining their own direct contacts and marketing approach. Whether using Salesforce or a personal system, they have learned to sell by proactively offering competitive solutions to their targets. In contrast, many bank relationship managers tend not to be sufficiently focused on generating revenue, particularly from new clients. Going forward, more traditional bankers will adopt the proactive techniques used by these acquired groups, improving overall bank sales productivity and profit per relationship.
• Pay for performance. Most of a traditional banker’s compensation is salary-based; much of, if not most, of equipment finance RM equivalent compensation is performance-based. That makes a big difference in sales focus, energy and productivity. Traditional bankers need to change to become more like equipment finance personnel. More banks should be and are looking at fundamental changes to compensation.
• Relationships built upon demonstrated value. Equipment finance units have few “legacy” clients; they need to win a client with structure, responsiveness and speed, among other attributes. The core bank needs to emulate their equipment finance’s group approach to demonstrating value to win business.
The senior leaders of equipment finance units also may manage differently than their core bank counterparts. They set clear directions but also encourage creativity and pushback by experienced personnel. Internal arguing is often viewed as a sign of commitment and passion rather than disrespect. These leaders will also exit underperforming personnel rather than moving them to another area, as often happens in banks. In fact, one leasing executive even recounted how eliminating the bottom ten percent of his sales staff improved his group’s performance by allowing credit and other personnel to focus on higher likelihood transactions. More banks need to emulate this approach.
Because many of the bank units began as independents, much of that entrepreneurial spirit survives. Equipment finance unit leaders can bring focus and heightened performance expectations that traditional banks often lack.
One further point regarding banks: during the last downturn, a number of banks pulled funding from independents and even reduced the funds available for their internal equipment finance units. Competitors should not bet on this happening to the same degree again. The independents that survived the last downturn are financially stronger, and many startups have private equity support, so banks can feel more secure in lending to them. Regarding internal funding, more banks are seeing the economic and cultural value of equipment finance groups. Based upon their performance and risk profiles, most will maintain their current internal funding levels, short of a bank funding crisis.
INDEPENDENTS: CONTINUE NICHE FOCUS
We recently had the opportunity to interview executives at about 20 independents. Several elements are critical to their success, but nothing is more important than this segment’s discipled focus on servicing selected niches and verticals.
The best independents have learned to avoid direct competition with lower cost banks and captives by targeting areas those larger players avoid. For example, one independent services the agriculture segment but, rather than trying to take on well-entrenched captives on their turf, focuses on used equipment or equipment that is too highly specialized and low in volume to be of interest to major captives.
In addition, independents review their niches regularly, exiting those that no longer meet their risk/reward criteria and entering new ones after developing a business case to do so. The culture of these companies encourages them to identify problem areas as soon as possible and make changes before significant issues emerge. This niche focus will continue and goes a long way to ensuring continued profit and growth for independents.
At the same time, we expect some independents to disappear both for positive and negative reasons. The good reason is the continued acquisition by banks of independents that can immediately contribute to earnings growth. Conversely, a few players will disappear over the next year due to one or more of a number of factors: portfolio quality, their inability to compete against more tech savvy independent competitors and/or low growth rates, resulting in a pull back in their funding support by PE firms.
CAPTIVES: ESTABLISH MANAGED SOLUTIONS
Captives may be increasingly challenged by independents and banks that can provide financing for multiple equipment types across several manufacturers. Captives need to determine if they wish to go down that path. One area more will focus on is managed services, basically a pay-as-you-go program that has begun to catch on in a few industries. More than their bank or independent competitors, captives may possess the equipment and residual knowledge, the risk appetite and the deep pockets required to distinguish themselves in this area.
FOR ALL: EMPHASIZE TECHNOLOGY ADOPTION AND FINTECH PARTNERSHIPS
During recent interviews with independents, we heard several say they are “all in” on leveraging technology to enable their small ticket activities. Conversely, a few interviewees suggested that technology was not critical to them, since they relied on relationships, structuring capabilities and industry specific knowledge to differentiate themselves. We think those interviewees are both declining in number and making a major mistake.
Technology adoption and management will be essential to success. Equipment finance companies will increasingly employ technology-enabled approaches in virtually all internal and external areas of their business. Internally, IT can improve productivity and profitability, as processes are streamlined and management is better able to focus on areas (and people) for improvement. Externally with customers, more firms are using IT to embed themselves with their clients and to differentiate themselves by providing management insights in areas like trucking.
How to use technology and how much to invest in it will differ from player to player. Some firms, even mid-sized independents, are spending heavily on customizing third-party software to their own use. Others simply work within the standard reports provided by end-to-end software platforms. Every company needs to have one or more persons dedicated to reviewing possible technology partners and determining which to work with. Technology will become even more of an enabler and differentiator in the future.
The current state of equipment finance remains strong. Most of the industry has the organization, funding, and strategy in place to withstand a downturn. 2019 and beyond will show equipment finance providers building off their expertise and the relationships they have developed to enhance their returns and prove the sustainability of their strategic approaches.
Whether you are a third-party originator or a funding source/bank, the responsibility lies with all parties to build partnerships based on mutual trust, mutual commitment, shared ideas and common goals.