Competing in a Slow Growth Environment: Meeting the Sophisticated Needs of Vendor Partners
by Rita Garwood May/June 2016
In a Monitor Q&A, executives from four leading vendor finance companies provide an overview of the current vendor finance landscape. They discuss last year’s intense competition and its effect on standards, how the process of developing new vendor relationships has changed during the past decade and the opportunities and challenges they anticipate in 2016.
MONITOR: Has the process of developing a new vendor relationship changed during the past decade? What has changed and why?
BERG: Our primary focus has always been our vendors and having specialized asset and industry knowledge to help them grow. We are committed to their businesses, understanding the asset life cycle and continuing to develop our product offerings to meet their changing needs.
That being said, vendors today are demanding increased sophistication from their financing providers. Our partners expect more, both in the products we offer as well as our knowledge of their market landscape. Ten years ago, iPads didn’t exist. Now we have a global team dedicated to developing mobile solutions that enable our partners to do business whenever and wherever they choose.
We’re also responding to the increasing demand for usage-based consumption models and are collaborating with our partners to develop products that meet the diverse needs of their customers. Hefty upfront costs are no longer desirable to end users, and we’re in a position to help our partners adapt to this “new” way of doing business.
CAMPBELL: In the segment of the market where we are focused, the last 10 years has seen vendor finance continue to evolve from a financing product to a customer relationship management solution. The engagement of technology and the customization of how data is collected, analyzed and reported back to the vendor has played an important part of this evolution. In the process, it has created much deeper relationships between the vendor finance supplier and the manufacturer.
KELLY: The basic concept of developing a new vendor relationship has remained the same. However, advances in technology, data and the speed in which we are expected to work with our partners have drastically changed. How we operate and our ability to integrate from a technology standpoint with our relationships are more important now than ever. OEM partners are expecting ever-increasing system capabilities to drive speed and ease of use. Decisions need to be made in minutes or seconds — reporting and portfolio monitoring need to be easily accessible and in real-time. While diversification among lenders may be more common, the biggest and most successful OEMs are still looking for true differentiation that can be driven by more comprehensive program structures. Lenders who can add value and help their partners strengthen customer relationships, identify opportunities and drive operational efficiency and ultimately impact their top-line growth can create a lasting partnership with mutual benefits for both parties.
SMALL: The process has not changed. What has changed is the number of finance suppliers that vendor clients are managing. It used to be that many manufacturers and distributors, dealers or resellers would have a primary finance partner who adjudicated every deal with any declines going to a secondary source. Now, it’s not uncommon, particularly at larger accounts, to see a client employ as many as five or six finance suppliers.
Two reasons explain the change. First, mergers and acquisitions among the manufacturers and channel are resulting in larger portfolios that originally were financed among several suppliers. Second, the growth among finance companies has led to an oversupply situation, which drives, in some cases, a willingness to do business at lower rates or take greater risk in structuring, credit or asset residual setting.
MONITOR: A common theme in 2015 was intense competition. Would you agree or disagree that the vendor finance environment was more competitive last year? If you agree, do you believe competition affected pricing, structure and credit standards?
BERG: I would agree that 2015 was a competitive year; consolidation and marketplace movements certainly altered the vendor finance landscape. Despite the increased competition for both price and credit, we chose not to shift our underwriting strategies. Instead, we focused our efforts on other core areas, including the customer experience and the added value we provide our partners.
Ultimately, the relationships we have with our partners are built on trust and a mutual commitment to collaboration. This enables us to thrive in an increasingly competitive market.
CAMPBELL: There are a handful of players that are capable of delivering national and international vendor finance solutions in North America. Last year saw intense but disciplined competition between those players. Pricing is always important, as is the scope of the program’s credit standards. But the customers in this end of the market know that service quality, structuring experience, turnaround and dependability are critical to the success of the vendor finance offering that they put in front of their clients so they’re looking at a range of factors in selecting a vendor finance partner.
KELLY: 2015 was another year of intense competition. The slow growth environment certainly intensified the competitive pressures in the marketplace along with greater access to capital and demands within lenders to grow their share in certain verticals. We saw competition affect pricing primarily and structuring to a lesser degree. The only way increased competition should impact a credit decision is from a speed perspective — you have less time to evaluate a credit, so you have to condense the process, but make sure you end up with the same decision whether it took two minutes or two days. If you allow competitive pressures to affect your credit decision, that tends to end badly for all involved. I’d like to think the industry continues to behave in a way that exhibits sound credit practices and avoids the pitfalls of the past. In any competitive environment, lenders evaluate their pricing and structuring models but we also focus on the intangibles — how we can be faster and more convenient than our competitors and come to the table with solutions that solve our customers’ broader business needs.
SMALL: The last few years have all been highly competitive in nearly every conceivable factor. That is why it is critical to focus on delivering exceptional service, being flexible in our structures and continually investing in our systems, processes and people.
MONITOR: What is your outlook for the vendor finance market in 2016? What are the greatest opportunities, challenges and concerns that you anticipate?
BERG: I would expect 2016 to be a “more of the same” year for the vendor business. The U.S. market continues to experience slow growth, and we do not predict that will change. We need to help our partners innovate in order to outgrow the general economy.
In the year ahead, we will continue to identify new opportunities to support our partners in their sales channels. We remain committed to building new, sustainable financial solutions and leveraging digital technology to enhance our overall customer experience. We’ll also continue to make operational efficiencies that enable us to maintain our profitability in an increasingly regulated environment.
Adjusting to the new EPS standards will continue to be a challenge in 2016. I also believe the market volatility we experienced in Q1/16 will continue to be an obstacle throughout the remainder of the year. Our goal is to help our partners navigate the choppy waters and make decisions that will ensure long-term success.
CAMPBELL: We are quite optimistic about the opportunities that we see in vendor finance through 2016 and beyond. The U.S. economy is regaining strength, and that is showing up in the order books of our manufacturing partners. As this recovery drives demand for increased manufacturing capacity, I expect that we will begin to see some manufacturers that insourced their vendor finance programs during the financial crisis start to migrate those programs back to third-party providers in order to liberate capital that can be put to better use in their core manufacturing operations.
With the dismantling of GE Capital, we will continue to see a monumental shift in this space as the new owners of the GE portfolios sort out what they bought and the service levels required to support the manufacturer partners. This equals opportunity.
KELLY: Overall, I see the theme of slow, moderate growth continuing given the current economy and OEM forecasts. Our trends show increasing deal sizes in the industry segments we serve and the credit quality of the end-users has remained very strong, which should help keep losses at historically low levels.
I’ve been in the industry for over 30 years, and I am very optimistic about the opportunities that lie ahead. As in any year, some markets will be up while others are down, and our goal is to always grow at a rate greater than the markets where we lend. That being said, one of our greatest opportunities this year is combining two highly customer-focused organizations with market leading technology and experienced people to create one that results in the best of both cultures. Both GE and Wells Fargo were well positioned to meet the needs of their vendor partners, and this combination gives us the opportunity to drive deeper into specific industries and expand our existing relationships.
Another opportunity we see is with transactions that are moving from 100% physical equipment to more usage-based products, specifically in the technology industry, which is dominated by software and managed- or cloud-based services. Understanding the environment and designing products that meet customer needs is a great opportunity for lenders.
As far as challenges, lenders eager to grow in a low growth environment with low interest rates will always create increased competition on all transactions. These factors lead to fierce pricing competition, particularly for the better credits. It will be important for us to remain focused on relationships and speed of service coupled with a strong operating platform, complete product offering and an experienced team. We will need to do this in the midst of a changing regulatory environment and an economic climate that remains somewhat volatile.
SMALL: We expect 2016 to resemble 2015 in many ways in the vendor finance market. Ultimately, our industry growth is closely tied to U.S. GDP performance. At CIT Equipment Finance, we have done well to grow at a much higher rate than GDP.
The greatest opportunities and challenges are ensuring we are capable of meeting the changing requirements and expectations of end-user customers. Customers believe their commercial experiences should be comparable to their consumer lives. That means as finance companies, we’re being compared to the experiences delivered by leading consumer brands. It means investing in resources to understand what that means for our business and executing on plans to make that shift to deliver world-class service and experiences to customers and vendors alike.
Another opportunity for finance companies is supporting vendors whose customers are demanding “total solutions” structures from their suppliers. More customers are focusing on what their purchases allow them to achieve, what jobs it allows them to accomplish and what associated services and consumables are required for their impacted processes. The implications for finance companies include being comfortable from a credit position with the content of these total solutions, as well as being capable of presenting invoices with sufficient details and remitting payments to multiple suppliers involved in these solutions.
Barry Shafran, President and CEO , Chesswood Group Limited
Barry Shafran shares the story behind Chesswood Group’s journey from a Canadian new car dealership business with automotive lease receivables of just $80 million in 1999, to a North American public equipment finance business with a portfolio of $1.0 billion in 2019. He says the one constant and key ingredient in Chesswood’s journey is its amazing team of tenured and committed people.