by Dexter Van Dango, EL&F Senior Executive June 2013
Industry veteran Dexter Van Dango explains that in a world in which the more things change, the more they stay the same, nimble players willing to "color outside the lines" can sidestep stagnation by exploring innovative strategies to find new business volume.
“The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.” ― Albert Einstein
Some things never change. Democrats disagree with Republicans. Headlines capture the scandal de jour ― whether that be the IRS harassing the Tea Party or the Benghazi cover-up ― anything that can lead the eleven o’clock news will do.
Change “Tea Party” to “war protesters,” and change “Benghazi” to “Watergate,” and that first paragraph could have been written 40 years ago in 1973. Despite technological advances and supposed maturity and refinement of our civilization, industry and selves ― some things never change.
There is uproar over the proposed lease accounting changes. Industry participants are being asked to make their voice heard by commenting on the shortcomings of the second Exposure Draft before the September 13 deadline. Get a grip! Accounting changes come and go. We assess, adapt and move on accordingly. This too shall pass.
Wal-Mart just released first quarter results showing a 4.6% increase in earnings per share but reduced second quarter guidance attributable to spending cut backs by consumers hindered by the return of the payroll tax. Some Americans are shocked by the 2% increase in tax on their wages, returning to the pre-holiday rate of 6.2% on the first $113,000 of income. The payroll tax holiday was in place for two years. Payroll taxes are specifically set aside as contributions to the Social Security trust funds, which exist to payout set living benefits ― read that as income during retirement ― and disability benefits to Social Security recipients. This isn’t a new tax; it’s an old tax and an important tax for any of us considering retirement. But it is a tax, nevertheless, so we complain about it. Some things never change.
In its Q2/13 U.S. Economic Outlook report, The Equipment Leasing & Finance Foundation forecasted “positive but modest growth of 2.2% in 2013.” It continued, “Headwinds to growth, however, include both higher tax rates and fiscal consolidation that are expected to adversely impact consumer and government spending.” Jeez! What were they thinking? They forgot to mention “misery and despair ― people dying everywhere.” What happened to positive thinking?
As an exercise enthusiast, I frequently find myself on a foreign treadmill in a hotel workout facility running at a speed that the LED monitor shows to be six miles per hour but my body tells me is less. After running ten-minute miles for a few decades your body gets accustomed to the speed, the trek, the elapsing seconds. But get on a treadmill that shows six but is clearly running closer to five miles per hour, and maybe even less than five, you get out of synch. To me it feels like our economy is showing 2.2% growth but is really running closer to zero growth and is out of synch.
It’s no different than the guy who is pulling down an $80,000 salary who gets a 2% cost of living increase at year end, then has it yanked back in the form of an increase in the payroll tax. The raise was real but it feels like no raise at all. It feels out of synch.
Competition is fierce. Pricing is outrageous. Volume is soft while expenses remain stable. What else is new? Excluding the period during the throes of the Great Recession, one could have made the same statement at nearly any time over the past 25 years. Pressures from competition, pricing, volume and expenses have always been present and always will be. The more things change, the more they stay the same.
What can be done to change without staying the same? I refer you back to the opening quotation from Mr. Einstein. What must change is our way of thinking. Shamelessly stealing from Steve Jobs, think different. You will notice Jobs did not use the adverb “differently,” as a linguist might recommend. Instead, he used the adjective “different.”
From Dictionary.com: Different ― adjective
1. not alike in character or quality; differing; dissimilar: The two are different.
2. not identical; separate or distinct: three different answers.
3. various; several: Different people told me the same story.
4. not ordinary; unusual.
Years ago I was taught that people buy value. If you value safety you may be attracted to a Volvo when shopping for a car. If you value speed or sportiness, a Corvette may be more to your liking. Price is an element of value. If you most value low price, then a Nissan Versa or a Ford Fiesta might satisfy your need. Value is created through differentiation. When a product or service is noticeably different than those offered by competitors, it may be viewed to have greater value, and accordingly, justify a higher price.
For the past three to four years we have experienced a slow and prolonged recovery in the leasing and finance business. After portfolio quality, delinquencies and charge offs hit bottom in 2009, we have seen a steady improvement while the ship righted itself and tighter underwriting standards led to stronger portfolio performance.
Portfolio growth and credit quality gains are likely to moderate in the foreseeable future as competition heats up. If your tendency has been to lead with price ― but you reserve that competitive pricing for only the best of credit quality customers ― you may no longer have a sustainable competitive advantage. Others are going to add value to differentiate their offers, thereby justifying a higher price. This added value could come in the form of more flexible terms, less arduous underwriting standards or simpler documentation requirements.
Anything that adds value to the seller or buyer helps to differentiate from the competition.
Theoretically, the only party that can compete on price is the player with the lowest cost of funds. Wrong! A friend of mine who works for a large bank told me he was speaking with a prospect and offering him spreads of 125 to 150 basis points over U.S. Treasury rates. To his surprise, he was told that for investment grade or near-investment grade credits, he has funding sources willing to commit to pricing at 100 over treasuries “all day long.” In reality, he who is willing to play Limbo Leasing ― How low can you go? ― will be crowned as the winner and forever known as Dumb Money.
There are other ways to find new business volume without gravitating to the lowest common denominator ― price. Creativity and innovation can contribute to differentiation. It’s not always the simple answer; sometimes you need to think different.
For example: many years ago I was struggling to provide pricing that met operating lease requirements. I needed a few extra points of residual, which my asset management folks refused to give me. The CFO of my vendor partner suggested that he was willing to wait for payment on his leases for ninety days. In the higher interest rate environment of that era, those ninety days allowed me to pick up the equivalent of an extra three percent of residual investment, which allowed us to offer an operating lease structure to the vendor’s clients. A different approach led to a workable solution.
Occasionally, to get back in synch and on the right track, you have to really think outside the box. This can mean leaving your comfort zone because you intuitively know that your current strategy is flawed. EverBank Commercial Finance has chosen the less traveled path. With successful verticals in healthcare and office products, EverBank looked to replicate its success by bringing in teams of experienced salespeople to help the group enter the construction, manufacturing, golf equipment and specialty vehicle markets ― each representing a niche specialty served by seasoned industry veterans. But in one of its largest target markets, technology, EverBank struggled to gain serious penetration.
In a bold move, EverBank management decided to exit the low yielding wholesale business ― buying paper from the captive finance companies, which is extremely price competitive ― and focus instead on the less price sensitive area of value-added resellers and software developers. It decided to hire a group of experienced salespeople to focus on growing this higher spread but lower volume market using a value proposition that includes service commitments, preferred program structures like deferred payment plans, and simplified program documentation, which may or may not require a vendor program agreement. By positioning itself as “the easy to do business with source,” it is starting to see market penetration where less flexible banks have failed. I will be watching with interest to see how this strategic shift impacts the growth of EverBank’s technology business.
I found the article profiling Element Financial (USA) by Lisa Miller in the May/June edition of the Monitor to be quite interesting. Don Campbell and Steve Grosso have worked together for more than 30 years at a half dozen different companies. Now they find themselves part of Element, the group led by Steve Hudson and Brad Nullmeyer of Newcourt fame and fortune. Don and Steve have seen a lot over the years. Yet, they are likely to experience some real changes when they are asked to “think different” by the guys at Element, who will expect significant growth in each identified target market. This is another group that will have my full attention as it executes their growth strategy.
There is plenty of room for growth in the U.S. equipment finance and leasing market. And there is always room for new entrants ― especially independent lessors. With bank-owned lessors dominating the landscape there remains an opening for unregulated agile players to come into the market and color outside the lines. Expect to see another nimble competitor enter the U.S. market in the coming months.
Do you have a different opinion? Share it with me at email@example.com.
“Change the way you look at things and the things you look at change.” ― Wayne W. Dyer
Dexter Van Dango is a pen name for a real person who is a senior executive with more than 25 years of experience in the equipment leasing industry. A self-described portly, middle-aged, graying, balding leasing guy in the twilight of a mediocre career, Van Dango will provide occasional insight from the front lines via the Monitor.
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